Readings in Money and Banking Part 8

The situation, during the early months of 1878, was extremely critical.

For the time the three direct a.s.saults on the public credit were warded off. The Matthews resolution was "concurrent," and hence a mere expression of opinion without binding force. The bill repealing the Resumption Act of 1875 was killed by disagreement in the Senate.

Meantime the Silver-Coinage Act was modified by the Senate into a compromise requiring purchase and coinage by the Government of two to four millions' worth of silver monthly. Even thus modified, it encountered the veto of the President, but was pa.s.sed over his veto, without a day's delay, by the requisite two-thirds majority. Executive conservatism seemed to be fruitless; nevertheless, there is no doubt whatever that the steadfast policy of Mr. Hayes did much to stem the current of reaction.

Congress adjourned on June 19th. Even before Congressional adjournment, the canva.s.s for the November State elections had begun. The State Convention platforms in the summer of 1878, were not in all respects such as the session's work in Congress would have suggested.

The opposition had gone too far in Congress, and popular opinion to that effect was expressed with sufficient emphasis in November, 1878. The Administration party gained what amounted to a decided victory. There were but four States, East or West, where opposition majorities were increased in 1878 or Administration majorities diminished, and these were agricultural States, where the season's sharp decline in wheat had stirred up discontent. There was not much danger from the closing session of a Congress whose earlier ventures had received this response from the people.

PROVISIONS OF THE ACT OF 1878

[18]Although the silver dollar of which the coinage was resumed in 1878, dates back as a coin to the earlier days of the Republic, its reissue in that year marks a policy so radically new that the experience of previous years throws practically no light on its working. The act of 1878 provided for the purchase by the Government, each month, of not less than two million dollars' worth, and not more than four million dollars' worth of silver bullion, for coinage into silver dollars at the rate of 412-1/2 grains of standard silver (or 371-1/4 grains of fine silver) for each dollar. The amount of the purchases, within the specified limits, was left to the discretion of the Secretary of the Treasury. As every Secretary of the Treasury, throughout the period in which the act was in force, kept to the minimum amount, the practical result was a monthly purchase of two million dollars' worth of silver bullion.

The act is sometimes described as having called for a monthly issue of two million silver dollars; but this was not the exact situation. The amount of silver obtainable with two million dollars obviously varies according to the price of the metal in terms of the dollars with which the purchases are made. In February, 1878, when the first purchases were made, those dollars were the inconvertible United States notes, or greenbacks, worth something less than their face in gold. The amount of silver bullion obtainable with two million such dollars depended, on the one hand, on the price of silver bullion in terms of gold, and on the other hand on the value of the dollars themselves in terms of gold. When specie payments were resumed, on the first of January, 1879, and the greenbacks became redeemable in gold, the measure of value in the United States became gold, and the extent of the coinage of silver dollars under the act of 1878 became simply a question of how much silver bullion could be bought with two million dollars of gold. The price of silver in 1878 was, in terms of gold, not far from a dollar for an ounce of standard silver. Since 1878 it has gone down almost steadily, and ...

in 1889 was barely above 80 cents an ounce.[19] The silver dollar of 412-1/2 grains contains less than an ounce (480 grains) of standard silver. The monthly purchase of two million dollars' worth of silver has therefore always yielded more than two million silver dollars, the amount being obviously greater as the price of silver went lower. On the average, the monthly yield [was] not far from two million and a half of silver dollars.... Thirty millions of silver dollars a year was roughly the addition to the currency of the community from the act of 1878.

SILVER CERTIFICATES

[20]An important provision of the act of 1878 was that authorising the issue of silver certificates against the deposit of silver dollars. This authority was limited at the time to certificates in denominations only of ten dollars and upward: a restriction which ... proved to be of great importance. At the time it does not seem to have been expected that the silver certificates would enter directly into the circulating medium; we may infer from the restriction to large denominations that no such expectation was entertained. But in fact, it has been chiefly in the form of certificates that the silver has entered into circulation. These certificates, it is true, are not, like the dollars themselves, a legal tender; but they are receivable for all public dues, customs included, and they pa.s.s from hand to hand at least as readily as the bulky pieces which they represent.

CAUSES OF THE ACT

[21]The pa.s.sage of that act was due to causes easily described. It was part of the opposition to the contraction of the currency and the resumption of specie payments which forms the most important episode in our financial history between 1867 and 1879. The resumption of specie payments had been provided for by the act of 1875, and was to take place on January 1, 1879. In the meanwhile, the long-continued depression which followed the crisis of 1873 intensified the demand for more money and higher prices. That demand led to the inflation bill pa.s.sed by both Houses of Congress in 1878, and killed by the veto of President Grant.

The same feeling led to the silver act. The great fall in the price of silver, beginning in 1873, and showing itself markedly in 1876, made silver, at the old ratio, a cheaper currency than gold, and so caused the opponents of the return to specie payments to prefer silver to gold, as they preferred paper to either. No doubt some additional force was given to the movement in favor of the use of silver from the desire of the silver-mining States and their representatives, that the price of the metal should be kept up through a larger use of it for coinage....

WHEREIN PECULIAR

[22]Although the specific measure pa.s.sed in 1878 thus rested on a long train of historical causes, it contained details that were essentially new, not only in our own experience, but in that of the world at large.... It ... provided for a regular mechanical addition of large amount to the general circulating medium. No precise experiment of this kind had ever been tried. It is true that Germany and the countries of the Latin Union possess, in their circulating medium, large quant.i.ties of overvalued thalers and five-franc pieces which are exactly like our silver dollars. They also are legal tender without limit; their total quant.i.ty is limited; and it is only by this limitation of the quant.i.ty that their value is kept above that of the bullion contained in them.

But the thalers and francs in these countries are not new additions to the currency. They are remnants from an earlier period, when Germany had a silver standard, and the Latin Union a complete bimetallic standard.

No addition whatever to the thalers is made in Germany; and if some coinage of five-franc pieces takes place in France and in other countries of the Latin Union, the additions are meant merely to fill the place of abraded coins, to provide for the ordinary losses from daily use, and to make any additions to the supply which may be needed for convenience in making small change. No other country has ever entered on an addition of overvalued coin to its circulating medium having the object and extent of that made by our silver act of 1878. This characteristic of the measure, it need hardly be said, was the result not of any deliberate intention to try a new experiment, but of the spirit of compromise which explains so many anomalies in the legislation of democratic communities. The silver act, as pa.s.sed by the House of Representatives, provided for complete bimetallism--for the free and unlimited coinage of the silver dollar at the old ratio of 16 to 1. In the Senate, it was amended by the subst.i.tution of the provisions for a limited coinage, which were finally enacted. The compromise was meant to satisfy both those who objected to the cheaper standard and those who wanted more money; and it afforded a welcome escape to the legislators who were trying to satisfy all parties. At the time, no one probably expected that the measure would remain in force for any great length of time. The conservative element hoped that it would be repealed after a short trial; the inflationists (for by that name they might, then at least, fairly be called) believed that it would soon be superseded by the free and unlimited coinage of silver. As it happened, the act remained in force, unamended, and indeed without very serious attempt at amendment, for over twelve years; and the measure which succeeded it in 1890, though different in many details, followed the same method of forcing a large regular injection into the circulating medium of money based on silver purchases by the Government.

LIMITED CIRCULATION OF THE SILVER DOLLARS

[23]The Government has made every effort to get the dollar coins out of its hands.... But the great bulk of the coins thus got out of the treasury return to it almost at once. The degree of favor which they meet with of course ... varies in different parts of the country, apparently reflecting in a curious way the popular feeling as to the desirability of having silver currency at all. They circulate very little east of the Alleghanies, but are used more freely and permanently in the Mississippi Valley. Among the negroes of the South the big pieces are said to be favorites, and to find a permanent lodgment. Their greatest circulation ... was reached in 1886; after that time the change in the denominations of silver certificates caused a decline in the amount used.

PROVISIONS OF THE ACT OF 1890

[24]The act of July 14, 1890, is[25] more remarkable than that of 1878.

It is unique in monetary history. It provides that the Secretary of the Treasury shall purchase each month at the market price four and a half million ounces of silver bullion. In payment he shall issue Treasury notes of the United States, in denominations of between one dollar and one thousand dollars. These Treasury notes, unlike the old silver certificates, are a direct legal tender for all debts, public or private, unless a different medium is expressly stipulated in the contract. They differ from the silver certificates in another respect; they are redeemable either in gold or silver coin, at the discretion of the Secretary of the Treasury. The indirect process of redemption which,... was applied to the silver certificates, is replaced for the new notes by direct redemption. The avowed object is to keep the silver money equal to gold, for it is declared to be "the established policy of the United States to maintain the two metals at a parity with each other on the present legal ratio, or such ratio as may be provided by law."

The act of 1878 is repealed; but the coinage of two million ounces of silver into dollars is to be continued for a year (until July 1, 1891).

Thereafter it is directed that only so many silver dollars shall be coined as may be needed for redeeming any Treasury notes presented for redemption. Practically this means that the coinage shall cease; redemption in silver dollars will not be called for under present conditions. The coinage of silver dollars accordingly was suspended by the Treasury on July 1, 1891; a change which was the occasion of some vociferous abuse and equally vociferous praise, but which in reality was of no consequence whatever.

AMOUNT OF MONTHLY ISSUES

[26]The monthly issues of the new Treasury notes vary, like those of the old silver certificates, with the price of silver. But the new issues vary directly with the price of silver, while as we have seen, the old issues varied inversely with the price. The volume of Treasury notes issued is equal to the market price of four and one-half million ounces of silver. For a month or two after the pa.s.sage of the act, the price of silver advanced rapidly, and at its highest, on August 19, 1890, touched $1.20. After September a steady decline set in....

THE POLICY OF THE BANKS

[27]Shortly after the pa.s.sage of the act [of 1890], some sort of understanding seems to have been reached between the Treasury Department and the banks of New York. The banks came to an agreement that the new notes were to be treated as "current funds," receivable in all payments, clearing-house settlements included....

The fact that the new notes were received by the banks from the Sub-Treasury in settlement of clearings, was of sensible advantage to the Government. The success of the Government in maintaining its nominal willingness to pay gold to all comers was due to the forbearance of the banks. Gold was called for by them only when needed for export.

THE ARGUMENT FOR SILVER

THE BIMETALLIST ARGUMENTS

[28]... Is it desirable that we should have more money? Does the maintenance of the gold standard involve injustice or hards.h.i.+p to debtors, or to any cla.s.s in the community? Does it have any ill effects in hampering industry or checking the advance of production? Is the free coinage of silver, or any measure leading ultimately to a silver basis, fairly open to the objections commonly urged against it on the grounds of dishonesty and injustice?...

In considering these questions, we must look to the ultimate and permanent results of the silver standard. The details ... as to the mode in which the silver issues circulate and the degree of promptness with which they will affect prices, are here of no great importance. Under a silver standard the rise in prices will take place in the end; and we are concerned with the social consequences of such an eventual result....

I propose here to take up chiefly one set of serious arguments--those which rest on the changes in general prices which have taken place throughout the civilised world in the last twenty years. The conclusions in favor of a wider use of silver, drawn from such changes, have been maintained by distinguished economists. It is true that the particular plans for the use of silver which are now in vogue in the United States have generally been opposed by these economists. They have urged international agreements for the wider use of silver, and have deprecated independent action by any one nation. But the more thoroughgoing advocates of free silver in the United States say, certainly with much force, that an international agreement has proved to be simply impracticable, and that if the wider use of silver is to be deferred until there is concerted action by the great nations, it will never come. If anything in this direction is to be done, some one country must be courageous enough to take the lead, trusting that others will follow in due time. And certainly it is true that the scheme for international bimetallism has practically no prospect of adoption; while, on the other hand, the serious arguments urged by its advocates tell, in some degree, in favor of any scheme for enlarging the use of silver as money. These arguments, moreover, are of weight, and deserve a more painstaking consideration than is often admitted by those who oppose the silver legislation of the United States.

The serious and important arguments, then, among those who, both in this country and in Europe, advocate a greater use of silver as money, are derived from the general fall in prices which has been so conspicuous among the economic phenomena of the last twenty years. To that fall they ascribe two evils: first, an unjust increase in the burdens of debtors; and, second, a check to enterprise and to the efficient working of the productive machinery of the community. The increase in the burdens of debtors is one which all economists have pointed to as the result of a general fall in prices, or rise in the value of the circulating medium.

The debtor who borrows a hundred dollars now, and repays them five years hence, when all prices have fallen, gives back more than he received. On debts running for short periods of time, changes in general prices are not likely to be great enough to cause serious hards.h.i.+p; but on debts running over long periods the loss to debtors and the gain to creditors will be great and continuing. But such a steady and continuous fall, it is urged, has taken place since 1873; and the fall is likely to continue further, and to renew its hards.h.i.+ps on each new act of borrowing, because its cause is a permanent one. That cause is found in the growing scarcity of gold, which has been selected as the sole standard of value among civilised countries. The production of gold, after having increased with great rapidity in the twenty years following the Californian and Australian discoveries in 1850, has gone on but slowly since 1870. Meanwhile, the population of the civilized countries, their wealth, their production of commodities to be exchanged, have increased with extraordinary rapidity; while the adoption of the gold standard by Germany in 1873, and the resumption of specie payments by the United States in 1879 and by Italy in 1883, have added to the demands for which the scanty annual supply of gold must suffice. Hence the general fall in prices; in other words, the appreciation of gold.

The second effect of the appreciation of gold, in checking industrial progress and promoting industrial depression, has been less insisted on in the United States than in European countries. The cla.s.sic economists had generally reasoned that a general rise or fall in prices was indifferent, except in regard to the relations of debtor and creditor.

If money became scarce, if its value rose and all prices fell, every producer, to be sure, would receive a smaller money income than before, and would have a smaller money capital. But he would be able to buy as many commodities and as much labor as before, and would be in reality just as rich and prosperous. In the middle of the eighteenth century, when economic thought was just beginning to a.s.sume its modern form, David Hume had argued that though a fall in prices is at bottom indifferent to everybody (except as debtor or creditor), it would yet, in its effects on men's spirits and expectations, which are all connected with money and with terms of money, exert a depressing influence on industry, and would so be harmful; while rising prices, though also really indifferent to all, would stimulate hope and confidence, and so arouse to more active exertion and more plentiful production. The younger Mill, in his _Political Economy_, thought it worth while to enter on a careful refutation of Hume's reasoning. But the bimetallists of our time are disposed to agree with the shrewd Scotchman. They say that the active manager of industry, the business man or _entrepreneur_, in the first place is always more or less in debt; in the second place, is always buying labor, or materials, or goods, with the intention of selling a product at a later date at an advance in price. He habitually measures his gains in terms of money, and not in terms of the commodities he can buy with the money. In times when prices are falling, he finds it harder to meet his debts, and to dispose of his goods in hand at a money advance over what they cost him.

But the business man, or entrepreneur, in our day is the director and initiator of industry. He employs labor, borrows capital, sets the wheels of industry in motion; it is his expectations and fears and hopes which determine primarily whether the investment of capital shall take place in large or small amount, and whether the machinery of production shall move smoothly and effectively, or slowly, hesitatingly, inefficiently. The argument certainly does not lack plausibility; nor can it be said to have often been squarely met. No doubt it takes the form, in the United States, more frequently of confused encomiums on the inspiriting effects of plentiful money, than of direct reasoning as to the ill effects of too little money, such as I have endeavored to state with fairness in the preceding sentences. Yet it does not lack weighty backing. So eminent an economist as President Francis A. Walker has ...

insisted on the evils of a deficient supply of money as strangling the arteries of industrial life.

On the whole, however, the other argument, bearing on the increase in the burdens of debtors under falling prices, has been more often heard in the United States, and certainly has been of more effect. Prosperity, activity, general industrial advance, have been in this country so great and so obvious that the argument as to any check to industry could take serious hold only in occasional periods of depression or slackened advance. The burden on American debtors from falling prices has therefore been much more steadily complained of, chiefly in regard to the debts of the farmers and other borrowers on a comparatively small scale. No doubt there are other debtors whose burdens are affected at least as much, notably the railways, among whom the practice of borrowing heavily on long time has sometimes had its serious effects.

But it is the farmer whose case has received most attention, and in some ways doubtless has deserved it most.

The discussion of the relations of debtors and creditors under the gold standard has led to some further conclusions as to the "honesty" of the gold and silver standards. Those who oppose a silver basis speak of the silver dollar as a "dishonest" coin. But those who attack the gold standard retort that the really dishonest dollar is that of gold. It is pointed out by them that the fall in the price of silver which has taken place since 1873 has not been greater than that in the prices of commodities generally. As compared with commodities, therefore, silver has been more steady in value than gold. The fall in the gold price of silver, which is adduced by the mono-metallists to show that silver is not a good standard of value, is said to be the very thing which proves it to be a good standard of value; for a given amount of silver will buy the same amount of commodities, roughly, as it would twenty years ago, while a given amount of gold will buy more. If debts had been expressed in terms of silver, the debtor would have had to repay the creditor the same amount of commodities that he received--not more commodities, as he has had to do, with debts measured and repaid in terms of gold. So far as the attainment of the closest possible approach to ideal justice is concerned, a silver standard would have served the purpose better than a gold one.

THE EFFECT OF IMPROVEMENTS IN PRODUCTION

The bimetallist agitation for a return to the wider use of silver concurrently with gold first became prominent in the years of depression which followed the crisis of 1873. For some time those who opposed it took the ground that the alleged evils did not exist--that in fact there had been no permanent fall in general prices. The decline in the years after 1873 was supposed to be simply the usual reaction from the rise in prices which marks a period of speculative activity. It was expected that the upward movement of the next period of activity would bring the average range of prices as high as it had been before. The general revival which set in after 1879 in all civilized countries did indeed check the downward tendency, and in some countries brought about an appreciable rise. But this counter-movement by no means offset the marked fall which had preceded it; and in any case it soon came to an end, and was followed by a new fall, which has continued with no considerable interruption to the present time (1891). It is true that some part of the fall is no more than a recoil from the abnormally high prices of the years 1871-73. It is true, also, that some commodities have shown a tendency to rise, and that in one very important respect--in money incomes and the money rate of wages--there has been a striking exception to the general movement. Further, it must be borne in mind that even the lowered level which has now been reached cannot be described as abnormally low, being still as high as that which obtained at the middle of the present century. But on the whole, the fact of a general fall in the prices of commodities during the last fifteen or twenty years cannot be denied. The fall has not been uninterrupted; it has not been so rapid or general as to bear on the face of it proof of harmful results; but it has been steady, and, in the opinion of the present writer at least, is likely to continue slowly and steadily for some time to come.

Recently, therefore, those who combat the bimetallist reasoning have taken a different position. They have reasoned that while prices may in fact have gone down, the fall is not due, as the bimetallists allege, to an appreciation of gold. It is to be accounted for, they say, by other causes, notably by the extraordinary improvements in the production of commodities. New inventions and the perfecting of old ones have cheapened almost all manufactured articles. Raw materials and food products have been cheapened partly by the discovery of new sources of supply, and partly by that improvement which has been transforming the industrial situation more radically than any other--the wonderful cheapening of transportation by railways and steams.h.i.+ps, which has made the resources of the plains of our West and of the sheep-runs of Australia available for the supply of the markets of London and New York.

So far as this train of reasoning undertakes to explain the mode in which the fall in prices has been brought about, it seems to me impregnable. But in so far as it endeavors to disprove the appreciation of gold, or to show that the general fall is not due to this appreciation, I have never been able to see its force. In truth, both the bimetallists and their opponents seem to confuse the question when they speak of the appreciation of gold as causing lower prices. The appreciation of gold _is_ the general fall in prices. The two are not related as cause and effect; they are simply two names for one and the same thing--namely, a different rate of exchange between gold on the one hand and commodities in general on the other, by which the same amount of gold buys more commodities than before. When the general fall in prices is admitted, the case of the bimetallists as to the appreciation of gold is established once for all. Improvements in the production of commodities may explain how it happens that they are more abundant, and exchange on less favorable terms with gold, of which the quant.i.ty has not been increased by new rich mines or great improvements in production; but the fact of the depreciation of commodities, or of the appreciation of gold, is not thereby explained away.

Nevertheless, the improvements in production do seem to me to have an important bearing on the question in hand: a bearing not on the simple fact of the appreciation of gold, but on the social consequences which are said to flow from it, and therefore on the questions of policy which are here under consideration. A moment's thought will show, for example, that a general increase in the efficiency of labor affects very materially the mode in which a fall in prices acts on the relations of debtor and creditor. If A borrows from B a hundred dollars, repayable in five years, and if at the end of the five years prices in general have fallen to one-half of the previous rates, B, in paying back to A the one hundred dollars, clearly returns twice as many commodities as he got.

But if, at the same time, the efficiency of labor has been doubled by improvements in production, B can produce with the same labor twice as many commodities as before; and he returns to A the product of the same quant.i.ty of labor as he received. The cla.s.sic economists and the socialists (at least some schools of socialists) have maintained alike that the ideally perfect standard of justice in the exchange of commodities and services is equality of sacrifice or labor; that if things so exchanged for each other that equal sacrifice got the same reward, complete justice would be attained. Applying this test to the relations of debtor and creditor in the case supposed, we find it not one of hards.h.i.+p to the debtor, but apparently one of justice to both parties. It is true the creditor gets more commodities than he gave; but he gets the product of the same amount of labor as he devoted to the commodities originally lent; and why should he not share with the rest of the community the benefits of a general increase in the productiveness of labor?

This line of reasoning will become simpler and more concrete if we approach it from another point of view. Reference has already been made to the most striking and important exception to the general tendency of prices to fall, namely, that money wages and incomes in all civilized countries have shown a tendency not to fall, but to rise. Whether the incomes of the rich have increased faster than those of the poor, or whether the movement has shown itself with rough uniformity for all cla.s.ses, is immaterial for the present discussion. The admitted fact of a general upward movement alike among rich, middle cla.s.s, and poor is the significant thing. In other words, there has been an inverse movement of money wages and of the prices of commodities, the one going up while the other went down. Now, such an inverse movement is what must take place in case of any real improvement in material welfare. The only concrete way in which civilized people can become better off, is by being able to buy more--by their money incomes going further in the purchase of commodities. The improvement may take the form either of higher money incomes, with stationary prices; or that of stationary incomes, with lower prices; or the intermediate form which in fact seems to have occurred, of money incomes rising somewhat and prices at the same time falling somewhat. If we a.s.sume a monetary supply that is limited, or does not increase as fast as improved means of production cause the quant.i.ties of commodities to increase, one or the other of the two forms last mentioned must be found.

In such a state of things there can hardly be said to be any real hards.h.i.+p for the debtor. It is true that prices have fallen, and that the money he repays the creditor will buy more goods than it did when the loan was contracted; but his own money income has risen, or at least has not fallen, and the repayment of the loan can cause him no special hards.h.i.+p--none greater than he must have expected. The case clearly differs fundamentally from that of a simple rise in the value of money, or general fall in both prices and wages.... The fall in prices in the United States since 1879, and that in European countries in the period since 1873, are the result, on the whole and in the long run, of ... the general improvements in production; they have not been accompanied by a fall in money incomes, and they cannot be said to have caused an increase in the burden of debtors.