Popular Science Monthly/Volume 43/September 1893/Why Silver Ceases to Be Money
By F. W. TAUSSIG, Ph. D.,
PROFESSOR OF POLITICAL ECONOMY, HARVARD UNIVERSITY.
THE striking fall in the price of silver and the unmistakable tendency among civilized countries to cease using it as a basis for currency, suggest the inquiry whether these results are accidental or flow from causes so regular and continuous in their application as to be analogous to physical law. Thirty years ago most economists would have hesitated little in seeking analogies of this sort. The general conclusions on which economists were then agreed were often stated to be natural laws, as certain and immutable in their application as the laws of the physical universe. The general rate of wages was governed by natural laws; prices were determined by natural laws, which combinations and speculators could not violate with impunity; monetary phenomena were subject to similar unalterable conditions. The value of the precious metals, like that of other commodities, was determined only by their cost of production, and legislative action seeking to regulate their value and bring about their concurrent circulation must of necessity be futile.
Of late the language even of conservative economists has been more guarded. The more ardent representatives of the new movement in economic thought go further, and reject once for all the notion of natural law in economic phenomena. Even those who appeal with confidence to economic laws must admit that their operation is in many ways unlike that of physical law. They are stated to be tendencies; they are conclusions hypothetically true, or true only in the long run. Above all, the play of human volition, and of legislation as reflecting human volition, is admitted to be not the least of the forces that affect economic phenomena. Wages and prices may be affected by combinations on the one hand, and by legislation on the other hand; doubtless within limits, but within limits not so narrow nor so easily defined as was formerly thought. So the value of money is subject to legislation in no small degree. Paper money, though of the purest fiat character, with no hope or promise of redemption in specie, may yet perform with reasonable efficiency the functions of a circulating medium. No doubt the degree of effect is limited, and the expediency of particular forms of legislative action is more than doubtful. But the possibility of effect can not be denied. In granting so much, we may give aid and comfort to those whose proposals on the currency are mischievous; but truth, fairly faced, compels the admission that the value of money is not fixed by natural law in the sense that it may not be seriously affected by legislation. Looking to specie alone, it is clear that convention and legislation are at least the immediate cause of their high value. If gold ceased to be used as money, and if all the gold in the world were to be used in the arts only, it is beyond question that its value would fall, and would remain low for an indefinite time to come; while a great and sudden extension in the use of gold for monetary purposes, such as legislation might conceivably bring about, would quickly raise its value.
Coming now more closely to the subject in hand, and the question whether silver is likely to continue in use side by side with gold, we encounter the suggestion that silver is doomed from the operation of great and permanent causes operating with the force of natural law. Silver at best is bulky in proportion to its value. For transactions on a large scale it is inconvenient; and as it gets cheaper, a given value becomes bulkier, and the metal less available for the great transactions of modern commerce. Iron, copper, and other metals have been used in their day for monetary purposes, and with the progress of civilization have given way to the "precious" metals. As the further advance in wealth and progress brings the need of a medium of exchange by means of which large transactions can be conveniently carried on, must silver meet with a similar fate, and gold become the only standard monetary metal?
No doubt it is true that as coin, and for circulation in the form of coin, obstacles of this sort are serious for silver. As copper can be used, only for very small payments, so silver can be used only for moderate payments. A striking illustration of the impossibility of using silver directly on a large scale is furnished by the experience of the United States under the silver act of 1878. That act provided for the monthly coinage and issue of a very large number of silver dollars—on the average, two and a half millions a month—and the expectation of the legislature was, at the beginning, that these bulky coins would find their way into circulation and use. In fact, but a very small proportion of them ever came into actual use. Notwithstanding every effort of the Treasury to get the coins into circulation, the community stubbornly refused to make use of more than a small proportion of them. Some sixty millions were got into circulation; but the remainder of the four hundred millions which were coined lie unused in the vaults of the Treasury, and when issued by it flow back with a regularity and persistence not unlike the operation of natural law.
But the experience of the United States under this same act of 1878 suggests a very easy mode of surmounting this difficulty and of securing the actual and effective use of silver in indefinite quantity. The printing press and the engraver's art have revolutionized the situation. The silver certificates, which now form the largest single constituent in our every-day money, were issued, at first sparingly, later more generously, to represent the coined dollars and to circulate in their place. They are printed in any desired denomination; they are easy to carry; they circulate more freely even than gold coin. It is curious that this simple device should not have been thought of at the outset, and should have been evolved only after an experience, running through several years, of the impossibility of securing the circulation of the actual coins. But the lesson has been learned, and in the schemes for the free and unlimited coinage of silver dollars it is now always proposed that the silver shall indeed be freely coined, but that its actual circulation shall take place through certificates representing the deposit of the coined metal in the Government's hands. By a machinery of this sort any durable commodity may indeed become the basis of the monetary circulation, and the crucial question becomes not one of the possibility of the use of a commodity, but one of its expediency.
This leads us to another phase of the question, the inquiry whether silver possesses that stability in value which is admitted on all hands to be essential for money. If the price of silver, like that of copper and iron, is subject to great and rapid variations from changes in the conditions of production, it is inexpedient, even though possible, to make it the basis of the circulating medium. If the great decline in the price of silver in the last twenty years is due to causes like those which have brought down the price of copper and the price of iron, we have strong ground for refusing to use it further, except for subsidiary purposes like those for which copper continues to be used. But here it may be answered, and certainly with much show of reason, that the decline in the price of silver has been due largely to legislation. The civilized countries one after another have given up the use of silver, and by so narrowing the field for its use have caused a fall in price to take place which otherwise would have been averted. Germany gave up the use of silver, except for subsidiary purposes, in 1873. The United States dropped silver from her list of coins in the same year. France and the Latin Union virtually closed their mints to the free coinage of silver in 1874. Italy and Austria, in resuming specie payments—the one in 1883, the other in 1893—refused to adopt any but a gold standard. If in all these countries silver had been freely coined; if in Germany, France, the United States, and Austria, silver had retained the footing before the law which it had twenty-five years ago, the price undoubtedly would not have fallen so much, and the objection to its use from the fall in its price would certainly be much less strong than it is. Unquestionably, the great increase in the production of silver has contributed to bring down its price; but it is at least probable that the fall would have been less, and indeed that there would have been little fall, if any, in the gold price of silver if the mints of all those countries had remained open to silver as they were in 1870. Whether such a state of things would have been conducive to the general prosperity of these countries is another question. Looking merely at the point now under consideration—the cause and meaning of the lower price of silver—we must admit that legislation has been an important cause among those that brought it about.
We may go further with this line of thought, and consider how far it is possible that legislation might affect the price of silver in the future. If at the present time an effective international agreement were adopted for the wide use of silver as money in civilized countries, the price of silver undoubtedly would be raised for some considerable time. An agreement of the great countries, such as England, France, Germany, and the United States, for the free coinage of silver at a fixed ratio with gold would undoubtedly absorb much silver, would clear the market of heavy stocks, and would raise the price of silver in terms of gold to the point fixed by the international ratio. Such an agreement could hardly fail to bring about the concurrent circulation of silver and gold in the contracting countries, and to establish a real and effective bimetallism. How long this concurrent legislation would continue, and how long, even if the legislation continued, silver and gold would remain equal in relative value at the agreed ratio, are different questions. The future production of silver, the possible extended use of gold for other than monetary purposes, the probable increased use of gold in countries outside the international agreement, would very likely cause gold to disappear in the end from the contracting countries, and so would make silver the sole basis of their circulating medium. But this result should not be brought about for a long time, measured by generations rather than by years. Certainly for a series of years international bimetallism, if adopted, would at least be not ineffective. No doubt all this is idle speculation, BO far as any political probabilities are concerned. International jealousy, and a sufficient satisfaction in most countries with the existing state of things, make such an agreement impracticable. But this does not answer the question of principle, or show that the wider use of silver is restricted by any natural law. Doubts as to the expediency of the change and unwillingness to enter on hazardous legislation are the serious sources of difficulty for those who demand a free use of silver for currency.
The real question for the future of silver, then, is one of the expediency and possibility of legislation. It may be freely admitted that if legislation were different, the silver situation would be essentially different. And ultimately legislation will doubtless respond to the pressure of expediency. If it should appear that the exclusive use of gold works ill, that the failure to use silver causes mischief, and that the wider use of silver would make things better, we may expect that eventually the civilized countries, either by international agreement or by separate legislation, will retrace their steps and endeavor to secure the use of both metals. The fundamental question of expediency, again, is one as to the stability of prices and incomes. If under the gold standard there is a steady tendency toward lower prices and lower money incomes, and if such a decline works evil, there is ground for demanding a change. If, on the whole, the disuse of silver is accompanied by no mischievous changes, things may remain, and in all probability will remain, as they are.
So far as the experience of the past is concerned, it is not to be questioned that in fact there has been a general decline in prices since the date, roughly speaking, when silver began to be discarded and gold became the sole basis of the medium of exchange. The year 1873 brings at once the high-water mark of general prices and the beginning of the demonetization of silver. During the last twenty years wholesale prices and retail prices have steadily pressed downward. So far there is a prima-facie case for the proposition that it is gold that has appreciated rather than silver that has depreciated. But another equally striking and unquestionable phenomenon of the last twenty years has been that the money incomes of all classes of society have not gone down, but have rather tended upward. Such a movement, combined with the movement for lower prices, simply means that material prosperity has increased on all hands, that our income in terms of commodities is growing, and that men are getting more in return for their labor. Moreover, it is not to be denied that on the whole and in the long run general prosperity has been great and wide during the last generation. The usual cycles of speculative activity and industrial depression have appeared, and at the successive periods of surface depression the cry has been raised that some unusual cause, like the demonetization of silver, was leading to general calamity. But the upward turn of the wave soon reappeared, and the growth of material prosperity, good years and bad years taken together, has not been interrupted.
Looking, too, at the relations of debtors and creditors, we find on the whole little to complain of. No doubt a period of simple rise or fall in general prices operates unjustly. When prices and money incomes rise, creditors do not get their dues; when they fall, debtors are subjected to a painful burden. But where we have the phenomenon of money wages and money incomes which are steady and on the whole probably increasing—and this is what the world has seen during the last generation—the situation approaches as near justice as is possible in things human. A debtor who borrowed five, ten, or twenty years ago has an undiminished money income, and can not be said to feel special hardship when he repays his debt, even though the prices of commodities may have decreased. That individual debtors and classes of debtors may have suffered is beyond question; but in the mass the situation has not given rise to general hardship.
Hitherto, therefore, the adoption of the gold standard, the drift toward restricting silver to use as a quasi-subsidiary coin, have not worked ill. Indeed, it may be said to have prevented ill, since the use of silver side by side with gold, in view of the enormous increase of the production of silver, in all probability would have disturbed seriously the stability of the monetary medium. What, now, of the future? Are the same tendencies likely to appear in years to come, and is the gold standard likely to work well in the future as it has in the past?
In answering these questions we must not refuse to face certain facts in the situation insisted upon by the bimetallists. The supply of gold available for monetary use is not likely to increase rapidly in the future. The production of gold has been nearly stationary for the past twenty years. In the last two or three years an upward movement has appeared; it remains to be seen, however, whether any permanent advance will be maintained. The use of gold in the arts is apparently increasing, and is likely to continue to increase; and it absorbs a growing part of the annual supply. Meanwhile the wealth and population of civilized countries are advancing rapidly. If stability in money affairs is to be secured, some steady increase in their circulating medium must be provided for. If we regard gold coin alone, and consider the development of the currency to be limited to the coin or to be in exact proportion to the coin, the situation may be fairly described as ominous. There would be ground for saying, as men of science have recently done, that eventually the gold standard will become untenable, and that silver will force its way into use side by side with gold, if not to the exclusion of gold.
But the situation is modified, if not transformed, by another factor in present and in future industrial history: that development of credit machinery which forms the most striking phenomenon in the monetary history of modern times. In the development of credit as a substitute for money we have something like a natural law, which will put to naught the predictions of those who predict disaster from the failure to make wider use of silver. If, indeed, coin money were the sole or the most important constituent in the medium of exchange in civilized communities, silver or some other metal must certainly be brought in to supplement the scanty growth of the supply of the gold. In fact, however, the actual currency of civilized countries tends to consist less and less of specie, more and more of credit substitutes for specie. Bank notes, government notes, and above all bank checks, actually perform the commercial transactions of civilized countries. Specie is the basis of exchange; it is the measure in terms of which the value of commodities is expressed; but it is only to an insignificant extent the medium by which exchanges are actually conducted. The use of credit is of course most highly developed in countries like the United States and England, which lead the world in general industrial development. It is growing steadily and surely in continental Europe, and, beyond question, will continue to grow. Each individual, each financial institution, each government, is tempted to enlarge the scope of credit operations and to diminish the use of actual coin; and the steady pressure of these motives makes the tendency as sure and unalterable as physical law.
That this tendency brings its dangers can not be denied. An ever-increasing volume of credit is based upon a relatively smaller foundation of specie, and the evils of a sudden impairment of credit become more and more serious. It has been attempted to obviate the dangers by enlarging the basis of specie; and the wider use of silver is advocated as one method of broadening the substructure. But efforts in this direction are likely to have but temporary results. A broader basis of specie is likely, under the influence of the same forces which now lead to an extended use of credit, to bring about in due time an expansion of credit machinery in some way proportionate to the enlarged foundation on which it rests. After a brief respite the difficulties which it was proposed thus to obviate will reappear with undiminished intensity. The surer method, and that which is developing under the stress of need and the growth of experience, is to strengthen the foundation rather than to enlarge it. The specie which serves as the basis of the swelling volume of credit transactions is massed in fewer hands, and so is made more effective in sustaining the superstructure. The great public banks of European countries are guardians of the treasure which gives tone to their currency and serves as the standard for transactions in which it is used to less and less extent in bodily shape. The central stock which serves the same purpose in the United States is held, not by a semi-public institution to whom the duty has been delegated, but by the Federal Treasury directly. Its amount has been seriously lessened of late, and may be subject to further drain in the immediate future. But there are no indications that the supply of gold obtainable for this, purpose is inadequate, in the United States or in the world at large, to serve the uses likely to be made of it in the future. Our own reserve should be enlarged; and there can be little doubt that the community, once aroused to the situation, will not permit it to shrink to the point of real danger. So far as the visible future is concerned, we may therefore look to the maintenance of the gold standard by all the great civilized countries. Silver will be used for subsidiary purposes to some extent in all advanced countries, and apparently to a very large extent in the United States. But silver will not again become standard money, freely coined for all holders. It will have to seek its market, partly for use in the arts, partly for subsidiary purposes as money in the countries of advanced civilization, partly for more or less complete monetary use in regions like India, China, and South America. Within the last two months the British Government in India has taken a step of far-reaching consequence, in suspending the free coinage of silver in that country. The step is not definitive, and it remains to be seen what policy will finally be adopted. Whatever may be done, a considerable flow of silver to India is likely to continue in the future; the market for the metal there has by no means been wiped out. But the conditions under which silver can be disposed of must be seriously affected by the cessation of unlimited coinage in the country in which alone very large quantities found their way into permanent monetary use through a free mint. The new move, moreover, whatever its effect may be on the quantity of silver which will actually find its way to India, must in any case have an important effect on the future of silver in its political aspects. It wipes out the possibility of free coinage of silver in the United States; it makes highly probable the diminution or cessation of large silver purchases by the United States. The grounds of expediency against making silver the standard of value, or so legislating that it may possibly become the standard of value, have become stronger than ever.
What the price of silver will be in the future must depend on the volume of the annual production as compared with the occasion for its employment in the several ways just mentioned. The crucial question is that of production. During the last twenty years the world's production of silver has more than doubled. Geologists tell us that this great increase has been due to an extraordinary succession of lucky finds, not likely to be repeated; and they predicted, even before the collapse in the price due to the action of British India, that silver would be produced in smaller quantity in the future. Predictions on this subject, even from the most competent men of science, are to be accepted with caution, and it remains to be seen what the future will bring. Those old mines or newly discovered bonanzas which can produce silver at very low cost will continue to turn it out, even though a mixed feeling of panic and bluster may have caused them for the moment to stop operations. Mines which have been working at a moderate profit or none at all will one by one cease, now that the prospect of a rise or even maintenance of the price of silver has become so desperate. The gambling character of the business makes it difficult to use the reasoning which would apply to most industrial operations; but apparently we may look for some diminution of production. If this occurs, silver may maintain something like its present value, and the commercial relations between gold-using and silver-using parts of the world will gradually adapt themselves to the new basis. If production continues at anything like its present rate, still more if it augments, no one can tell what may happen to silver. Its price may fall indefinitely, and in the end it may disappear from monetary use as completely as copper has done. But a diminution of production and of the quantity of silver finding its way to the market seems the more probable outcome; and with this a price at a permanently lower level than ever in the history of the world until within the last twenty years. In either case silver ceases to be the basis on which the countries of advanced civilization rest their monetary systems: not so much from its physical unfitness, as from the increasing use of a more refined and highly developed medium of exchange, needing for its foundation a moderate supply of specie having a stable and uniform value.