THE FINANCIAL DEPRESSION AND THE STANDARD OF VALUE.

Otago Witness, Issue 2111, 9 August 1894, Page 50

THE FINANCIAL DEPRESSION AND THE STANDARD OF VALUE.

A PLEA FOR "GOOD MONEY."

Following is the concluding portion . of the paper read by Mr E. Melland at the meeting of* the Otago Institute on July 17 : —

Until last year, when the absurd course was adopted of closing the Indian mint .to the unlimited coinage of silver, there had been no fall in the value of silver. (I say " absurd course," because it was a policy of scarcity when a policy of plenty was wanted; it was an attempt lo rate the rupee to the 'sovereign without the security of,a fixed ratio between silver and gold — an attempt foredoomed to failure.) That there, had been no fall in the value of silver was obvious from the fact that silver prices of commodities had remained steady, at all events until last y«ar. (Evidence is rather contradictory as to what has happened to prices since the closing of the Indian mint.) A rupee was worth as much in India in 1890 as in 1870. Therefore, to take the wheat pro-, ducer as an example, as all the expenses of the Hindoo in growing wheat were- calculated in rupees, all he wanted was to receive as many rupees for his wheat as formerly. ' Whether wheat was quoted at 50s a quarter or 30s a quarter concerned him not at all, so long as he received — as he certainly did — the same number, of rupees in the latter case as in the former. No wonder that wheat growing io New Zealand has been practically abandoned when we have had to fight against" the Indian ryot's bounty, amounting just now to at least 40 per cent. !

Had gold been demonetised when silver was, the effects on the commerce of the world would have been far less disastrous, for this parity between silver and gold countries would not have been broken, and trade between them would not have been dislocated. It should not be forgotten also that whereas up to 1873 there were no people who used gold as absolutely their only money, there are even yet some 800,000,000 (more than half the population of the world) who know no ' money but silver. Although the appreciation of silver would have been very considerable, had . gold been demonetised, it would not have been nearly so great as that of gold has been, because it would bavo been spread over a vastly greater area, and because the supply of silver was increasing rapidly just at that time, and would have been further stimulated by the appreciation. Moreover, as Ricar.do pointed out long ago, " silver is much more steady in its value in consequence of its demand and supply being more regular " (it is never found in placer deposits, for instance) " and there can be no doubt that, en the whole, silver is preferable to gold as a standard." (Ricardo, I may mention, was not a bimetallist, at all events of the present day type, simply because international agreements were not within the scope of practical politics in his day. Even a Postal Union would have' been considered an absurd and visionary scheme in those times.) . Before leaving this brief summary of the disastrous effects of the demonetisation of silver, I must point out that these evils, or most of. them, had been prophesied _ by experts in monetary science when the idea was first mooted. In a paper read before the French Institute in" 1868, M. Wolowski said: "The suppression of silver would be a veritable revolution. Gold would augment in value with a rapid and constant progress, which -would break the faith of contracts, and aggravate the situation of all debtors, including the nation. It would add, at one stroke of the pan, at least three milliards to the 12 milliards of the public debt." But the fullest prophepy, the most exact in every detail, was probably that of Ernest Seyd, who wrote in 1871 as follows :— '

It is a great mistake to suppose that the adoption of the gold valuation of other States besides England will be beneficial. It will only lead to the disturbance of the monetary equilibrium hitherto existing, and cause a fall in the value of silver, from which England's trade and the Indian silver valuation will suffer more than all the other interests, grievous as the decline of prosperity all over the world will be. The strange doctrinism existing in England as regards the gold valuation is so blind that when the time of depression sets in, tbere will be this special feature": the economical authorities of the country will refuse to listen to tbe cause hero foreshadowed; every possible attempt will be made to prove that the decline of commerce is due to all sorts of causes and irreconcilable matters. The workman and his Btrikes will be the most convenient target; then speculating and over-trading will have their turn. Later on when foreign nations, unable to pay in silver, have recourse to Protection— when a number of other secondary causes develop tb«nisi-lves— jhen many would-be wise men will have the opportunity of pointing to specific reasons which in

their eyes account for the falling-off in every branch Of tijide. Many other allegations will be made totally irrelevant to the real issue but satisfactory to the moralising tendency of financial writera. The great danger of the time will then he that among all this confusion and strife England's supremacy in commerce and manufactures may go backwards to an extent which cannot be redressed when the real cause becomes recognised and the natural remedy is applied.

I now claim to have shown (1) that the demonetisation of silver reduced the full-powered money in the world quite sufficiently to account for the general fall in prices from which we are suffering ; and (2) that the exact consequences which monetary science and history show would result from such a contraction <;.f the etandard of value have actually resulted, and that, moreover, these consequences were accurately foretold before the demonetisation took place. This is as near mathematical proof as the nature of the subject will allow. It is generally admitted that the power to prophesy correctly the course of events is the surest proof of the trull of any scientific theory.

While on this subject of the test of prophecy it is instructive to note that while the bimetallists have consistently prophesied a continuous fall in the level of prices so long as the demonetisation of silver was taking place Ca fall to which no limit can be placed if the United States decide to have gold ' money only, and if a eerious attempt is made to force a gold standard on India), the monometallists, excepting Giffen, have usually talked as i we had touched bottom and a re-action was about to set in. Even Jevons, bne of the ablest students of the subject, so far committed himself as to wtite in 1877 : " Price>, it is'said, will fall and the burden of debts will, thus bn increased by the demonetisation of silver. But there is no proofs nor even probability that such results will follow." This prophecy contrasts staogely with that of Ernest Seyd, and is the mote noticeable because of Jevons's extreme caution in all his statement's) 1 would speak of Jevops, however, with much rep. cS, for tbero o*n be littlo doubt that but for his premature death, in 1882, he would before now have been a convinced bimetallist. The lessons of experience, not to mention the falsifying of his own prophecies, could not have been without their natural effect on such an essentially fairminded man.

Having diagnosed the disease, let us mow turn to. the remedy. And first I should point out that the gold monometallists have no remedy to propose They have had everything their own way for 20 years, and world-wide financial disaster has been the result. The laissez-faire, let-things-drift, policy has been, and I may say still i», their only policy. "J his has been very largely the result of mere ignorance and prejudice. Partly, _owever, there is no room for doubt, it has been due to tho discreditable idea that England (the home of tho monometallism) being a creditor country, having debts all over the world which have to be repaid in gold, mutt needs benefit by the appreciation of gold. This selfish, not*. to say dishonest, idea was clearly present in the minds of certain of tbe Royal Commission of 1887-8. The march of events is at last convincing even the bankers and moneyed men of London that in the long run it does not pay mortgagees for mortgagors to be ruined ; neither' do banks prosper most when their customers' are carrying on business at a loss. As Mr Charles Hoare, a well-known banker, said at the Bimetallic Conference in London on the 2nd May last, " Toe prosperity of bankers depends on the prosperity of their customer*)." When this simple fact thoroughly grasped — in addition to the fact that Eogland is a nation of producers and manufacturers as well as a nation of creditors — the straggle will be over { for bi medallists all along havo not had to fight against' arguments, but against ignorance, apathy, and mistaken ideas of self-interest. Tho nature of the disease realised, the remedy can then be applied without delay. The remedy obviously is a return to the principle of bimetallism. ■As Francis Walker puts.it: "The remedy of the wroDg must be sought in the concerted action of the civilised States, under an. increasing conviction of the impolicy of basing the world's trade on a single money metal." All that is needed is an international agreement by which England, Germany, aud the United States join with the Latin Union in keeping open mints for silver as well as gold at a fixed ratio — that is to say, & return to the old Btate of things, only on a firmer and broader basis. As an instince of the ' ignorance of the public and the press on this subject, I may mention that many people, and newspapnis too, always speak of bitnetallfem tw though ifc were some new-fangled currency fad, instead of — what is really the case — it having been., in some form or other, the custom of the civilised world right through historic times, or, at all events, as Max Miiller points out, from the eighth century be. Up till 1873, in fact, we were all bimetallist^ Cas M. Jourdam spoke prose) without being awafe of the fact. And at the present time there ' is not a ' single economist of any note, in any country, who is a mono-

mefcallist (for Giffen and Mulhall are mere statisticians, and do not even pretend to be economists) .

There can be no doubt that if England had opened her mint to silver in 1873 (instead of Germany taking action in the opposite direction) the financial disasters of the last 20 years would never have taken place. By a beneficent arrangement of Providence the annual supply of silver was then increasing, just as the gold supply was falling off ; and the probability is that prices would have remained fairly steady ever since, with a slight rise recently, owing to the South African gold returns, and the also increasing supplies of silver. The results of the grievous errors of the last 20 years cannot be effaced, but we may prevent their being continued and aggravated. As Robert Giffen wrote in 1888 : " Many mischief s might have been avoided if all concerned had realised 10 or 15 years ago what was likely to happen in money." He does not, however, go on to say, as he fairly might have done, that as the bimetallists were the only people who had realised and foretold correctly " what was going to happen in money," that therefore it might be as well to listen to their advice even now. On the contrary, he persists in proclaiming bimetallism to be impracticable because no legislation can fix the value of silver, or anything else. We must examine this plea for a moment. Admitted that legislation cannot directly fix the value of anything, still no one can deny that it can set op a demand, which is one -of the main factors of value. History and common sense alike agree that with open mints offering 53 per ounce for silver, the price of silver will not fall perceptibly below 5s per ounce. For the historical view of this question I would refer you to Del Mar's "Money and Civilisation," from which I will read one extract only :—: —

From 1493 to 1640 Spain and Portugal obtained from America and the Orient about 1125 tons of gold and 46,200 tons of silver. If these quantities be added to the stock on hand in 1492 the result would be 1245 tons of gold and 48,600 tons of silver, a proportion of Ito 39. If the new supplies are taken by themselves, without reference to the previous stock on hand, the proportionate quantity of gold to silver was Ito 41 ; yet these metals were all coined successfully at a value of 1 to about 13J, a convincing proof that production had nothing whatever tp do with the ratio, and that tho latter was due entirely to laws and the conflict of laws. From 1(540 to 1690 Spain got about 355 tons of gold and 24,720 tons of silver, or 70 times as much silver as gold ; ytt it was coined chiefly at the ratio of 14 or 15 to 1. If these circumstances — even after making the mo3t liberal allowances for error, the conversion of bullion into plate, and of plate into coins, <fee— are not sufficient to prove that the ratio is entirely amenable to legislation, then I, for one, utterly fail to see the utility of inquiring into the matter any further.

This should suffice to settle this question, but as it is no less a person than Robert Giffen who declines to believe that Government action can settle the ratio between gold and silver, I will refer briefly to the history of Europe from 1816 to 1873, during which time the ratio of 15£ to 1 was successfully maintained in spite of every kind of disturbance that could possibly have interfered with the relative value of gold and oilver. As Mr Samuel Smith, M.P., pointed out in an essay, published in 1887 : " This ratio of 15£ to 1 was equally unaffected by the great increase in the cost of producing silver during the civil wars in South America, which closed the richest silver mines, and by the extraordinary decrease in the cost of producing gold, when the rich mines of Australia and California were first discovered. ... So long as the French Mint was] open to coin either of them to an unlimited extent, and as full legal tender, it mattered not whether the yield of gold was two millions a year or 30 millions ; whether the yield of Bilver was six or 16 millions ; whether the miners in Australia were extracting gold at a cost of £1 per ounce, or the miners in Nevada were producing silver at Is 6d per ounce. Between 1848 and 1870 the stock of gold money in the world, according to trustworthy estimates, increased by nearly 90 per cent., whilst the quantity of silver money in the world increased by only 10 per cent. But still, under the natural operation of the bimetallic system of France and other countries, the relative value of gold and silver stood practically unchanged."

When we see the ratio so well maintained under such circumstances, and without any international agreements, it seems absurd to doubt that with an international agreement the maintenance of the ratio would still be possible. The Royal Commission of 1887-8 took the best evidence to be had on the subject, and agreed unanimously — monometallists and bimetallists together — that it was possible, and they could have come to no other conclusion. This branch of the subject may be regarded as definitely settled. In the words of Mr A. J. Balfour, iv his speech in London on May 2 last : " There is practically now a consensus of the whole economic scientific world, which has devoted itself to the elucidation of this problem ; and any man who, in the face .of that opinion, now quotes any of the old tags about demand and supply making it impossible to fix a ratio between the two metals, or such doctrines as that the interference of the State to fix prices, must necessarily fail. Any man who now relies upon arguments of that kind to show that the double standard is an impossible expedient, does nothing less than write himself down \n individual ignorant of the latest scientific developments of political economy."

The chief difficulty, however, of arguing with monometallists is that no two of them seem to take up quite tho same ground of defence. Borne contend that the cause of the fall in price is increase in commodities. Giffen pooh-poohs thiß idea, and points to contraction of money as the real cause. Hio objection is that it in impossible for Governments •to maintain a ratio between gold and silver. The Royal Commission monometallists assert that it is quite possible; and so it goes on, monometallists answering eaoh other so completely as to leave but little for their opponents to do. Since 1873 the gold price of silver has fallen 50 per cent., say 2s 6d per ounce : and yet there are men with such limited reasoning powers as to say that this is due to the increased supply of Bilver from the Oomstock Lode and other mines ; whereas the actual proportion of silver to gold in the world is not so great now as it was in 1848.

The mere cost of production is also spoken of sometimes as though it were an important matter materially affecting the ratio'; but all economists admit that the value'of the precious metals is not, and cannot possibly be, dependent on their cost of production. Del Mar proves this at considerable length ; but the mere fact is perhaps most clearly stated by J. S. Mill, who says: "Alterations in the cost of production of the precious metals do not act upon the value of money, except just in protion as they increase or diminish its quantity." Another objection to bimetallism that some- , times shows itself iv the daily press is the idea that it is a form of Protection - that silver is in gome way to be protected. This is a curious misconception of the situation. Protection, in the economic sense, means protecting a man against his competitors by means ot unequal laws. Tbia is the very opp >s;te of what the bimetallists wish to b ing >ibou\ At pre;-- ut gold is strictly protected. Of court>o konuthiny canst be instituted by the Government as full |

legal tender money. What the bimetallists want is free trade between the precious metals : let them both be full legal tender, not one of them only. A further fallacy which may as well be nailed to the counter in passing, is the popular idea that very low rate 3of interest and discount, such] as are now ruling in London (below 1 per cent, per annum, I believe), are a sign of abundant money. Now, as Jevons explained as long since as 1863, the rate of interest "is quite independent of the value of the gold "—" — and anyone can see that for .himself by referring to the tables of the bank rate of discount, and noticing,' for instance, how it rose and rose in 1853 and 1854 when gold was" flowing in from California, and Australia. It is in times of brisk trade and rising prices that rates are high. The subject is carefully discussed in "Money and Trade," by Francis Walker, who shows that it is capital rather than money that men seek to borrow, and that the rate of interest " depends upon the supply of capital in all its forms suited to productive uses, compared with the opportunities existing to use capital productively." Of course no one cares to borrow unless he can use the borrowed capital profitably, and what these very low really show is that business and production generally are hopelessly unprofitable and that enterprise is temporarily dead.

It is, I hope, unnecessary to refute the men who point to the unusually large reserves of gold now held by the Bank of England, and talk as if it was the amount of gold in the Bank of England which determines the range of prices.

Before leaving the subject of banking I should perhaps mention the economy in the use of gold brought about by improved banking facilities of various sorts. This is sometimes spoken of as though it were a very important factor in the question, but this is not really the case. Bank paper, as a rule, is an increase of en dit rather than of money, and as for the use of cheques, j clearing .houses, and co on (as Giffen told the London ' Statistical Society in 1879), "the United Kingdom was very fully banked before 1850, the growth of banks and banking business having since been no more than in proportion to the increasing wealth of the community." Mr J. B. Martin also showed the same society more recently that London bankers made exactly the same percentage of their payments in coin in 1880 as they had done in 186*. The question of the ratio is now the only remaining one. How many ounces of silver shall be taken as the equivalent of one ounce of gold at the various mints ? This is by many people considered a very puzzling question. It is certainly not so easily answered as it would have been 20 or 15 or 10 years ago ; but, on the other hand, it is more easily answered than ib will be 10 years hence, if gold should be allowed to go mi appreciating. There can be little doubt that even now a conference representing the different nations concerned would settle the matter without much delay or difficulty. The old ratio was 15 J, to 1. That is still the ratio in force in the Latin Union, and that )V what it should be for the rest of the world. Though the present market ratio may be 30 to 1, it should be remembered that the value of a precious metal as money is a very different thing from its value as a commodity, with the main demand for it (that is as money) cub off. One of the main factors in deciding this question should be the relative quantities of gold and silver in the world ; and as a matter of fact, the total stocks of silver are now less in proportion to the gold than was the case 50 ye&rs ago, when 15£ to 1 was the actual ratio in use; nor is there, as far as we can see, any probability of the proportions being very materially altered. Of course, the objection is raised that the owners of silver or of silver mines would suddenly find their property doubled in value. This idea, however, is due to that ever-recurring source of mistakes' — a confusion between the meaning of the terms "value" and "price." The gold price of silver would at once be doubled, but I should say more than half of this rise would be due to depreciation of gold and less than half to appreciation of silver. Moreover, the silvermen, not unnaturally, think it only right that they should have their turn ; the gold-men have had the advantage ";long enough. In order, however, to prevent any great disturbance in trade, a compromise has been suggested on a graduated plan, which has, I think, distinct merits. Mr Robert Barclay, in his little book " The Disturbance of the Standard of Value," proposes that the ratio of 15£ to 1 shall be approached gradually by beginning say at 20 to'l and lowering it each year for four years, until the desired ratio is reached. This plan has at all events the merit that it may, to some extent, reassure those who express so much apprehension as to the results of a return to the old ratio.

OE course some depreciation of money with corresponding appreciation of commodities would result, but this would revive trade, and bring back general prosperity without really injuring anyone. Creditors would find it much better to be fully paid even though in a slightly depreciated currency than not to be paid at all, or to bo paid very partially ; and in very many cases this is really the alternative before them. To producing countries such as these colonies it would be unalloyed good. Some people talk as if falling prices must necessarily benefit the labouring classes and rising prices must injure them, but, as Del Mar explains in the " Science of Money," "although theoretically labour benefits from a general fall of prices (it being the last in point of time to feel the effects of a diminished sum of money) it practically suffers even more than during a general rise of prices, because a .fall of prices hinders commerce and depresses production, and thus deprives labour of employment or tangible existence." M'Culloeh, in his article on tho "Precious Metals" in the Encyclopedia Britannica (eighth edition), says : " Though, like a fall of rain after a long course of dry weather, it may be prejudicial to certain classes, it is beneficial to a incomparably greater number, including all who are actively engaged in industrial pursuits, and is, speaking generally, of great public or national advantage." Jevons also, in his essay on " The Value of Gold," in 1863, when referring to the great depreciation of gold which had taken place in the previous 10 years, supports these views of M'Culloch's, and emphasises them. The depreciation of money, he says, had already had "a most powerfully beneficial effect. It loosens the country as nothing else could from its old bonds of debt and habit.

. . . It excites theactiveandskilfulclassesof the community to new exertions, and is to some extent like a discharge from his debts js to the bankrupt long struggling against his burdens."

We have now finished our inquiry, and I will only ask, by way of summing up, what then is the duty of the British Government in the matter if the exigencies of party politics will allow it to turn its attention "to anything which is not a party cry ? (I say the British Government advisedly, because it has been made quite clear at the various international conferences on the subject that only the concurrence oE the British Government is necessary to have the bimetallic agreement signed immediately.) One of the first and most essential duties of a Government is to provide it's people with "goodmeney." Now, the main characteristic

of " good money " is that it shall be a standard measure of value, that it shall possess "that stability and permanence of value — that is to cay, of purchasing power, — which is the essence of a just measure — an honest equivalent." Or, as John Locke put it, " Money is the measure of commerce, and of the rate of everything, and, therefore, ought to be kept (as all other measures) as steady and invariable as may be." The goal to be aimed at is a perfectly steady general average of prices — that is to say, that the quantity of money should increase with equal step with the growth of population and the multiplication of commodities. This desideratum may appear Utopian, but scientific methods have been suggested by which it might possibly be attained — methods which time will not allow us to discuss this evening. It is quite clear, however, that our present measure of value — gold deprived of the assistance of silver — is not •' good money," for it has appreciated some 40 per cent, in 20 years. There can be no doubt that the old bimetallism, with mints open to both silver and gold to an unlimited extent, gave far more satisfactory results, and that, as Francis Walker says: — "To unite gold and silver in the office of money is to generate a compensatory action which shall . . . give to the two, as a mass, a steadiness in comparison with the general body of commodities which neither by itself could have." M. de Laveleye emphasises the came point, and so does Jevons, in his well-known simile of the two reservoirs. "Imagine," he says, "two reservoirs of water, each subject to independent variations of supply and demand. In the absence of any connecting . pipe, the level of the water in each reservoir will be subject to its own fluctuations only. But if we open a connection the water in both will assume a certain mean level, and the effects of any excessive supply or demand will be distributed over the whole area of both reservoirs. The mass of the metals, gold and silver, circulating in Western Europe in .late. years is exactly represented by the water in these reservoirs ; and the connecting pipe is the law of the seventh Germinal, which enables one metal to take the place of the other* as an unlimited legal tender."

This connecting pipe has been closed, but will have to be opened again. We have seen that the present anomalous position of money is entirely due to the demonetisation of silver and the consequent breaking of the parity between silver and gold. The injury has been caused by the action of the Governments, and can ority be undone by the action of Governments, i Germany and the United States recognised their mistake many years ago, and are willing to retrieve it if England will join them. (It was as long since as 1881 that Bismarck made his now classical simile about the scramble for gold resembling two men struggling to, cover themselves with a blanket only large enough for one.) The interests of England in the restoration of the par between gold and silver are greater than those of any other nation. Her trade with her greatest dependency, India, and the East generally, can never again be satisfactory until this is done. What ' prevents England from taking the necessary step is nothing but the ignorance of the bulk of her people, who do not understand what is really the matter. Governments in these days do not readily take action unless forced to it by popular clamour. The people are now being educated by the severe lessons of experience ; but whether the popular clamour when it comes will be an intelligent one, or will be only the uprising of a people entirely ignorant of the cause of their misery, and therefore hopelessly in the dark as to the remedy (as appears 1 to be the case just now in the United States and even in France), it would, indeed, be difficult to say.

I cannot but think, however, that the popular clamour in England might be made more intelligent and more effective if the various Australasian colonies (which have all been such great sufferers from the appreciation' of gold) were to send strongly -worded petitions on the subject to the British Government.

The task I have attempted — of giving a summary of all the essential points of this subject in a lucid manner in bo brief a paper — has been a difficult one, and I cannot hope I have succeeded. I have had to omit altogether such interesting branches of the subject as inconvertible paper money, the present situation in India, the effect of the appreciation of gold on wages and the labouring classes, and the particular manner in which the British colonies have Buffered ; but if I have succeeded in interesting any of you who may not have hitherto thought much about the matter; so that you will take it up and study it for yourselves, I shall be quite content. I have little fear as to the result of your studies. Converts from monometallism to bimetallism abound, and are rapidly increasing in numbers. I have never heard of a convert — or, shall I say, pervert — from bimetallism to monometallism.

Mr J. Scott, F.G.S., who for the past four years and a-half has filled the position of assistant manager to the Stockton Coal Company, New South Wales, arrived from Sydney on Thursday. Mr Scott has been appointed manager of the Blackball Company's works at Greymouth in place of Mr Syndon, transferred to Wehtport.