Chapter Four: The variations in the proportion of values with regard to the Metals which serve as Money

Chapter Four

The Variations in the Proportion of Values with Regard to the Metals Used as Money

Abstract: The price of gold and silver and the ratio between them is determined by markets and is also based on their usefulness, cost of production, and transportation costs. When government mints establish a fixed ratio between gold and silver money that is not based on market prices, the overvalued metal will be driven from circulation. This is commonly referred to as “Gresham’s Law” where bad money drives out good money.

IF METALS WERE FOUND as easily as water commonly is, everyone would take what he wanted and they would hardly have any value. The most abundant metals that cost the least to produce are also the cheapest. Iron seems the most necessary, but as it is commonly found in Europe and produced with less trouble and labor than copper, it is much cheaper.

Copper, silver, and gold are the three metals generally used as money. Copper mines are the most abundant and cost less in land and labor to produce. The richest copper mines today are in Sweden and more than 80 ounces of copper are needed there to pay for an ounce of silver. It is also to be observed that the copper extracted from some mines is more perfect and lustrous than what is obtained from others. The copper of Japan and Sweden is brighter than that of England. That of Spain was, in the time of the Romans, better than that of Cyprus. But gold and silver, regardless of where they are extracted, are always of the same perfection when refined.

The value of copper, as with everything else, is proportional to the land and labor which enter into its production. Beside the ordinary uses to which it is put, like pots and pans, kitchen utensils, locks, etc. copper is used as money in most states for small purchases. In Sweden it is even used in large payments when silver is scarce. During the first five centuries of Rome, it was the only money. Silver only began to be employed in exchange in the year [of Rome or A.U.C.¹⁴³] 484 (269 B.C.). The ratio of copper to silver was then rated in the mints at 72 to 1; in the coinage of 512 (241 B.C.) at 80 to 1; in 537 (216 B.C.), 64 to 1; in 586 (167 B.C.) at 48 to 1; in 663 (90 B.C.) by Drusus and 672 (81 B.C.) by Sulla at 53 to 1; in 712 (42 B.C.) by Marcus Antonius and 724 (30 B.C.) by Augustus at 56 to 1; in 54 A.D. under Nero at 60 to 1; in 160 A.D. under Antoninus at 64 to 1; in the time of Constantine 330 A.D. at 120 and 125 to 1; in the age of Justinian about 550 A.D. at 100 to 1. Since then, it has always varied below the ratio of 100 to 1 in the European mints.¹⁴⁴

Today, because copper is only used as money for small purchases, whether alloyed with carbon to make brass as in England, or with a small portion of silver as in France and Germany, it is generally rated in the proportion of 40 to 1, though the market price of copper to that of silver is ordinarily at 80 or 100 to 1. The reason is that the cost of coining is generally deducted from the weight of the copper. When there is not too much of this small money in circulation for small transactions in the state, coins of copper or copper and alloy are used without difficulty in spite of their defect in intrinsic value. However, when being used for exchanges with a foreign country, they will only be taken for the weight of the copper and the silver alloy. Even in states where there is too much copper in circulation for small transactions, when the greed or ignorance of the governors mandate laws that require a certain amount be received in large payments, it is unwillingly accepted. Small coins lose a certain percentage when traded for silver, as is the case with billon coins and ardites in Spain,¹⁴⁵ or when they are used for large payments. Yet small coins can always be used without difficulty for small purchases because the value of the payments is small and therefore the loss is even smaller. This is why they are accepted without difficulty, and why copper is exchanged for small silver coins above the weight and intrinsic value of copper within a state, but not with other states, because each state has the wherewithal to carry on its small exchanges with its own copper coins.

Gold and silver, like copper, have a value proportional to the land and labor necessary for their production. If the public assumes the cost of minting these metals, their value as bars and coins is identical, their market value and their mint value are the same, and their value in the state and in foreign countries is always alike, depending on the weight and fineness; that is on weight alone if the metals are pure and without alloy.

Silver mines have always been found to be more abundant than those of gold, but not equally in all countries or at all times. Several ounces of silver have always been needed to buy one ounce of gold, sometimes more and sometimes less, according to the abundance of these metals and the demand for them. In the year A.U.C. 310 (443 B.C.), 13 ounces of silver were needed in Greece to buy an ounce of gold, i.e. gold was to silver as 1 to 13; A.U.C. 400 (353 B.C.) or thereabouts, 1 to 12; A.U.C. 460 (393 B.C.), 1 to 10 in Greece, Italy, and the whole of Europe. This ratio of 1 to 10 seems to have persisted for three centuries to the death of Augustus, A.U.C. 767 or 14 A.D. Under Tiberius, gold became scarce or silver more plentiful, and the ratio gradually rose to 1 to 12, 12½, and 13. Under Constantine, 330 A.D., and Justinian, 550 A.D., it was 1 to 14. Later history is more obscure. Some authors think it was 1 to 18 under certain French kings. In 840 A.D., under Charles the Bald, gold and silver coins were struck at 1 to 12. Under St Louis, who died in 1270, the ratio was 1 to 10; in 1361, 1 to 12; in 1421, over 1 to 11; in 1500, under 1 to 12; about 1600, 1 to 12; in 1641, 1 to 14; in 1700, 1 to 15; in 1730, 1 to 14½.

The quantity of gold and silver brought from Mexico and Peru in the last century has not only made these metals more plentiful, but has also increased the value of gold compared to silver, which has been more abundant, so that in the Spanish mints, following the market prices, the ratio is fixed at 1 to 16. The other European states have closely followed the Spanish price in their mints, some at 1 to 15⅞, others at 15¾, 15⅝, etc., following the ideas and views of the directors of the Mints. But since Portugal has drawn great quantities of gold from Brazil, the ratio has begun to fall again if not in the mints at least in the markets, and this gives a greater value to silver than in the past. Moreover, a good deal of gold is often brought from the East Indies in exchange for the silver sent there from Europe, because the ratio is much lower in India.

In Japan, where abundant silver mines are found, the ratio of gold to silver is today 1 to 8; in China 1 to 10; in the other countries this side of the Indies 1 to 11, 1 to 12, 1 to 13, and 1 to 14, as we get nearer to the West and to Europe. But if the mines of Brazil continue to supply so much gold, the ratio may eventually fall to 1 to 10, even in Europe, which seems natural to me, if anything but chance is the guide for the ratio. When the Roman republic exploited all the gold and silver mines in Europe, Asia and Africa, the ratio of 1 to 10 was the most consistent.

If all the gold mines regularly produced a tenth of what the silver mines produce, the ratio between these two metals would not necessarily be 1 to 10. The ratio always depends on the demand and on the market price. Rich people might prefer to carry gold coins in their pockets rather than silver, or they might develop a taste for gildings and gold ornaments rather than silver, thus increasing the market price of gold.

Neither could the ratio between these metals be determined by considering the quantity found in a state. Assume that the ratio is 1 to 10 in England and that the quantity of gold and silver in circulation is 20 million ounces of silver and 2 million ounces of gold; that would be equal to 40 million ounces of silver. Now assume that 1 million ounces of gold are exported from England out of the 2 million, and 10 million ounces of silver are imported in exchange; there would then be 30 million ounces of silver and only 1 million ounces of gold, still equivalent in all to 40 million ounces of silver. If there are 30 million ounces of silver and 1 million ounces of gold, and if the quantity of the two metals decided the ratio, it would be 1 to 30, but that is impossible. The ratio in the neighboring countries is 1 to 10, and it would therefore cost only 10 million ounces of silver, with a little extra for the cost of transportation, to bring back 1 million ounces of gold to the state in exchange for 10 million ounces of silver.

Therefore, to determine the ratio between gold and silver, the market price is alone decisive. The number of those who need one metal in exchange for the other, and of those who are willing to make such an exchange, determines the ratio. It often depends on the attitudes of men; the bargaining is done approximately and not geometrically. But, I do not believe that one can imagine any rule but this one to determine the ratio. At least we know that in practice it is the one which decides, as in the price and value of everything else. Foreign markets affect the price of gold and silver more than they do the price of any other goods or merchandise because nothing is transported with greater ease and less waste. If there were a free and regular trade between England and Japan and if a number of ships were regularly employed in this trade and the balance of trade were in all respects equal, i.e., if the goods exported from England to Japan were equal to the goods imported from Japan in terms of price and value, it would cause gold to be exported from Japan in exchange for silver, and the ratio between gold and silver in Japan would be made the same as it is in England, subject only to the risks of navigation, because the costs of transportation is assumed here to be paid by the trade in goods.

Taking the ratio at 1 to 15 in England and 1 to 8 in Japan, there would be more than 87 percent to gain by carrying silver from England to Japan and bringing back gold. But this difference is not enough to pay for the costs of such a long and difficult voyage. It pays better to bring back merchandise from Japan rather than gold in exchange for silver. It is only the costs and risks of the transport of gold and silver that can make a difference in the ratio between these metals in different states. In the nearest state, the ratio will differ very little, with a difference from one state to another of 1, 2 or 3 percent, but from England to Japan, the total of all these differences will amount to more than 87 percent.

It is the market price which decides the ratio of the value of gold to that of silver. The market price is the base for this proportion in the value assigned to gold and silver coins. If the market price varies considerably, the coinage must be reformed to follow the market rate. If this is not done, confusion and disorder will emerge because the price of one or the other metal coins will rise above its specified monetary value. There are an infinite number of examples of this in antiquity. There is a quite recent one in England under the laws made at the London Mint. There an ounce of silver, eleven-twelfths fine, was worth 5 shillings 2 pence sterling. Since the ratio of gold to silver (which had been fixed at 1 to 16 in imitation of Spain) has fallen to 1 to 15 and 1 to 14 1/2, an ounce of silver sold at 5 shillings 6 pence sterling, while the gold guinea continued to circulate at 21 shillings 6 pence sterling. This caused the export from England of all the silver crowns, shillings and sixpences which were not worn by circulation. Silver money became so scarce in 1728 (only the most worn pieces remained) that people had to exchange a guinea at a loss of nearly 5 percent. The trouble and confusion thus produced in trade and circulation forced the Treasury to request that the celebrated Sir Isaac Newton, director of the Tower Mint, make a report on the measures he thought most suitable to remedy this chaos.

Nothing could have been easier. It only required following the market price of silver in coining silver at the Tower. Whereas the ratio of gold to silver was traditionally by the laws and regulations of the Tower Mint set at 1 to 15 3/4, it was only necessary to make the silver coins lighter in the proportion of the market price, which had fallen below 1 to 15, and then to anticipate the changes which the gold from Brazil would bring in the ratio between these two metals. It might even have been possible to fix it on the basis of 1 to 14 1/2, as was done in 1725 in France, and as they will be forced to later do in England.

It is true that the coinage in England might equally have been adjusted to the market price and ratio by diminishing the nominal value of gold coins. This was the policy adopted by Sir Isaac Newton in his report, and by the Parliament in response to this report. But, as I shall explain, it was the least natural and the most disadvantageous policy. Firstly, it was more natural to raise the price of silver coins, because the public had already done so in the market. The ounce of silver, which was worth only 62 pence sterling at the Mint, was worth more than 65 pence in the market, and all the silver money was being exported except for the coins that were considerably reduced in weight due to wear in circulation. On the other hand, it was less disadvantageous to the English nation to raise the silver money than to lower the gold money when considering the sums that England owes to foreigners.

If it is assumed that England owes foreigners 5 million sterling of capital, invested in the public funds, it may be equally assumed that foreigners paid this amount in gold at the rate of 21 shillings 6 pence a guinea or in silver at 65 pence sterling the ounce, according to the market price.

These 5 millions have therefore cost foreigners 4,651,163 guineas, at 21 shillings 6 pence per guinea; but now that the guinea is reduced to 21 shilling, the capital to be repaid is 4,761,904 guineas, a loss to England of 110,741 guineas, without counting the loss on the annual interest paid.

Newton told me in answer to this objection that according to the fundamental laws of the Kingdom, silver was the true and only monetary standard, and that as such, it could not be altered.

It is easy to answer that the public has altered this law by their practice and the price of the market and therefore, it had ceased to be a law. Under these circumstances, there was no need to adhere scrupulously to it to the detriment of the nation and to pay foreigners more than their due. If gold had not been considered true money, it would have adjusted to the change, as in Holland and China, where gold is considered merchandise rather than money. If the silver coins had been raised to their market price without touching gold, there would have been no loss to the foreigners, and there would have been plenty of silver coins in circulation. They would have been coined at the Mint, whereas now no more will be coined until some new arrangement is made.

By reducing the value of gold (brought about by Newton’s report from 21 shillings 6 pence to 21 shillings), an ounce of silver which was sold in the London market before at 65 pence and 65½ pence, only truly sold at 64 pence. But as it was coined at the Tower, an ounce was valued in the market at 64 pence and if it was taken to the Tower to be coined, it would be worth no more than 62 pence, so no more was taken there. A few shillings or fifths of crowns have been struck at the expense of the South Sea Company, losing the difference of the market price; but they disappeared as soon as they were put into circulation. Today, no silver coins of full mint weight can be seen in circulation, only worn coins that do not exceed the market price in weight are circulating.

However, the value of silver continues to rise imperceptibly in the market. The ounce, which was worth only 64 pence after the reduction of which we have spoken, has risen again to 65½ and 66 in the market; and in order to have silver coins in circulation and coined at the Tower, it would be necessary again to reduce the value of the gold guinea from 21 shillings to 20 shillings and to lose to foreigners double of what is lost already, unless it is decided to follow the natural course and to adjust silver coins to the market price. Only the market price can set the ratio of the value of gold and silver, as is the case for all other values. Newton’s reduction of the guinea to 21 shillings was designed only to prevent the disappearance of the light and worn coins which remained in circulation, and not to fix gold and silver coins on the true ratio of their price. I mean by their true ratio that which is fixed by market prices. This price is always the touchstone in these matters. Its variations are slow enough to allow time to regulate the mints and prevent disorders in the circulation.

In some centuries, the value of silver rises slowly against gold, while in others the value of gold rises against silver. This was the case in the age of Constantine, who reduced all values to that of gold as the more permanent. However, the value of silver is generally the more permanent and gold is more subject to variation.

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¹⁴³ An alternative dating system which begins with the establishment of Rome in 753 B.C.

¹⁴⁴ The dates given above which are not followed by A.D. are in terms of A.U.C. (Ab urbis condita) or in the years of Rome where the year one is 753 B.C. Hence the year 484 is 269 B.C. and the year 724 is 30 B.C.

¹⁴⁵ Billon coins were small copper coins that were used in France and that were similar to Spain’s ardite coins.