Book Eight - Bimetallism and the Rise of the Gold Standard

Book Eight. BIMETALLISM AND THE RISE OF THE GOLD STANDARD THE appearance of the single gold standard in the currency systems of the modern world, the exotic quality of the standard and the tender substance of its growth, easily bruised by every wind of casuistry and political unrest, require, for their understanding, some reference to the question of the ratio and the unhealthy soil of bimetallism in which the gold standard is rooted. /. The Question of the Ratio THE development of gold coinage, or rather the reintroduction of gold in the coinage of Europe on a widespread scale in the thirteenth century, created a factor of extreme disturbance in the reviving money economy of Christendom. The maintenance of a stable relationship, or parity, between two precious metals, both of which were struck with the seal of the sovereign authority, and both of which were of equal validity in the discharge of obligations, now became the perplexing problem of honest governments, and at the same time the opportunity of dishonest ones. Nothing is more vocal of the incapacity of European philosophy and practice to deal with the money mechanism than the absorption of attention for the better part of five hundred years in the question of the ratio, the pages devoted to it in European currency history, the shifts and changes in business activity to accommodate itself to the disturbances it created, the orientation of statecraft around monetary policy connected with it, and the growth of parasitic financial activity feeding upon the opportunities it presented.

Though bimetallism was present in the ancient world, and undoubtedly offered the same problems as it did in modern Europe, it does not appear to have been, in general, a vital factor 145 146 MONEY AND MAN in monetary policy. While there are some who think that Roman money difficulties were the result of the imperial effort to establish a fixed ratio among the coinages of different metals, the real explanation of Roman money trouble was the dishonesty of the state, and the policy of manipulating the coinage in the interest of the treasury rather than for the benefit of commerce. The comparative immunity of the Empire to the ratio question was no doubt due to the fact that all Mediterranean civilization was embraced within the Empire frontiers, and foreign trade was negligible in relation to the domestic trade. Civilization centered in Rome, and commercial relations between Rome and the other centers of civilization such as China and India, were physical rather than financial. Much Roman gold and silver flowed out in payment for the silk of China and the spices and perfumes of India, but there were no spasmodic convulsions and sudden reversals in the flow of the metals which are characteristic of arbitrage operations. Commerce in the precious metals was unknown as a factor producing their drainage from the Empire.

In the previous period of history, before the Mediterranean was dominated by Rome, and when the trade of this area centered in the Greek commercial cities, arbitrage must have been an important factor in foreign trade. Every Greek city state had its own coinage, and the confusion, the diversity in weights and standards among these various coinages, offered fertile opportunity for the money changer and the dealer in precious metals. Yet so far as a factor influencing state policy, the variations in value between the metals appear to have been negligible. Certainly debasement of the coinage for the purpose of readjusting the ratio, which we find so frequently offered as an excuse for European monetary manipulations, does not appear to have been a necessity of the day. Debasement of the currency either for state profit or for the accommodation of changes in the ratio was rare in Greek history, and such debasements as occurred arose from the necessity of adjusting the standard to the worn and abraded state of the coinage in circulation. On the contrary, there are cases of actually raising the standard of the coinage for the greater prestige which a coinage of high intrinsic value seemed to offer. In the sixth century B.C., the Euboean unit was BIMETALLISM AND THE RISE OF THE GOLD STANDARD 147 increased in a number of cities by about five grains, in emulation of an increase introduced by Pisistratus in Athens.

During the long period of Byzantine history, foreign trade was an important source of social income: Byzantium was, as we have seen, a commercial civilization whose contacts extended to the farthest outposts of the known world. Yet the problem of the ratio does not seem to have been a disturbing one in state economy. An undervaluation of silver in the monetary scheme may have been a factor in its disappearance from coinage; at any rate, we know that the money of Byzantium was exclusively gold and copper; but the fluctuations in the relative value of the metals was not, in the course of a thousand years, a sufficient factor to disturb either the gold basis of the money, or the actual quantity or quality of the standard. Though Byzantine gold moved out to the most distant corners of the earth and served as the measure of value to feudatories in England and to Persian merchants in India, there was no apparent diminution of supplies at Constantinople, no scarcity of metal that would provoke an alteration of the standard.

The fact is that Byzantium did not concern itself with "mercantilism." In both the early and later Greek civilization an economic structure was built upon money, but money was kept as a means rather than as an object of commercial activity. Property arose from the growth of natural rather than monetary wealth, and financial activity was concerned with the acquisition and movement of physical rather than monetary values. In Europe, however, hardly did gold reappear in the money system when the problem of the ratio became acute and crucial. It is in Italy that its manifestations first develop. Because of the financial organization that developed here, the growth of the financial-capitalist spirit, and the superior astuteness of the Italian commercialist, the ratio soon became a subject of state policy and the opportunity for the bullionist. A rise in the value of silver against gold, which occurred in the second quarter of the fourteenth century, told immediately upon Florence, because of her mint rates. The ratio in Florence 148 MONEY AND MAN had been fixed at 13.62 while in France the ratio had been fixed at 12.6. The result on Florence was immediate, and silver disappeared from circulation. In 1345, says the historian Villani, there was a great scarcity. No silver money was seen with the exception of the quattrini. It was all melted down and transported. Great discontent arose among the wool merchants, who feared that the gold florin, in which they received their foreign payments, might fall too much. Being powerful in the state, their agitation was effective and in 1345 a recoinage was instituted.

This was not successful, due apparently to an error in calculation, and within a short time a second recoinage was decreed. This likewise proved ineffectual and a third and finally a fourth followed within the space of the year. Yet, even so, the effort was only temporarily successful, and within two years the price of silver was again out of line, and a fifth recoinage was undertaken, in which a price was put upon silver so far removed from the market price that it really constituted a state subsidy to surrender silver, and was in effect a debasement of the money of account. Whether by way of effect or cause it is hard to say, but certainly silver in the middle of the succeeding century had so far disappeared in the Italian peninsula, or gold had so far increased, that the commercial ratio during the fifteenth century remained persistently low—9.25 both in Milan and Florence.1 Thus the main outlines of the effect of bimetallism become apparent. Starting out with a given ratio between the two metals, a difference in the ratio set by a neighboring state forces the ratio out of line. To restore the balance a debasement of the more valuable coinage is undertaken. Subsequent changes in the ratio force a debasement of the coins of the other metal. It is the familiar story of the monkey dividing the cheese for the cats. By a process of nibbling at one piece and then the other in order to restore the balance, the monkey ends by having swallowed the whole cheese.

The actual process in Florence was as follows: The first recoinage reduced the number of coins struck to a mark of silver from 167 to 132, but increased the value of each coin in terms BIMETALLISM AND THE RISE OF THE GOLD STANDARD 149 of money of account (the lire di piccioli) from 2 soldi 6 denari di piccioli to 4 soldi. The net result was an actual depreciation both of the coinage and of the money of account. Subsequent recoinages increased the number of pieces coined from a mark of silver to 140, but retained the same value for them expressed in the money of account. This was, in effect, a debasement of the coinage. The recoinage of 1347 abolished the former coinages, and introduced a new coin struck at 111.6 to the mark of silver, but raised its value in terms of money of account to 5 soldi, thus again depreciating the money of account. From this period down to 1503 subsequent recoinages occurred during which the coinage was debased by increasing the number of grossi struck to the mark of silver from 111.6 to 166.666, while at the same time the money of account was depreciated by increasing the value of the grossi from 5 soldi to 7 soldi.

Tribute is generally paid to Florentine monetary probity because the gold florin, struck at 53 grains fine, was not altered in weight or fineness for 175 years of Florentine history; but this overlooks the fact that its stated value was constantly raised. Between 1252 and 1534 the gold florin was successively increased in value from 20 soldi of account to 150 soldi of account. If alterations were necessary in the silver coinage to take care of changes in the ratio it is hard to explain on this ground the frequent reductions in the value of the money of account in relation to the gold coinage. In France during the same period the ratio of gold to silver was changed in a single century more than a hundred and fifty times, and with a roughness that is quite inconceivable to the modern mind. During a period of ten years, for example, the ratio fluctuated as follows: 1303 1305 1308 10.26 15.90 14.46 1310 1311 1313 15.64 19.55 14.37 Such changes can hardly be explained on grounds of trade 150 MONEY AND MAN balances or differences in the production or supply of the two metals. They arose from the perpetual change in the composition and the alloy, debasements practiced as financial statecraft, and the international struggle for the precious metals under the theory that national wealth consisted of a large stock of gold and silver. A single instance will serve to show the arbitrary character of the changes made on the obviously specious pretext of adjusting the ratio. In 1342 the mark of gold, which in normal times just preceding was valued at 41 livres 13 sols, was proclaimed equal to 117 livres, and in 1360 the mark of silver, valued normally at 5 livres, rose to 102 livres.

These violent changes were largely the product of the rising capitalist philosophy which we have noted earlier. The idea that national wealth consisted of money stock dominated the political and commercial policies of Europe until well in the eighteenth century, when Adam Smith put it in its rightful place by emphasizing the importance of human labor as a source of wealth. //. Emergence of the Single Standard IT was not until 1663 that a definitive solution of the question of bimetallism was resolved. In that year, in England, by the Act of 15 Charles II (c. 7, sec. 12) the statutes forbidding the exportation of bullion were removed at one blow of astounding boldness. "Forasmuch," says the act, "as several considerable and advantageous trades cannot be conveniently driven and carried on without the species of money or bullion, and that it is founded by experience that they are carried in the greatest abundance (as to a common market) to such places as give free liberty for exporting the same, and the better to keep in and increase the current coin of this kingdom, be it enacted that from and after the 1st day of August 1663 it shall and may be lawful to and for any person or persons whatsoever to export out of any port of England and Wales in which there is a customer or collector, or out of the town of Berwick, all sorts of BIMETALLISM AND THE RISE OF THE GOLD STANDARD 151 foreign coin or bullion of gold or silver, first making an entry thereof in such customhouse respectively, without paying any duty, custom, poundage, or fee for the same, any law, statute, or usage to the contrary notwithstanding."

The importance of this enactment lies in its abandonment of the attempt to control, by means of mint rates of metal purchase and metal coinage, the working of the money mechanism and the flow of the precious metals. It was a step in the direction of laissez faire so far as the financial system was concerned. Shaw hails it as "a revolution as signal as that produced in the relations of labor to capital by the disuse of the old labor laws," and as a change from "a medieval state-bound, merely legislative system to the modern system, in which the flow of precious metals is determined by the perfectly natural and automatic action of international trade—is indeed the index and safety valve of it, and of the whole present commercial world-circle."1 In Shaw's view, the change was the result of an intellectual attack upon the mercantilist theory, in which the monetary policies followed by the governments of Europe—the advantage of the process of altering the coinage—was impugned upon theoretic grounds.

This attack arose from the general growth of the body of doctrinaire opinion embraced under the name Physiocratic. Del Mar, on the other hand, regards the Act of 1663, and the subsequent Act of 1666, opening the English mints to the free coinage of the metals, as the greatest calamity which has occurred in the whole history of money, going so far as to characterize the latter act in several of his works as "The Crime of 1666." Though we cannot agree with his great thesis that the system of money suffered its greatest catastrophe when government surrendered its control of the money mechanism by the process—which became almost universal after the English enactment—of opening the mints to the free coinage of the metals for anyone who presented them, his caustic explanation of the Acts of 1663 and 1666 are probably nearer the truth than Shaw's. In Del Mar's view, the abandonment of government control 152 MONEY AND MAN over the movement and coinage of the metals was due directly and primarily to the pressure of the East India Company for freedom to export metal in unlimited quantities to the Indies, and the enactment was secured by influence put upon Charles by the intermediary of his mistress, Barbara Villiers. Such an explanation certainly accords with our experience in the methods of political bodies, which have always shown themselves more pliant and amenable before the pressure of entrenched interests than of intellectual doctrine.

The prime importance of the Acts of 1663 and 1666 was that they paved the way for the establishment of the single gold standard. During the eighteenth century the mint ratio was, on the whole, in favor of silver in France, and conversely, in favor of gold in England and Spain. The result was that gold became almost the only constituent of the currency of England and Spain for the greater part of the century. What silver appeared in England was drawn off for the Indian trade, where the ratio of silver to gold was very low, possibly one to four. There can be little doubt that this fact had a great influence in actually determining the great currency legislation which closed the century and finally decided England upon gold, and France and the United States upon bimetallism strongly favoring silver. The transition in England from the bimetallic to the gold standard may be traced briefly: Concurrent with the Act of Charles II freeing the precious metals from import and export restrictions, a new gold coin, the guinea, was introduced, and no attempt was made to give this coin a fixed value as against silver coins. The fixing of the value of the coin was left to the open market, and the treasury was allowed to accept the guinea in payment at the rate of exchange of the day.

This system which England now adopted, and which is known as the "parallel standard" or "alternative standard," did not prove satisfactory. Traders found it inconvenient to have to calculate continually in two different kinds of money which stood to each other in a fluctuating ratio, and under the pressure of this inconvenience the experiment had to be dropped.

BIMETALLISM AND THE RISE OF THE GOLD STANDARD 153 Towards the end of the seventeenth century the English silver coinage, as a result of fraudulent abrasion and clipping, had lost a large part (a sampling showed an average of 48 per cent) of its original metallic content. As a result of the influence of the free market in the metals, the new and relatively full weight guineas rose in value to 30 shillings or more. The government of William and Mary, intending at the time to reform the debased silver currency, viewed these quotations with dismay. In order to put a stop to any further rise, it prohibited the treasury in August, 1695, from accepting the guinea at a rate of exchange higher than 30 shillings, and upon the reformation of the silver coinage the maximum rate for the guinea was in the first months of the following year reduced step by step to 22 shillings. This process was consolidated by the Act of 1717 which fixed the legal tender value of the guinea at 21 shillings, at which rate it was coined until 1813.

As the maximum rates fixed for the guinea were higher than the market ratio—that is, gold was more valuable as legal tender than as bullion, while silver was less valuable—the effect was to drive silver out of circulation. In consequence of the low value of silver set by the statutory ratio, silver did not find its way to the English mint, and it became profitable to melt down for sale as metal the silver coins which had been recoined between 1695 and 1698 and had been brought up to their full statutory weight. Silver coins of full standard value disappeared entirely from circulation, and those remaining were so worn that their melting down was not a profitable proposition, notwithstanding the high price of silver. The solution to this problem of preserving the advantages of the preponderating gold currency while retaining a silver circulation was found by the Act of 1774. This act provided that for sums exceeding £25 silver would be legal tender only by weight, the coins being calculated on the basis of 5 shillings 2 pence per ounce. The final abolition of the double standard did not come about until the end of the eighteenth century, and was occasioned by a new rise in the value of gold as against silver, which 154 MONEY AND MAN made it profitable to export gold and tender silver for minting.

The English government, faced with the dilemma of accepting silver for minting and allowing gold to disappear, and unwilling to adopt the ineffective historical device of forbidding the export of gold, adopted the solution of forbidding the free coinage of silver which had prevailed by right since the Act of 1666. With the abolition of the free right of silver coinage in 1798, England forsook the system of bimetallism and passed into the stage of the single gold standard. The actual formal and legal establishment of the gold standard did not take place, however, until 1816, following the currency disorder introduced by the Napoleonic wars. The legislation of 1816 supplanted the guinea of 21 shillings value by a new gold coin, the sovereign, worth 20 shillings. The silver coins were reduced in content to a point that brought their metallic value well under their legal tender value, and prevented their disappearance by melting or export. Gold coins alone were given full legal tender value, and the legal tender value of silver coins was limited to amounts not exceeding 40 shillings. The guinea survived only in nomenclature, today used mainly by British tailors.

///. Momentary Equilibrium IN England the problem of the ratio was solved by the adoption of the single metal standard, the metal being gold, and the reduction of the other metals, copper and silver, to the status of satellites, with restricted orbit and function, and deriving their limited validity by reflection of their golden luminary. This solution was not the result of conscious effort directed by intelligence and governed by far-sighted objectives, but rather the chance outcome of the play and interplay of mercantile and financial interests in which the state was sometimes participant, sometimes helpless spectator. In Europe the history of the ratio is filled with even more blindness, and groping, undirected effort.

BIMETALLISM AND THE RISE OF THE GOLD STANDARD 155 In Germany, where the chaos of coinage and currency had been most profound, a momentary solution to the ratio question had been devised in the so-called "alternative system," introduced about the middle of the eighteenth century. Frederick the Great issued an ordinance which, though nominally fixing a ratio, provided in effect that gold and silver coins could not be substituted for each other in making payments. The fixed ratio between the coins therefore lost its principal significance. In 1787 the fixed ratio was definitely abolished, the relative value of gold and silver being "left simply to competition." The preponderance of silver coins in the circulation gradually established silver as the standard of transactions, the gold coins being regarded more and more merely as "trade coins."1 <*§ $»» In France the manipulations of the coinage by the Grand Monarque, Louis XIV, ostensibly to restore a parity between gold and silver, but actually to finance his extravagant court and wars, had led to the utmost confusion in the currency. Between 1696 and 1715 the livre of account had been depreciated, in terms of gold, by 50 per cent, through the process of calling in the outstanding coins and reissuing them at a higher value. By 1720, after the collapse of Law's System, some forty different gold louis and ten different silver louis were in circulation. In 1726, in an effort to restore some order to this chaotic system, a general recoinage was instituted on the basis of a ratio of 14.625 to 1. This ratio was subsequently adjusted (in 1785) to 15.5 to 1, but meantime the effect had been to draw off gold and leave the circulation predominantly silver.

This was the situation on the occasion of the currency reforms introduced by the French Revolution. In 1803, the monetary system was reorganized on the basis of the franc, with decimal divisions, and the familiar accounting by livre, sol (sou), and denier, so dear to readers of Dumas, officially ceased, though many of the old coins remained in circulation as late of 1852, and the sou in common speech until much later. The Act of 7th Germinal of the year XI (March 28, 1803) 156 MONEY AND MAN established the franc as a coin of silver weighing 5 grams, .900 fine, and retained a bimetallic standard in the provision that "gold coins of twenty and fifty francs are to be struck." The ratio adopted was 15.5 to 1, or the same as in monarchical France, so that aside from the adoption of the decimal system of accounting, the Revolution marked no decided change in the French currency system. The bimetallic system, and the course of the ratio, tended to place France, and those countries which, following the Revolution, adopted the French system of francs (namely, Belgium, Switzerland, and Italy) largely upon a silver basis. The Belgian law of June 5, 1832, for instance, adopted the silver franc as a unit of coinage without ordering or permitting the coining of gold francs.

Thus the course of the ratio and the currency provisions of the various states had brought about a general use of silver as the main or principal standard of value throughout Europe except the Netherlands. Of all the European states the Netherlands stood alone in the first part of the nineteenth century as a country with any considerable circulation of gold. By a law passed in 1816 (September 28), the same year in which the gold standard was formally established in England, the Netherlands had adopted a double standard based upon a ratio of 1 to 15.873. At this ratio gold was overvalued as compared with the actual market ratio, with the result that Holland coined gold coins exclusively. Notwithstanding the large coinages of gold, however, silver became the standard. The constant outflow of gold in foreign trade, and the fact that silver ranked in the public mind as the real currency, led to the currency law of November 26, 1847, which substituted a silver standard pure and simple for the actually existing double standard.

In the United States, the currency system had been founded on a bimetallic basis on a scheme that was at once simple and direct, but the course of the ratio made it impossible to maintain BIMETALLISM AND THE RISE OF THE GOLD STANDARD 157 two metals in circulation, and after a long period of trial and error, gold became predominant. By the Act of 1792 establishing the first mint, it was provided that gold and silver both should be legal tender for all payments at the ratio of 15 to 1, and that the coinage should be free for both metals. The relative values of the two metals had been fairly steady for some time at the ratio established, and on the face, circumstances never seemed more propitious for the working of the double standard.2 The establishment of a double standard had been due to Alexander Hamilton. Hamilton himself was an advocate of the single metallic standard, preferably gold, but his prime object was to secure an abundance of metallic money. Silver, being in use, must of course be retained, and gold brought in also, if possible, by the bimetallic system.3 Hardly had the act been passed, however, when silver began a steady fall relative to gold, and the standard began to "limp"

and then to walk on one leg. The ratio never again touched the low figure of 15 to 1; and the relative decline in silver which had led in England to the substitution of the gold standard, led to the disappearance of gold coinage in the United States. In the twenties of the nineteenth century, gold went to a premium of 5 per cent. The greater part of the American circulation consisted of foreign silver coins, especially of Spanish piasters— the Spanish "milled dollar," which circulated at a rate of exchange fixed by law. The attempt to maintain a parity between the piaster and the American dollar led to the disappearance of the latter, at the same time keeping the mint busy to the profit of the money-brokers. The coinage of dollar pieces was consequently suspended in 1805 by the President, and none was coined until 1836.4 As early as 1818 the United States began to recognize that Hamilton's ratio of 15 to 1 differed so much from the market ratio that if it were still designed to maintain a double standard, a new adjustment of the legal relations between the two metals was necessary. While nominally possessing a double standard, the country really had a single standard, and that, silver. A committee of Congress recommended in 1832 the establishment of a single silver standard, but the close commercial and finan158 MONEY AND MAN cial relations with England implied the necessity of a gold coinage. This was achieved by the Acts of June 28, 1834, and January 18, 1837, which established a ratio of 16 to I.5 To bring the coinage into this ratio, the familiar device of lowering the content of the more valuable coin, which we have noted elsewhere, was adopted.

The amount of pure silver in the dollar was left unchanged at 371.25 grains, but the fine gold content of the gold dollar was reduced from 24.75 grains to 23.22 grains, a debasement of 6.26 per cent. The ratio taken was higher than the market (then about 15.6 to 1) so that now it was cheaper to pay debts in gold than silver. In consequence, no more silver was tendered to the mints, and upwards of $50,000,000 at once disappeared, being sent abroad in payment of obligations, or melted down for other uses at home. Within three months after the passage of the Act of 1834 gold began to move toward the United States in such quantities that for a time alarm was created in London over the reserve position of the Bank of England.6 From 1834 on the United States was, for all practical purposes, on a gold standard. Thus, about the middle of the nineteenth century we find silver fairly well established as the standard of value on the European continent and in the Middle and Far East, and gold as the standard of value only in England, the United States and a few smaller states, such as Portugal, and the English colonies.

It was at this point that the discovery of the Californian and Australian gold fields, and the immense increase of the supplies of gold metal that followed upon these discoveries, introduced a new disturbance in the ratio. The effect was immediate upon the fragile mechanism of money, and a new revolution occurred in the currency systems of the world. IV. Dethroning of a Monarch THE opening of great gold areas almost simultaneously in both BIMETALLISM AND THE RISE OF THE GOLD STANDARD 159 Australia and California had an effect upon the price and money systems of the world as pronounced in effect as the earlier flood of precious metal that followed the discovery of the Americas. The effect upon the ratio was immediate. Gold now began to depreciate in value in relation to silver, and, in countries on a bimetallic standard, to force silver out of circulation into export or into hoarding. The movement was first felt in the United States. With a market ratio of around 15.7 to 1 and a legal ratio of 16 to 1, the effect had been to drive out the silver dollars from circulation.

The drop in the ratio toward 15.5 to 1 now made it profitable to the money brokers to melt down or export the smaller coins: half dollars, quarters and dimes. To protect this subsidiary coinage, which was necessary for change and small transactions, the inevitable debasement was adopted. By the Currency Act of February 21, 1853, the silver content of the subsidiary coinage was reduced by 6.91 per cent, to correspond to a ratio of 14.88 to 1 (from 371.25 grains to the dollar to 345.6 grains). This made silver more valuable as coin than as bullion, and to prevent the money brokers from tendering silver for minting, coinage was restricted to government account. In effect, this was a demonetization of silver as subsidiary money. The content of the one-dollar piece was not changed, and it remained formally the "standard dollar," a full legal tender coin, with unlimited coinage privilege; but as none was in circulation, none could disappear, and it was not profitable to tender silver for coinage into dollars. The total effect of the Currency Act of 1853 and the trend of the ratio was to place the money of the United States more firmly upon the gold basis.

The countries dominated by the French system and legal ratio of 15.5 had not been immediately affected, although the ratio crossed this line in 1851. But by the sixties these states found it necessary to take steps similar to those used in the United States. The first defensive step to prevent the outflow of silver was taken by Switzerland in 1860, which began to coin its subsidiary silver as token money with a content below its face value, by reducing 160 MONEY AND MAN the fineness from .900 to .800. Two years later Italy followed suit, by reducing its small silver coins to .835 fine.1 France, bound by commercial and political ties to these smaller countries, and unwilling to see her dominance threatened, called a monetary convention in 1865 for the purpose of evolving common action to meet the threat of the ratio. The result of this conference was the formation of the Latin Monetary Union among France, Italy, Switzerland and Belgium, under the terms of which the signatories agreed to coin their silver pieces of 2 francs or less on a basis of .835 fine, to restrict silver coinage exclusively for the account of the issuing state, and to accept in public payments the coins of each state irrespective of origin. The effect of these provisions was to abandon the free silver standard, by reducing the small coins to the status of token money, which, however, might circulate freely as legal tender within the four countries which were members of the Union. It was an approach to the gold standard, but it was not yet a gold standard. It was still a fictitious double standard.

Thus, within two generations after Holland had abandoned the double standard for silver, the new position acquired by gold, and the consequent course of the ratio, was rapidly bringing Europe to gold as the standard of value. It is quite likely that the conference that produced the Latin Monetary Union would have adopted the free gold standard had it not been for the opposition of the Bank of France and the money interest in France headed by the Rothschilds. To them, bimetallism afforded a lucrative opportunity for profitable arbitrage operations, and it was only when the bank found itself obliged to pay gold and receive silver that it could bring itself to depart from bimetallic policy.2 Hardly had the hermaphroditic system created by the union been fairly established when fresh troubles arose. On May 1, 1866, Italy was forced to suspend specie payments, which meant that small silver was no longer redeemable in Italy. As the Union required this token money to be accepted freely by all the signatories, a profit arose in exporting Italian silver to the BIMETALLISM AND THE RISE OF THE GOLD STANDARD 161 other three countries. The money interest was not slow to seize its opportunity, and the commerce assumed enormous proportions. Soon most of the Italian small coin was in circulation in the territory of the allies, where it produced a plethora of silver circulation, at the same time further weakening the Italian financial position. It was obvious that new measures had to be devised.

The Paris Exposition of 1867 afforded the French government an opportunity to retire gracefully from its opposition to the gold standard by calling a new conference. This was an international monetary conference attended by representatives of nineteen European governments and the United States. The idea behind the call to conference was a hope still entertained in France of inducing the world to adopt a universal money system on the double standard, but the overwhelming sentiment was in favor of the gold standard. Although the attempt to retain the double standard was a mistake, there was much to recommend a greater world uniformity of money based upon a single metal, and conditions were favorable for such an agreement. The day was fortunately one of international agreements and freer international intercourse, and it was hoped that the principles of the Latin union might be extended to form the basis of a world union. But the principal states, such as England, the German states, and Holland, declared themselves satisfied with their traditional standards, and this opportunity for a concerted intellectual attack upon the problem of the ratio and the standard went for naught.

The principal contribution of the conference was the recommendation of the gold standard. The solution of the ratio problem in Europe was not to be the achievement of well intentioned conferences, or the intelligent action of statecraft, but the by-product of the FrancoPrussian War and a new turn in the market for the metals. In Germany the condition of the currency had been one of the 162 MONEY AND MAN greatest chaos prior to the establishment of the gold standard. Six different systems were legally in force, and in addition an uncounted number and variety of coins were to be found in circulation. The currency muddle can hardly be more clearly described than was done in a document which Ludwig Bamberger, at the time a leading authority in the Reichstag on matters of finance and economics, placed before the Customs Parliament on May 5, 1870, on the occasion of a speech delivered on the question of the necessity of unifying the German currency. He is quoted by Helfferich as follows: "I have here a so-called 'bordereau,' namely, a table setting forth specifically the types of money which a trader enclosed with a draft to his bankers. The 'bordereau' is dated the 19th December, 1869. It relates to a sum of 15,834 gulden. I have extracted it from the correspondence of a bank. It contains the coins of which these 15,834 gulden were composed, and in order that you might understand its true meaning, I must add that the draft came from a small town in the province of Rhenish Hessen. The town is small, 3,000 to 4,000 inhabitants, and has but a single inn—not sufficiently attractive to be frequented by strangers. It is a payment composed of receipts from rents, purchase agreements, and from sales of wheat, barley, fruit, and similar products, brought from the various surrounding villages to this small town to be sold through the agency of a merchant. What was thus collected from the pockets of the peasants is as follows: The sum of 15,834 gulden consisted of double talers, crown talers, pieces of two and one-half gulden, of two gulden, one gulden, one-half gulden, one-third, one-sixth and one-twelfth Imperial talers, five-franc pieces, twofranc pieces, one-franc pieces. Then we have gold coins such as pistoles, double and single Friedrichsdor, half-sovereigns, Russian Imperials, dollars, Napoleons, Dutch Wilhelmsdor, Austrian and Wurttemberg ducats, Hessian ten-gulden pieces, and last of all a piece of Danish gold."3 Under the terms of the Treaty of Frankfort, an indemnity of five billion francs was levied upon the defeated French. This indemnity made all considerations of monetary reform in France impossible for the moment, and threw the currency of BIMETALLISM AND THE RISE OF THE GOLD STANDARD 163 Germany into further confusion. At a time when the government was considering the establishment of the gold standard, the French indemnity payments caused a strong demand on all international money markets for German currencies, and large amounts of silver were sent to Germany for the satisfaction of payments due and were delivered to the German mints for coinage. The strong flow of silver is explained by the fact that by reason of the indemnity which France was required to pay, Germany became, in a sense, a creditor of the whole world. As Germany had at that time a silver standard, silver became the more important metal for the purpose of covering drafts on Germany. Finally, the Berlin mint was authorized by the Prussian government on July 3, 1871, not to buy further silver from private persons.

The actual establishment of the gold standard in Germany was made by Act of December 4,1871, which defined the mark as 1/1395 of a pound weight of fine gold (5.532 English grains), and was completed by the Act of July 9, 1873, which proclaimed in its first article the formal acceptance of the gold standard. The act permitted coinage for individuals, or free coinage, within certain restrictions, and subject to seignorage to be determined by the Chancellor of the Reich, but not to exceed seven marks a pound of fine gold. In 1872 the Scandinavian kingdoms of Sweden, Norway and Denmark followed Germany in establishing a gold standard. The Netherlands reluctantly followed, half-heartedly, by receding from a silver to a double standard. By 1873, however, it became imperative to suspend the free coinage of silver. The gold standard was definitely adopted as the result of two acts, the first, in 1875, establishing a gold 10-gulden piece and permitting its coinage on private account, the second, in 1877, definitely suspending the free coinage of silver.

In the United States, the predominant position of gold had been given further recognition by the Act of 1873. Since the 164 MONEY AND MAN Act of 1853, which reduced fractional silver currency to a token basis, as we have noted, the country had been, to all purposes, on a gold standard. By the Act of 1873, the free coinage of the silver dollar piece was suspended, thus leaving the field free to gold. As there were no silver dollars in circulation, and no silver was being tendered for minting (because of the ratio), the act occasioned little notice at the time. In 1875 and 1876, however, when the trend of the ratio was reversed, and silver began to depreciate rapidly, the right of silver coinage again presented a profitable possibility to the mining interests, and agitation began for silver coinage. The Act of 1873 was denounced as "The Crime of 1873" and agitation was brought to such a pitch that, as a compromise, the various silver purchase acts were passed with their threat to the American monetary system. Under these acts, the mints were indeed not reopened to the free coinage of silver, but the government relieved the mining interests by purchasing some 300,000,000 ounces of silver on the open market over a period of years (1870-1893) and coining it into silver dollars. When this process threatened to bankrupt the government in 1893, these attempts to give a forced circulation to silver were abandoned, and in 1900 the gold standard was definitely and formally adopted by act of Congress.

In Europe, the final settlement of the ratio question, at least for the nineteenth century, occurred when the rush of the world to gold, and the closing of the mints to the coinage of silver, combined with a slower demand for the metal from the East, began to push the ratio in the other direction. Silver had begun to decline relatively, and from the high point of 15.19 achieved in the year 18594 dropped until, within a few years, it became again profitable in France, where the ratio was still legally 15.5 to 1, to present silver for coinage. The drop became precipitate from 1873 on, and would have produced collapse of the whole coinage system in France had not the government, by a series of steps, gradually restricted the amounts of silver that might be presented at the mints. In the middle of 1876 France and Belgium at last definitely suspended the coinage of silver legal BIMETALLISM AND THE RISE OF THE GOLD STANDARD 165 tender money, and in 1878 the suspension of the free coinage of silver was at last ordered for the whole area covered by the Latin Union. The cessation of silver coinage in the Latin Union sealed the fate of silver throughout Europe. Austria-Hungary turned away from silver in 1878-1879, and at the same period Russia did likewise.

"Thus," in the words of Helfferich, "within a few years a radical change in the international currency machinery had taken place. When, after being drawn off in large masses by Asia in the fifties and sixties, silver began in the seventies again to force its way into European circulation, it found the door banged, barred, and bolted against it by one country after another, even by countries on a paper basis. Ludwig Bamberger, at the time, aptly described this historical and worldwide phenomenon as the 'dethroning of a world-monarch.' All important civilized European states ostracized the metal which for thousands of years had enjoyed equal privileges with gold. Only Asia, Mexico, and a few Central and South American countries remained open to silver."5 If however the problem of the ratio was at last definitely solved for the money systems of the modern world, it only opened the way to vaster and more imponderable problems of money control. The driving out of silver from the money systems of the Western world, and the basing of these systems upon a metal so much more precious, so much more limited in quantity, revived, inevitably, the age-old cry of a scarcity of money to which Adam Smith called attention, and provided the specious excuse for the unlimited issues of paper money, based, theoretically, upon gold, but, practically, upon nothing more than the pious hopes of mankind. It is that development, which began to mount upon the world stage like the climax in a Greek tragedy, to which we now turn our attention.