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.