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GALLATIN TO S. D. INGHAM. - Albert Gallatin, The Writings of Albert Gallatin, vol. 2 [1879]

Edition used:

The Writings of Albert Gallatin, ed. Henry Adams (Philadelphia: J.B. Lippincott, 1879). 3 vols.

Part of: The Writings of Albert Gallatin, 3 vols.

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GALLATIN TO S. D. INGHAM.

Washington, December 31, 1829.

Sir,—

The information which it is in my power to give you respecting the relative value of gold and silver, applies principally to France. It, however, happens that it is that which affords the best and most easy means to ascertain the fact, as it is by far the most wealthy country in which both gold and silver coins circulate simultaneously.

There has been no scientific comparison of the new French and British weights. The most correct is that made in the year 1824, by Dr. Kelly, the result of which is 15,434.1 grains troy weight for the kilogramme. But, as it cannot be relied on within 3 or 4 grains, I have assumed 15,435 grains, which makes the par of exchange between the United States and France 5 francs 34½ centimes for our dollar.

The standard for both the gold and silver coins is fine and alloy, and the legal relative value of the two species of coin is, since about the year 1790, 15.5 to 1; the kilogramme of standard gold being coined into gold coins of the nominal value of 3100 francs, and the kilogramme of standard silver into silver coins of the nominal value of 200 francs.

It is believed that, notwithstanding the great attention which was at that time paid to the subject, gold was even then rated too low in proportion to silver; it is certain that the fact is so now. During the thirteen last years there has never been a premium on silver coins, and there has almost always been one on gold coins. This has never during that period reached 1 per cent., which may be considered as the greatest fluctuation in the relative value of gold and silver coins in France. But it is very rarely and only for very short periods that this premium on gold coins has ever fallen below ⅕ or exceeded ⅘ per cent.; and the average is about ½, rather below than above it. If, therefore, the legal relative value was enhanced ½ per cent., or be about 1 : 15.58, instead of 1 : 15.5, the ordinary fluctuations would not exceed per cent. above or below that legal value.

The relative value of gold and silver bullion differs from that of gold and silver coins, and is liable to greater fluctuations. Independent of these, there are two reasons which make gold bullion more valuable in relation to silver bullion than gold in relation to silver coins. It is more expensive to coin ten silver dollars than one gold eagle, which, if the charge for coining is the same for both, makes in proportion the silver coin more valuable. And the unavoidable difference between the legal and the actual standard of the most faithful coins, as well as the similar original difference of weight and the diminution arising from wear, are more sensible and greater in value in gold than in silver coins, so that the loss in melting the current gold coins of any country may be fairly estimated at ½ per cent.

Of this the French government was aware; and accordingly the mint, which coins all the bullion and foreign coins that are brought to it, paying for it as it is brought, deducts a much greater seigneurage on silver than on gold; that is to say, 3 francs (or 1½ per cent.) on each kilogramme of standard silver, and 9 francs (or less than per cent.) on each kilogramme of standard gold. In other words, the mint price of standard gold and silver per kilogramme, in France, is 3091 francs for the first and 197 francs for the last. The relative value of gold to silver bullion is, therefore, fixed at the rate of 3091 : 197, nearly equal to 15.69 : 1. Each metal is brought to the mint in greater or less quantities respectively, according to the fluctuations in their relative market value. But what proves that this ratio does not essentially differ from the true average market relative value is, that the mint has been abundantly supplied with both for the last twenty-five years, the coinage of France being far greater than that of any other country. I hardly need observe that it is due to the almost total expulsion of paper as currency. The Bank of France alone issues paper, and none of a denomination less than 500 francs; so that it is used almost exclusively for commercial remittances and transactions, and makes no part of the currency, properly so called, of the country. Paper, as all know, necessarily drives away the precious metals, which will naturally flow to the places where paper is not used. They are a dearer but the only safe circulating medium; and no country that will resort to other means can expect to have a sound and uniform currency. There is, indeed, no permanent standard of value in nature; but, as applied to periods of twenty or thirty years, within which time all ordinary contracts are executed, gold and silver are, for that purpose, far preferable to any other commodity; and paper, having no intrinsic value, must, however used as currency, be always estimated in reference to those precious metals.

Although it cannot be expected that an alteration in the erroneous relative legal value of the gold and silver coins of the United States will, whilst paper chiefly of a local circulation continues to be their general currency, be productive of any great advantage, still, the change will do some good, and can be attended with no injury. The present rate was the result of information, clearly incorrect, respecting the then relative value of gold and silver in Europe, which was represented as being at the rate of less than 15 : 1, when it was in fact from 15.5 to 15.6 : 1. It would be better, at all events, to discontinue altogether the coining of gold than to continue the present system.

Although the ratio of about 1 : 15.58, as from coin to coin, which is deduced from the average premium on gold coins in France, is most to be relied upon, yet there may be an advantage and no danger in fixing the value of gold at a somewhat higher rate. For it appears certain that the average ratio is higher both in England and in the United States.

I have not sufficient data to estimate that ratio in the first country; but I am inclined to the opinion that for the last two years the price of American (United States) silver has not exceeded there the average of 57½ pence sterling per ounce, which gives the ratio of 15.82 : 1. But it must be observed that this is not merely the ratio of bullion to bullion (which in France is 15.69 : 1), but of silver bullion to gold coin. This ratio is in France, according to the mint price and current value of gold coins (that is to say, with ½ per cent. premium), as 3115.5 : 197, or about 15.81 : 1.

With respect to the United States, the average premium on the American gold coins for the last four and one-half years has been about 5⅙ on the nominal value. This, being according to our ratio of 15 : 1, gives for the average market price the apparent ratio of 15.775 : 1 for that of gold bullion to silver coin; since, being so underrated, the American gold coins can be considered only as bullion. But as they are probably ½ per cent. defective in weight and standard together, the true ratio may rather be estimated at 15.82 : 1, or about the same as that deduced, from the price in England of 57½ pence per ounce of dollars, for the ratio of silver bullion to gold coin. But less reliance can be placed on the ratio deduced from the price of American gold in the United States than from either of the other two modes. A single glance at the table of prices current will show that that price is entirely regulated by that of the exchange with London. It will be found, accordingly, that in the summer of 1825, when the nominal exchange on London was 5 per cent. premium, or in reality near 2 per cent. below par, the nominal price of American gold was 2½ per cent. premium, or in reality 1½ per cent. below its average market value in Europe or in the United States. This anomaly was clearly due to the legal value being underrated. Generally speaking, the difference between the true rate of exchange on London and the true market price of American gold in the United States is about 1½ per cent., as will be seen by the table B, where the true premium on both is calculated according to the ratio of 15.6 to 1.1 This general result, deduced from the New York prices current for the last four and one-half years, agrees with the general result of actual sales of our gold in London. The freight, insurance, and all charges are near 1½ per cent., and the average loss in weight and standard about ½ per cent. But from this loss of 2 per cent. must be deducted, when compared with exchange at sixty days, near ¾ per cent. gained in interest, the sales of gold being realized within fifteen days after arrival. It follows that if gold coins are raised by law to their true value they will not be exported so long as the exchange on London is not above 1½ per cent. above the true par, or about 8½ per cent. nominal, as now calculated. Whenever the exchange is above that rate there is no means to prevent the exportation; and, as the general tendency of our exchanges with Europe is against us, this affords a reason why, in fixing the relative value of the two metals, gold may be a little overrated beyond the ratio deduced from the average premium on French gold coins in France. But this should be done cautiously, as there is always danger in going beyond what the well-ascertained facts will warrant.

No notice has been taken, in what precedes, of the market price of Spanish dollars and doubloons. The first vary in standard, and it is much more simple to draw conclusions from the price of our silver coin abroad than from the fluctuations in the price of Spanish dollars in the United States. The marc of Castile, of standard Spanish silver, should, according to law, be coined into 8½ dollars, making the legal weight of the dollar 416½ to 417 grains troy weight. The legal standard, at least since the year 1772, is pure and alloy, and the Spanish dollar faithfully coined should therefore contain about 376 grains pure silver. The calculation is founded on what has been stated as an accurate comparison of the Spanish with the modern French weights, by which it appears that the marc of Castile is equal to 229.8 grammes. In fact, the Mexican dollars, which (with the Bolivar) are the best, contain but about 374½ grains, and are worth from ¾ to 1 per cent. above ours. The Spanish proper vary, and the most modern are sometimes ½ per cent. less. The price of the Mexican is in London ⅜ of a penny sterling more per ounce than ours, and in France 7 centimes per dollar.

It may be proper, as connected with the exportation of our silver coin, to state that the price of American dollars in France, deduced from twenty different shipments, is 5.26065 francs per dollar. Deducting 1½ per cent., according to the mint price, from the par value of the dollar, or 5.345, would give 5.26482 francs. The small difference arises partly from that in weight, principally from a small charge at the mint for refining on bullion below the French standard. The freight, insurance, commissions, &c., amount, as on gold, to about 1½ per cent., and the total loss to 3.28 per cent. If from this ¾ per cent. is deducted for the gain in interest, the difference is 2½ per cent. Whenever, therefore, the premium on exchange exceeds 2½ per cent. true premium (equal to 9½ nominal on London), the American silver coins will be exported.

Means have been found very lately in France to extract with profit the very small quantity of gold which is always found in silver. The effect has been within a few months to raise common silver bullion ⅕ per cent. above the mint price. Dollars and other bullion are purchased at that rate by the melters, who, after having extracted the gold, sell the bullion to the mint at its ordinary price. This circumstance will not ultimately affect the relative value, as the process will be gradually applied to all the silver bullion before it is coined; but it is in the mean while a reason against overrating gold.

The doubloon ought to be of the same weight and standard as the dollar. But it has been more adulterated, and, taking the ratio of 15.6 : 1, is not believed to be, on an average, intrinsically worth more than 15.16 dollars. The premium, calculated on that basis, varies in the United States from 2½ : 8, and averages 4½ per cent. This affords no criterion whatever of the relative value of the two metals, as it is exclusively due to the varying demand for the Havana and South American market, where, by internal regulations, the doubloon is rated never less than 16 and generally at 17 dollars. This arbitrary order drives of course silver from the market, and, without raising actually gold to that rate, has nevertheless a considerable effect on the price of that particular coin. The average premium on Patriot doubloons, which are as good, is but about 2 per cent.

Reverting to the valuations founded on correct data, it has been shown that:

1. The relative value of gold to silver coins, deduced from the average premium of ½ per cent. on gold coins, is below 15.6 : 1.

2. The relative value of gold to silver bullion, deduced from the mint price in France, is below 15.7 : 1.

3. The relative value of gold coins to silver bullion, deduced from the mint price in France, combined with the average premium of ½ per cent. on gold coins, and also from the presumed average of 57½ pence per ounce of American dollars in England, is above 15.8 : 1.

4. The premium in the United States on American gold, though much less to be relied on, since it is regulated by the exchange, corroborates the last-mentioned ratio.

It is clear that it is the relative value of coins to coins which is the proper foundation. That of bullion to bullion and that of gold coins to silver bullion are in fact the same, allowing for the superior value of coins over bullion; and although, for the object in view, less correct than that of coin to coin, shows nearly how far the gold coins may be rated without danger above the last-mentioned ratio. The conclusion is that the ratio should not be below 15.58 and not above 15.69 : 1; and that we will be safe between those limits.

The ratio is only a basis on which to proceed, and it is quite immaterial whether it gives an apparently inconvenient fraction, since, once adopted, it is never recurred to either at the mint or for any calculation of exchange, rate of duties, &c. In selecting, therefore, a ratio between the limits aforesaid, the first object is to take one which will correspond with a convenient number of grains standard and pure contained in the ten-dollar gold piece. The next, if practicable, is that this should also give a convenient number for the reduction of pounds sterling into dollars and cents, which must be perpetually recurred to in the calculations of duties and exchange.

The most convenient ratio, in both respects, is that of 2700 : 173, equal to about 15.6069 : 1, and answers nearly to a premium of ⅔ per cent. on French gold coins; which is above the average. This ratio will give 259½ grains for the weight of the ten-dollar gold piece, 237⅞ grains pure gold in it, $4.7505 for the value of the pound sterling, and make the present eagle worth $10.40½. The table C shows the result of several other ratios. I think that that which gives 258 grains for the weight of the ten-dollar gold coin rates gold too high. The calculations in relation to the pound sterling are of course all founded on the fact that the 20-shilling sterling gold piece contains 113 grains of pure gold and the American dollar 371¼ grains of pure silver.

As there is not in nature any permanent standard of value, it has been objected to the simultaneous circulation of the two metals as a legal tender that, in addition to the fluctuations in the price of either gold or silver if only one of the two was made the sole circulating medium, the fluctuations in their relative value increased the uncertainty of the standard.

Great Britain has, since the year 1819, acted on the plan of adopting gold as the sole legal tender for all payments above 40 shillings sterling. But in order to have money for small payments she resorts to an adulterated silver currency, which is by law rated at about nine per cent. above its intrinsic value. The object appears to be to prevent the exportation of that silver currency which is, in fact, assimilated to the copper coinage. It has been a part of the same system to prohibit the issuing of bank-notes of £2 and under, the place of which is supplied by the overrated silver new currency.

Great Britain till the year 1797, when the suspension of cash payments took place, and all other nations to this day, have used the two metals simultaneously, without any practical injury, and to the great advantage of the community, though in many instances sufficient care had not been taken to assimilate the legal to the average market value of the two metals. A fact so notorious, so universal, and so constant is sufficient to prove that the objection, though the abstract reasoning on which it is founded is correct, can have no weight in practice. It might not therefore be necessary to discover in what respect the principle is misapplied; but the reasons appear sufficiently obvious.

The whole amount of the inconvenience arising from the simultaneous use of the two metals consists in this. Their relative value being fixed by law, if this changes at market, the debtor will pay with the cheapest of the two metals, and therefore at a rate less than the standard agreed on at the time of making the contract, if the change in the market price is due to a fall in that of the metal with which he pays his debt. And it is obvious, in the first place, that if the change is due to the rise in value of one of the two metals, and that had been the only legal tender, the choice given to the debtor to pay with either enables him to do it according to the standard first agreed on.

But the true answer is, that the fluctuations in the relative value of the gold and silver coins, arising from the demand exceeding or falling short of the supply of either, are less in amount than the fluctuations, either in the value of the precious metals as compared with that of all other commodities, or in the relative value of bullion to coin, and even than the differences between coins, particularly gold coins, issued from the same mint; and therefore that those fluctuations in the relative value of the two species of coin are a quantity which may be neglected and is in fact never taken into consideration at the time of making the contract.

It has been shown that the fluctuations in that relative value may, by affixing a correct legal value to each metal, be reduced to or, at most, ½ per cent. The relative value of gold bullion to gold coin has within the last five years varied 1 per cent. in England, the price of standard bullion having been in 1824 as low as 76 shillings 9 pence; and the average value of the bullion was for four years (1822-1825) 77 shillings 7⅓ pence, or ⅓ per cent. less than that of the coin. It has already been stated that the remedy and wear together make a difference of ½ per cent. between old and fresh American gold coins; but the differences are sometimes much greater, since even the guinea, of the legal weight of 129 grains, could pass when weighing only 128 grains, or 1 per cent. less than the legal weight. And the simultaneous rise and fall of the two metals in relation to all other commodities, though not susceptible of being precisely valued, does often take place to a greater amount than any of the other fluctuations. It is evident that whenever such rise takes place, whether generally or only on the spot, it is an advantage to be able to resort to both instead of one of the metals; and that if the rise is only on one of the metals for which there happens to be a greater demand, and that should be the sole legal tender, it will be exported, and diminish in a most inconvenient way the whole amount of specie, a diminution which in that case cannot be remedied by resorting to the other metal which is not a legal tender. That inconvenience is still greater when gold is the metal selected for currency, to the exclusion of silver, the annual supply of this last metal being much larger in value than that of gold. That annual supply was estimated with considerable correctness by Humboldt at 36 millions of dollars in silver and 12 millions in gold, prior to the year 1809. Since that time, on account of the revolutions and internal disturbances in what was formerly Spanish America, the annual supply may be estimated at 18 millions in silver and 9 millions in gold. As order is restored, the usual supplies will again take place. In the mean while, the annual exportation of silver to India and China from Europe and America has been lessened from 12 to about 6 millions of dollars, and this has prevented sensible alteration in the relative value of the two metals. What proves the great amount of both previously existing is, that the diminution in the general supply has not even affected sensibly the value of the precious metals in relation to other commodities.

But not only has England by that experiment, in the face of the universal experience of mankind, gratuitously subjected herself to actual inconvenience for the sake of adhering to an abstract principle, but, in so doing, she has departed much more widely from her own principles and from those which regulate a sound metallic currency. Whilst pretending to exclude silver, she admits it, and makes it a legal tender for all that multitude of daily purchases and contracts under 40 shillings, at an overrated value. This is, in fact, an issue of an adulterated money, which does not regulate itself; which, on account of the profit in the coinage, there is a strong temptation to issue beyond what is actually wanted for the object intended; which, being irredeemable, is therefore liable to fluctuation between its nominal and intrinsic value; and which, by its connection with the 20-shilling and 40-shilling gold coins, deranges, or may derange, the whole system of British currency.

Even if the precedent was good, it could not be conveniently adopted in the United States. If silver was adopted instead of gold as the legal tender, which is, in fact, our present system, gold will be excluded altogether, and the partial advantage gained by the English issue of silver must be given up. To the exclusion of silver there are, on the other hand, great objections. The American dollar, or 371¼ grains of pure silver, is the unit of money and standard of value on which all public and private contracts are founded; the supplies of silver are greater, and it requires a greater premium on the exchanges before it can be exported; payments in silver, suppressing small notes, is as yet the only practical remedy against over-issues of the worst species of paper currency.

There is another and very distinct reason in favor of affixing to our gold coins a value corresponding with their market price. By their conventions with France and several other countries the United States are bound (the condition being reciprocal) not to lay higher duties on their produce and merchandise than on those of same nature and value imported from other countries. In estimating that value, foreign currencies have generally been rated by law at their true value; whilst the pound sterling of England has been rated at $4.444, or 7 per cent. below what it is actually worth. It ought, at all events, to have been rated at least at $4.5657, so as to correspond with the legal value of our own coins. But it cannot with propriety be rated higher than that value; and it is necessary to raise this to its true relative value as compared with silver, in the manner proposed, in order that Great Britain may have no reason to complain that the pound sterling should be estimated at its worth, which is at least $4.75. And, on the other hand, if this is not done, France and other countries will, as they now have, a just right to complain that they pay duties 2 per cent. at least higher than what is imposed on goods of the same description imported from Great Britain. It is only to be regretted that this will produce an increase of revenue of several hundred thousand dollars; but this is an unavoidable evil, unless there should be a general though small reduction of duties to an equal amount.

I have the honor, &c.

GALLATIN TO ROBERT WALSH, Jr.

New York, 27th April, 1830.

Dear Sir,—

It is doubtful whether I will have time to prepare in season such an article in relation to currency as you desire, and still more so whether I can write anything on that subject worthy of the public and corresponding with your views. So much has been written on that question, that it does not seem to me that anything new can be advanced in support of what are admitted by almost all enlightened and disinterested men to be correct principles. The only points at all dubious, at least in my opinion, are those of local currencies, or what is commonly called “country notes,” and of the simultaneous circulation of gold and silver. Was it practicable, the following outline would appear to me preferable to any other, as combining safety, convenience, and facilities sufficient to promote industry and prudent enterprise.

1. No other but the Bank of the United States, nor any individuals, associations, or corporations, to be permitted to issue any bank-note, bills of credit, or paper in the nature of currency; but all such banks or bankers to be left, without restriction or special tax, at liberty to pursue in other respects their proper occupation, viz., to receive deposits, to discount notes, and to deal in bills of exchange or bullion; thereby assimilating them to the bankers of London and to all those of the Continent of Europe, neither of whom issues a single shilling of paper currency.

2. The Bank of the United States to issue no notes of a denomination under 100 dollars (a restriction the same as that of the Bank of France), those of a lower denomination excepted, which may be made redeemable at any of its offices where presented.

3. Gold and silver United States coins to circulate either on the new British plan of issuing silver at 10 or 15 per cent. above its intrinsic value, but not to be a legal tender for sums above ten dollars, or simultaneously for all purposes, but rating gold at its true value, which may be done so near the ratio of gold to silver (about 15.6 to 1) as to obviate every practical objection.

4. All foreign coins to be excluded; copper coins to remain as now, but not to be a legal tender for more than 50 cents.

You may perceive that I am an ultra-bullionist, which it is right you should know. But I am perfectly sensible that Congress will not attempt to prohibit the issue of notes by State banks; that we have no other security against their over-issues but State laws, which some States will not enact, and the Bank of the United States; that our reliance for a sound currency and, therefore, for a just performance of contracts rests on that institution; and that, in order to enable it to check and counteract the evil tendency of the local currencies, it must be permitted to issue notes of a smaller denomination than would otherwise be eligible. The principal object at this time is to preserve what we have, rather than to aim at what cannot be obtained. But I know too well, from sad experience, how difficult it is, without the aid of party, to carry any measure, however useful, which is opposed from sectional or interested views. And yet, though aware of the unavailing effect of argument under such circumstances, I would be disposed to contribute my mite if I thought I could add anything to what has been done by others. It is also so long since my mind was made up on the subject, that I have not lately collected any facts. The evidence reported by the committees of both Houses of Parliament previous to the resuming of specie payments in Great Britain is the last document of any importance which I read with attention. A correct statement of the amount and nature of our currency is an indispensable preliminary to any essay on the subject. The ordinary returns of the Bank of the United States and of the several State banks, of the latest dates that can be obtained, not in the aggregate for each State, but showing the situation of each bank, would be sufficient, as I am familiar with those returns. The cashiers of the several offices of the Bank of the United States might with ease procure most of them. If you can obtain these for me, I will try to write, with the understanding that, if prevented or not satisfied myself, I will put my notes in your hands to be used as you may think proper.

I have, &c.

[1 ]For the tables, see Report of the Secretary of the Treasury dated May 4, 1830.