The Online Library of Liberty

A project of Liberty Fund, Inc.

• Notice.
• Mr M C Culloch’s Publications.
• Treaties and Essays On Subjects Connected With Economical Policy; With Biographical Sketches of Quesnay, Adam Smith, and Ricardo
• A Treatise On Money. 1
• Sect. I.—: Circumstances Which Led to the Use of Money. Principal Properties Which Every Commodity Used As Such Ought to Possess. Not a Sign Or a Measure of Value, But a Real Equivalent.
• Sect. II.—: Circumstances Which Regulate the Exchangeable Value of Money.
• Sect. III.—: A Moderate Seignorage On Coined Money Advantageous. Principles Which Should Regulate Its Amount. 1
• Sect. IV.—: Expense of a Currency Consisting of the Precious Metals.
• Sect. V.—: Paper Money. Principle On Which Its Value Is Maintained.
• Sect. VI.—: Whether Gold Or Silver Should Be Adopted As the Standard of the Currency, Or Whether It Should Consist of Both.
• Sect. VII.—: Standard of Money. Degradation of the Standard In Rome, France, Great Britain, and Other Countries. Effects of This Degradation.
• Tables Relative to the Money of the United Kingdom.
• Treatise On the Circumstances Which Determine the Course of Exchange.
• Inland Exchange.
• Foreign Exchange.
• Sect. I.—: Nominal Exchange.
• Sect. II.—: Real Exchange.
• Sect. III.—: Computed Exchange.
• History and Influence of Bills of Exchange.
• Essay On Interest and Usury Laws.
• A Treatise On the Letting and Occupancy of Land.
• 1.: Money Rents.
• 2.: Proportional Rents.
• 3.: Produce Rents.
• 4.: Service Rents.
• An Essay Showing the Erroneousness of the Prevailing Opinions In Regard to Absenteeism.
• Sketch of the History of Commerce, to the Sixteenth Century.
• Sect. I.—: PhŒnician Commerce.
• Sect. II.—: Grecian Commerce.
• Sect. III.—: Roman Commerce.
• Sect. IV.—: Italian Commerce In the Middle Ages.
• Sect. V.—: Vasco De Gama and Columbus.
• An Essay On the Rise, Progress, and Decline of Commerce In Holland.
• An Essay On the Rise, Progress, and Decline of the Hanseatic League.
• Essay On the Origin of the Compass.
• Sketch of the Progress of Maritime Law.
• An Essay On the Colonial System of the Ancients.
• Sketch of the Life and Writings of Francis Quesnay.
• Sketch of the Life and Writings of Adam Smith, Ll.d.
• Sketch of the Life and Writings of David Ricardo, Esq., M.P.

Sect. VI.—

Whether Gold or Silver should be adopted as the Standard of the Currency, or whether it should consist of both.

As the values of gold and silver perpetually vary, not only relatively to other things, but also relatively to each other, it is impossible arbitrarily to fix them by mint regulations. Gold may now, or at any given period, be to silver as 13, 14, or 15 to 1; but were sovereigns and shillings coined in that proportion, the discovery of a gold or silver mine of more than the ordinary degree of productiveness, or the discovery of any abridged process by which labour might be saved in the production of one of the metals, would disturb this proportion. And as soon as the mint valuation of the two metals ceases to correspond with that which they bear in the market, it becomes the interest of debtors to satisfy all claims upon them in the over-valued metal, which, consequently, is alone used in all considerable transactions.

The regulations under which gold and silver coins circulated in England previously to 1663, differed at different periods. In that year the guinea was first coined; and its value (though fixed by the mint regulations at the low rate of 20s. in silver), and the values of the other gold coins then in circulation, varied according to the fluctuations in the market values of gold and silver, the latter being in effect the only legal tender. But, from a variety of causes—the principal being, perhaps, the extremely unsatisfactory state of the silver coin, gold began, in the reign of Charles II., to be used in preference to silver in large payments. Previously to the great recoinage of silver in the reign of William III. (1696-1699), the silver coins were so much worn and degraded, that the guinea passed current at from 28s. to 30s. After the recoinage, its value was very generally estimated, without any interference on the part of government, at 21s. 6d.; a valuation which was equivalent to a premium of 10d. in its favour, it being really worth only about 20s. 8d. of the new silver coins.

In consequence of this marked, though unintentional, preference of gold, the silver coins shortly began to be largely exported; and, to stop their exportation, the value of the guinea was reduced, by proclamation in 1717, from 21s. 6d., at which it had been fixed by custom, to 21s., both metals being made legal tenders in that proportion, or in the ratio of 1 lb. gold to 15 lbs. silver. But notwithstanding this reduction, which was made pursuant to the advice of Sir Isaac Newton, the guinea was still over-valued as compared with silver. This excess was estimated at the time as being at least 4d. in the guinea, or 1 per cent.;1 and as the value of silver compared with gold continued to increase for the greater part of last century, it afterwards became considerably greater; and this circumstance rendered it, as already stated, more and more the interest of all parties to pay in gold rather than in silver. Hence gold became in practice the only legal tender. And during the lengthened period from 1717 down to 1816, no silver coins of the legal weight and purity would remain in circulation, but were either melted down, or exported to other countries, where they passed at their full value. In consequence, the silver currency consisted entirely of light, worn coins. But as it existed only in a limited quantity, it did not, according to the principle already explained, sink in its current value. Though degraded, it was still the interest of debtors to pay in gold. If, indeed, the quantity of debased silver had been very great, or if the mint had issued debased pieces, it might have been the interest of debtors to pay in such debased money; but its quantity being limited, it sustained its value, and gold was really the standard of the currency.

The mint regulations issued in 1717, continued in full force down to 1774, when it was enacted by the 14 Geo. III., cap. 42, that silver coins should not be legal tender by tale for more than £25 in any one payment, but that standard silver should be legal tender to any amount in weight at the mint price of 5s. 2d. an ounce.1 This act had not, however, as some have supposed, any effect in causing the general employment of gold as money in preference to silver. For, to use the words of Mr Ricardo, “it did not prevent any debtor from paying any debt, however large its amount, in silver currency fresh from the mint. That the debtor did not pay in this metal was not a matter of chance, nor a matter of compulsion, but wholly the effect of choice. It did not suit him to take silver to the mint, but it did suit him to take gold hither. It is probable that if the quantity of this debased silver in circulation had been enormously great, and also a legal tender, that a guinea would have been, as in the reign of William III., worth thirty shillings; but it would have been the debased shilling that had fallen in value, and not the guinea that had risen.”1

In France, a different valuation of the precious metals produced a different effect. The louis d’or, which, previously to the recoinage of 1785, was rated in the mint valuation at 24 livres, was really worth 25 livres 10 sols. Those, therefore, who chose to discharge the obligations they had contracted, by payments of gold rather than of silver, plainly lost 1 liv. 10 sols on every sum of 24 livres. In consequence, very few such payments were made, gold was nearly banished from circulation, and the currency of France became almost entirely silver.2 In 1785, a sixteenth part was deducted from the weight of the louis d’or, and since that period the value of the precious metals, as fixed in the French mint, has more nearly corresponded with the proportion which they bear to each other in the market. Indeed, it was stated, in evidence before a committee of the House of Commons in 1819, that the difference between the mint and market proportions of gold and silver at Paris in 1817 and 1818, had not exceeded from one-tenth to one-fourth per cent. There is, however, no reason to presume that this coincidence, which must have been in a great degree accidental, can long be maintained under any arbitrary system. To ensure the indifferent use of gold and silver coins in countries where they are both legal tender, their mint values would require to be every now and then adjusted, so as to correspond with their real values. But as this would obviously be productive of much trouble and inconvenience, the preferable plan undoubtedly is to make only one metal legal tender, and to allow the worth of the other to be adjusted by the competition of the sellers and buyers.

The absurdity of employing two metals as legal tender, or as a standard of value, was unanswerably demonstrated by Locke and Harris, and has been noticed by every subsequent writer. But so slow is the progress of improvement, that it was not till 1816 that it was enacted that gold should be in law, what it had long been in fact, the only legal tender for sums of 40s. and upwards. From that period, silver has been a mere subsidiary currency, used only in small payments.

Whether, however, gold should have been adopted as the standard of exchangeable value, in preference to silver, is a question not so easy of solution, and on which there has been a great diversity of opinion. Locke, Harris, and Ricardo, are of opinion that silver is better fitted than gold for a standard; whilst Smith, though he has not explicitly expressed himself, appears to think that gold should be preferred. This latter opinion has been supported by Lord Liverpool, in his very valuable work “On the Coins of the Realm.” And his reasonings having received the approbation of Parliament, and gold having been made legal tender, all attempts to alter this arrangement ought to be opposed.

The late extraordinary increase in the supply of gold has led many persons to anticipate great inconvenience from the fall which may be expected to take place in its value. But, supposing that this fall should, as appears most probable, take place in the end, there is no ground for concluding that it will be brought about otherwise than by slow degrees; and if so, it will not occasion any injurious disturbance. About 140 or 150 years elapsed from the discovery of America before the influx of bullion from the new into the old world produced its full effect. And it is doubtful, considering the vastly increased field for the employment of gold and silver, whether the supplies from Siberia, California, and Australia, will speedily exercise any very material influence. We have elsewhere shown that a gradual fall in the value of gold would, in a public point of view, be highly advantageous.1

Whether gold or silver be adopted as the standard of the currency, does not affect its total cost or value; for, the quantity of metal employed as money, or the quantity of metal for which paper is the substitute, is always inversely as the value or cost of such metal. When gold is the standard, fourteen or fifteen times less of it than of silver is required; or, which is the same thing, if the denomination of a pound be given to any specific weight of gold or silver, fourteen or fifteen times more of such silver pounds will be required to serve as currency, fourteen or fifteen to one being about the proportion which gold bears in value to silver. Hence the expense of a gold or silver currency is identical. Gold being too valuable, in proportion to its bulk, to be coined into pieces of the value of a shilling or a sixpence, the subsidiary currency necessary in small payments, should be over-valued, and issued only in limited quantities, as is the case with the present silver coinage.

Were a seignorage charged on the gold coins, paper, it is obvious, might be depreciated to its extent, before it would be the interest of the holders to demand coin for the purpose of exportation, and consequently before the check of specie payments would begin to operate. But, even with a seignorage, all risk of paper being depreciated, might be obviated by making it obligatory on the Bank to pay their notes, either in bullion, at the mint price of £3, 17s. 10½d. an ounce, or coin, at the pleasure of the holder. A regulation of this kind could not be justly considered as imposing any hardship on the Bank; for no bullion would be demanded from her, except when, by the issue of too much paper, its value had been sunk below the standard.

[1 ] Liverpool on Coins, pp. 68-85.

[1 ] Being intended as an experiment, this act was limited to the 1st May 1776. But not being found to be productive of any inconvenience, it was prolonged by other temporary acts. It was, however, suffered accidentally to expire in 1783, and was not renewed till fifteen years after, in 1798. And yet, despite the extremely degraded state of the silver coin, very few instances occurred during this lengthened period of its being offered in payment of any considerable sum.

[1 ] Principles of Political Economy, p. 520.

[2 ] Say, i. p. 393.

[1 ] Treatise on Taxation. Part II. c. 11.