Front Page Titles (by Subject) I.: THE LOW VALUE OF SILVER, AND ITS EFFECT ON INDIA. - The Works and Life of Walter Bagehot, vol. 6 (Lombard Street, Essays on Guizot & Cairnes, The Depreciation of Silver)
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I.: THE LOW VALUE OF SILVER, AND ITS EFFECT ON INDIA. - Walter Bagehot, The Works and Life of Walter Bagehot, vol. 6 (Lombard Street, Essays on Guizot & Cairnes, The Depreciation of Silver) 
The Works and Life of Walter Bagehot, ed. Mrs. Russell Barrington. The Works in Nine Volumes. The Life in One Volume. (London: Longmans, Green, and Co., 1915). Vol. 6.
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THE LOW VALUE OF SILVER, AND ITS EFFECT ON INDIA.
When the great gold discoveries were made in Australia and California, most people expected that there would be a more or less rapid fall in the value of gold, as compared with silver. But, as a matter of fact, the effect has been the reverse. The value of silver as compared with gold was 59¾d. per oz., or as 1 to 15·7, in 1849; it now is 54¾d., or as 1 to 17·1. Not only what the best judges expected has not happened, but the very contrary of it has happened.
And this has not been the result of any collateral cause; it is the direct consequence of the gold discoveries themselves. The effect of these discoveries has been a great improvement in the currencies of the world, which, without them, would not have been possible. The countries of great commerce and large transactions require a more valuable medium of exchange, bulk for bulk, than countries of petty trade and minor transactions. The labour of paying £1,000,000 in sovereigns is only a tenth of that of paying it in rupees, and therefore where millions have to be paid sovereigns are a ten times better currency than rupees. Gold is much the best currency for rich nations of large trade; though silver does well enough, and is in some respects most suitable, for poor nations of little trade. But thirty years ago it would not have been possible for the nations of great commerce to have adopted this best currency. There would not have been gold enough obtainable. The supply from the mines was then barely sufficient to maintain the existing gold currencies; it would have been entirely insufficient for establishing new currencies on a large scale. No one then would ever have dreamed of proposing it. But, as we all know, Germany has just now tried the experiment on a great scale. She is buying gold, and selling off her silver. And in consequence silver is cheaper than it has ever been before.
Probably, if there were gold enough for all the world, it would be best that there should be only a single standard of value thoughout the world, and that one—gold. But this is impossible. Some have doubted whether there is gold enough even for the nations which now intend to use it; and there certainly is not enough for all the world. Happily, the East has always been a country which had much silver, and for whose purposes silver was quite sufficient. The transactions of the East are small in comparison with those of the West, and therefore a bulky paying medium is not so inconvenient there as it would be here. Since economical history has been written silver has been always sent from Europe to China, India, and the richer parts of the East, and never more so than in our own time. The payments of England in silver to India during the cotton famine were probably the greatest cash payments ever made in so short a time by one country to another. There is therefore in the end a certain market for the silver displaced from Europe; it will ultimately go, as the rest has gone, to the East, where it is the ancient and the best-attainable paying medium.
But for the moment there is a difficulty in disposing of silver. There is no new sudden demand for it in the East. The case is not like that of the cotton famine. Then we had incurred a large debt to India, and we had to pay it in the only currency which she would take. We had to find an immense quantity of silver on a sudden, and France—owing to the peculiar operation of her double standard—found it for us. But now there is no such debt; the present problem is not to find the silver, but to find the use for the silver. And this is a slower process.
Sooner or later, however, the ordinary laws that govern foreign exchanges will do it for us. The consequence of the low value of silver is that the rate of exchange is now 1s. 9¼d. per rupee (or less), the lowest, or almost the lowest, ever known. And this operates as a direct discouragement to ship goods to India. These goods are paid for in rupees, and when the merchant wants to bring home those rupees to England he finds that they do not go so far as they used to do. He has to pay much more for every £1,000 bill on England, and this extra cost destroys or diminishes his profit.
Secondly, the same state of the exchanges is a direct premium on sending goods from India to England. £1000 received for those goods here will go farther in buying bills on India than it used to do; in plain English, it will lay down more rupees at Calcutta in the same time than formerly, and this increase is so much extra profit. By this combination, therefore, exports from India increasing on one hand, and imports into India diminishing on the other hand, before long a large void will be created, which this silver, set free from Germany, will have to fill. The process will take time, but the effect is inevitable. The tendency of this great import of silver into India will be of course to raise prices, but the degree in which it will have that effect will depend on the degree in which it is counteracted by the causes which have intercepted its effect before—the hoarding habits of the people; the use of silver in ornaments (the ornaments being a sort of reserve fund to be sold in difficulty); the greater extension of silver in rude districts, where barter is still much used; and the general increase of trade, which rising prices always tend to quicken and develop.
When this rise of prices has taken place, the encouragement to exports from and discouragement of imports into India will manifestly cease. The value of the rupee at Calcutta, as against bills on England, may remain as it is now; but the diminution of that value as compared with former times will be compensated by the greater number of rupees which the English exporter to India obtains for the goods which he sells there. The value of the £1000 in London in purchasing bills payable on India in rupees may be as unusually great as now, if we compare it with the past, but there will be a corresponding difficulty in obtaining the £1000 in London. The merchant in India will have to pay more for the goods which he sends to London, and in the end this loss will be equal to the other gain.
If new silver should still continue to come into the market the same process must go on. The first step must be incessantly repeated. The value of the rupee must fall as against sterling money; instead of being 1s. 9d., it may fall to 1s. 6d. And then, mutatis mutandis, what we have just described as happening will happen again.
The effect, therefore, of the fall in the value of silver on the trade of India will be temporary only, but its effect on the financial position of the Indian Government will continue as long as the fall lasts. The Indian revenue is received in silver, and, therefore, the less far silver goes in buying, the poorer will the Indian Government be. And this is of more instant importance to the Indian Government than almost any other, because its foreign payments exceed those of most Governments, and those payments are made in gold. It has to pay interest in gold on a very large debt in England, to pay home salaries, maintain home depôts, and buy English goods and stores all in gold; and the less valuable silver is in comparison with gold, the less effectual for these necessary purposes will the Indian revenue be.
On one species of its debt the Indian Government will, indeed, not lose. The interest upon rupee paper is payable in rupees in Calcutta, and therefore the diminution in the value of the rupee is a loss to the creditor who receives, and not to the Government which pays.
How long the fall in the value of silver will continue no one can say. In the last resort, and taking great intervals of time into the reckoning, the relative value of gold and silver will be determined by their cost of production; but in the case of articles so durable, and so liable to be affected by political events like changes in coinage, it is difficult to say how long an average must be taken in order to exhibit distinctly this final result.