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• The Works and Life of Walter Bagehot Volume Vi
• Lombard Street.
• Lombard Street In 1910.
• Prefatory Note to Twelfth Edition.
• Advertisement.
• Chapter I.: Introductory.
• Chapter II.: A General View of Lombard Street.
• Chapter III.: How Lombard Street Came to Exist, and Why It Assumed Its Present Form.
• Chapter IV.: The Position of the Chancellor of the Exchequer In the Money Market.
• Chapter V.: The Mode In Which the Value of Money Is Settled In Lombard Street.
• Chapter VI.: Why Lombard Street Is Often Very Dull, and Sometimes Extremely Excited.
• Chapter VII.: A More Exact Account of the Mode In Which the Bank of England Has Discharged Its Duty of Retaining a Good Bank Reserve, and of Administering It Effectually.
• Chapter VIII.: The Government of the Bank of England.
• Chapter IX.: The Joint Stock Banks.
• Chapter X.: The Private Banks.
• Chapter XI.: The Bill Brokers.
• Chapter XII.: The Principles Which Should Regulate the Amount of the Banking Reserve to Be Kept By the Bank of England.
• Chapter XIII.: Conclusion.
• Appendix.
• Note A.: Liabilities and Cash Reserve of the Chief Banking Systems.
• Note B.: Extract From Evidence Given By Mr. Alderman Salomons Before House of Commons Select Committee In 1858.
• Note D.: Meeting of the Proprietors of the Bank of England. 13th September, 1866.
• The Metaphysical Basis of Toleration. (1874.)
• Monsieur Guizot (1874.)
• Professor Cairnes. (1875.)
• The Public Worship Regulation Bill. 1 (1874.)
• The Depreciation of Silver.
• Preface.
• I.: The Low Value of Silver, and Its Effect On India.
• II.: The Remedies For the Fall In Silver.
• III.: Further Suggestions On the Fall In Silver.
• IV.: The Effects of the Resumption of Specie Payments In France On the Price of Silver.
• V.: The Effect of a Depreciation of Silver On Our Foreign, and Especially On Our Eastern Trade.
• VI.: The Extreme Fall In Silver, and the Hasty Remedies Proposed.
• VII.: The Report of the Committee On the Depreciation of Silver.
• VIII.: The Proposal of the Bengal Chamber of Commerce to Suspend the Coinage of Silver In India.
• IX.: The Debate On the Indian Budget.
• X.: The Different Effect On Trade of a Cheapening of the Precious Metals, and of a Depreciation of Inconvertible Paper.
• XI.: The American Commission On the Currency.
• XII.: The Permanent Effect of an Increase of “council Bills” On the Flow of Silver to India and Upon the Indian Exchanges.
• XIII.: The Effect of the “council Bills” On the Indian Exchanges.
• XIV.: The Minute of the Indian Government On the Depreciation of Silver.
• XV.: A Proposed Remedy For the Depreciation of the Silver Coinage of India.
• XVI.: The Transition State of the Silver Market.
• XVII.: Bi-metallism.
• Appendix. Evidence Before the Select Committee On Depreciation of Silver. Monday, 8th May, 1876.

II.

THE REMEDIES FOR THE FALL IN SILVER.

The fall in the value of silver, of which we spoke weeks since, and which has attracted so much attention, proceeds from three causes. First, the actual increase of the production of silver, especially in America, the extent of which is very considerable, as will be seen by the figures we give below; secondly, the amount of silver which has been set free by the German coinage operations, and has been sold here and elsewhere; and, lastly, the perturbed state of men’s minds, which is consequent on these events. So large an increase of the supply makes dealers fear a still larger further increase, and therefore they do not wish to buy, and do not care to hold. When markets are in this temper speculations are for the fall, and not for the rise, and therefore there is just now a disposition to “bear” silver and to force its price down. Over and above the proper effect of the causes in operation, there is an additional effect consequent on apprehensive opinion.

The evils of the fall thus caused are two, and both of great importance. First, our English exporters to India and the East find their profits diminished or changed into a loss. They are paid in silver, which is the currency of those countries, but when they bring that silver home and turn it into gold, which is our currency, they find it is not worth nearly so much as it used to be, and this diminution is so much loss to them. In the presence of stagnant and unprofitable trade, such a sudden change for the worse is not easily borne, and its effect, as is usual in such cases, will be propagated through other trades. Secondly, the Indian revenue is received in silver, and the Indian Government, which has to send some £15,000,000 home annually, for interest on its debt and other purposes, finds, in the same way, that the drafts from England on India, by which the remittance is effected, will not go as far as they used to do.

In the end, as we before showed, this fall in silver will work its own cure. Every country is bound to take any quantity of its own money in payment for debts due to it. As has been just explained, imports into India are no longer profitable; and by the converse operation of the same causes, exports from India have become more profitable than usual. The silver price of Indian commodities in India has not as yet risen much, though silver has fallen here as compared with gold, and there is, therefore, more profit than there was in exporting them. They can be bought with the same sum in silver, and that silver can be obtained more easily. The balance of trade will thus be, as the old writers used to count, constantly very favourable to India; silver will be necessarily sent thither, and the prices there will rise. As far as commerce is concerned, at a certain time everything will be as it was before the fall began. The imports into India will be as profitable as before, because the silver prices in India will have risen as much as silver has fallen in relation to gold, and the exports from India for the same reason, turned the other way, will not be more profitable than usual. The equation of trade, as theoretical writers term it, will be as before. And if the Indian Government were like most Governments, its position also would not be altered. As its taxes were paid in a medium of less value as compared with commodities, it must raise its taxes by an equivalent amount. But, unhappily, the position of the Indian Government is peculiar. The best portion of its revenue is derived from rent, and not from taxation, and that rent is fixed for stated periods—usually thirty years—in advance. On the £21,000,000 which the Indian Government thus receives there will be a loss, which it will have to make good by some financial expedient; and, as we well know, financial expedients are not so easy in India as they are in England. Still, such is the natural effect of these economical causes, and such the ultimate cure for the evils which are due to them.

As usual, however, other cures are suggested which, it is said, will be less painful and quicker—one is that the Indian Government should demonetise silver, as the Germans have been doing, and adopt a gold standard. But in this case the remedy would be worse than the disease. We all know what the Germans have had to do, and how painful its effect upon us has been. They have had to buy gold to substitute for that silver, and the result has been an unusual disturbance of the London market, with sometimes very high rates of discount; nor is the operation yet complete. But the effect of a similar operation in India upon us would be altogether greater and more disturbing, because the Indian silver currency is so very much greater than the German. To get gold enough to supply the place of all this silver the Indian Government would have to buy constantly all the supplies from the gold mines for years, and so straiten incalculably the growing money markets of the world. And then what is the Indian Government to do with the silver? The sales of the German Government have greatly helped to send the price down already; the Indian sales would be on a much greater scale, and would come upon the market just when the supplies from the new American mines were arriving also. So much silver could scarcely be sold at all; the best result to the Indian Government from this expedient would be far worse than anything which it is enduring now by letting things take their course—besides the disturbance to the London and other money markets.

Secondly, it is suggested that the German Government should not sell any more silver, and so not reduce the price. But we may be sure that the German Government will be guided, as in such a case it ought to be, by a regard to its own interest. When it thinks it best to sell it will sell. Like any other holder of silver, it loses much interest by keeping very large sums; and looking to the possible magnitude of the American supply, it will probably not wish to incur for certain that great present loss at the risk also of a still further loss by depreciation. We cannot control the German Government; it will act for its own interest, and it is best that it should.

Thirdly, it is said that our Government should cease to draw bills on India. And our Government is quite right in doing so at the present moment. There is, as we said before, at present in our judgment an apprehensive opinion which exaggerates the effect of the real causes at work—and also, as we are inclined to believe, speculation acting on and aggravating that opinion. In such a state of the market the Indian Government is quite right in doing as little as it can, and it would do ill to hurry to incur a loss which may be saved. But sooner or later it must bring the necessary sums home from India, and must bear whatever loss accompanies its so doing.

Fourthly, it is suggested by M. Cernuschi, the eminent French economist, that England, which was the first country to adopt the single gold standard, should take the initiative in abandoning it; that it should give up the present silver-token currency, and instead, “coin pounds sterling of silver in pieces of four shillings, and, concurrently with gold, put them into circulation”. But the English Government and nation will not easily be persuaded to abandon the monetary policy which they invented, and which on the whole has been so successful, just when all other nations are adopting it. The loss of profit on our present gold circulation, the cost of selling it and substituting a silver currency, are in themselves very considerable objections. It would take a very much greater evil than we, or than India, now feel from the present depreciation of silver, to outweigh them. The moment, too, would seem to the practical English sense most ill-chosen to choose to coin silver as a concurrent medium with gold, and therefore necessarily in a fixed relation with gold, just when silver is falling in value, and when we are not sure what its relation to gold will be. Monsieur Cernuschi speaks of the “universality of the 15½”. “Since 1803,” he says, “the silver franc has weighed 15½ francs of gold, and the silver marc now weighs 15½ marcs of gold,” and he would have us coin on this assumption, and in this proportion. But the actual question is whether, in the face of the new and cheap supplies now brought from the American mines, this proportion can be maintained. Even if the best theoretical arguments could be urged for this proposal, it would for many years seem a paradox to our straightforward English minds, and they would be very slow to decide on adopting it.

But we think the theoretical argument is the other way, that it is in favour of our present English coinage, and not of M. Cernuschi’s proposed substitute. We differ from him on a fundamental point of principle. He says that “the cost of production does not determine the value of gold and silver. That value is determined by two elements—the employment and the quantity.” But we say, on the other hand, that the value of gold and silver is determined by their cost of production, just like that of all other things; that in their case—as in all other cases—what is more cheaply produced than usual will be more plentifully produced than usual, and that the purchasing power in consequence will be no doubt less. Being durable articles, gold and silver are articles stable in general, though not always, in value, as compared with other things, and a change in their cost of production does not so soon affect their value as a corresponding change in the cost of other commodities affects theirs. But the delay does not impair the principle; in the end, its effects will come.

The same causes which regulate the value of gold and silver as respects other things determine, as we believe, their value relatively to each other, and, therefore, as the circumstances of production of both are constantly changing, it is contrary to principle to make, or attempt to make by law, a fixed equation between them. So far, therefore, from M. Cernuschi’s proposal being recommended by abstract argument, we think such argument forbids it, as well as its unlikely look, which, for a long time, will have as much or more effect on most English minds than any argument.

Lastly, M. Cernuschi recommends that Germany and Holland, which are in the course of demonetising their silver, though at very different stages, should carefully consider before they go any further. And we do not feel able to say what effect this present fall in the price of silver should have on their present plans. All changes in currency are delicate things, and we quite admit—indeed, we have often before maintained—that this is a particularly delicate one.

But these are considerations for foreign Governments only. For our own Government and that of British India, we believe that there is no other policy possible except to leave the ordinary economical causes to operate—to suffer the present evil, and to await the ultimate cure.

The above figures are taken from the Reports of the United States Director of the Mint.