Front Page Titles (by Subject) IV.: THE EFFECTS OF THE RESUMPTION OF SPECIE PAYMENTS IN FRANCE ON THE PRICE OF SILVER. - The Works and Life of Walter Bagehot, vol. 6 (Lombard Street, Essays on Guizot & Cairnes, The Depreciation of Silver)
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IV.: THE EFFECTS OF THE RESUMPTION OF SPECIE PAYMENTS IN FRANCE ON THE PRICE OF SILVER. - 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 EFFECTS OF THE RESUMPTION OF SPECIE PAYMENTS IN FRANCE ON THE PRICE OF SILVER.
The increased supply of silver from the American mines, the amount of it thrown on the market by the coinage operations of Germany, and the consequent fall in its value as compared with gold, have all been much discussed; but there is another event which will have a great effect on the matter, and which must sooner or later happen, that has not received at all equal attention, viz., the resumption of specie payments by the Bank of France. The result of this, unless a change in the French coinage law is made, will be, we think, considerably to raise the price of silver as compared with gold, just as the result of the other causes which have been mentioned has been considerably to lower it.
Our older readers, and those of our younger ones who have followed the history of the London money market, will remember the exchange in 1860 of £2,000,000 of silver by the Bank of France for £2,000,000 of gold with the Bank of England, and the interest which it excited. We then explained what had happened, and the reason for it:—
“Why, then, do the Bank of France desire this arrangement? According to their own views, it was from no uneasiness as to their position. Notwithstanding the diminution in their reserve of bullion, they believe that they need feel no anxiety. By their last return their liabilities were:—
and their reserve was more than £17,000,000, and they consider that this is amply sufficient.
“The difficulty of the Bank of France, it is said, is not the amount of bullion they hold, but the nature of that bullion. In their seventeen millions, the proportions are in round numbers:—
And under the French currency laws this is not satisfactory. The Bank of France, for very sufficient reasons, prefer discharging their liabilities in gold instead of in silver. If they were to pay a noteholder £1000 in silver, he could immediately sell the silver in the market for gold, and gain a substantial premium by the transaction. Accordingly the managers of the Bank of France apprehend that if they began to discharge their liabilities in silver, there would be a run upon them immediately for the sake of this premium. ‘If every noteholder knew that he could obtain an appreciable percentage on his note by getting it changed, depend on it,’ they say, ‘he will get it changed. The same causes which have drained the rest of France of silver (except for the smallest purposes, and of insufficient quantities even for those purposes) would begin to act upon us also; in a short time we should be drained of the whole of our thirteen millions of silver.’ And this, they say, is the reason for their proposing this anomalous arrangement to the directors of the Bank of England.
“One remark must occur to every one when he hears this reasoning. It is the remark that no bank ever ought to be in this position. There must be some fault somewhere; there must either be bad management or bad legislation; there must be some peculiar error, or there could hardly be so peculiar a perplexity. For what is the allegation? The Bank of France say, ‘We have a large reserve, but it is not the kind of reserve we want. It is in the wrong metal; it is not gold, but silver.’ The alternative is irresistible that either the directors of the Bank have themselves made an error in hoarding a reserve in the wrong metal, or that circumstances beyond their power have forced upon them a hoard which they find they cannot use. They have a useless reserve, they themselves tell us; either, therefore, they have voluntarily selected it—in which case they are to blame; or it has, by an unfortunate necessity, been forced upon them—in which case they are not to blame.
“Nor is this the only remark which must immediately be made. There is another very obvious but very important one. This useless reserve is a misfortune, not to the Bank of France only, not to the French only, but to us also, to Europe, and to the whole monetary world. We have thirteen millions sterling thus locked away in a great banking establishment, which does not dare to use any part of that sum, for fear it may be deprived of all of it; and we have all been sufferers in consequence. The French demand for gold has been disturbing us for several weeks.
“In truth the entire difficulty is caused by the French currency laws. There has been a question whether there is a double standard of value in France, and we will not, therefore, use the phrase, but there is indisputably a double paying medium. Both gold and silver circulate in France; both are legal tenders to any amount; and there is a fixed relation between them. A certain quantity of silver by law will pay a debt of 1000 francs, and a certain quantity of gold will pay it also. One effect of this twofold currency has been often pointed out. The metal which is relatively depreciated will come into exclusive use; people will pay their debts in the least valuable metal, not in the most valuable; in the medium which they can obtain most easily, not in the medium which they obtain less easily. But we have now to remark a different effect. Some of the holders of the more valuable metal may be in a difficulty. If they are bound to pay either the less or the more valuable metal to their creditors, and they have not the former, they must use the latter. In consequence, in a country where two metals are a paying medium, those bankers who store up either metal for the necessary purposes of their business run a great risk. If it increases in value, there may be a run upon them, not because their credit is impaired, but because the metal they have chosen is desired.”1
And the same cause will act on the Bank of France as soon as it resumes specie payments. The Bank of France holds now over £70,000,000 in the precious metals, and it is known that gold preponderates largely. Roughly, it is said that the proportions are—
And here, just as in 1860, the principal component in the reserve is the comparatively appreciated metal. The metals have, indeed, changed places; in 1860 the metal which had augmented in value was silver; now the metal which has increased in value is gold. But the position of the Bank of France is for the purpose now in hand identical. It now holds an enormous amount of gold, which it would be dangerous to pay away; just as in 1860 it held a much smaller, though still considerable, amount of silver, to pay away which would have been equally dangerous.
The basis of the difficulty is that the French Mint coins the two metals thus—
—or in the proportion of 15½. But this is not the real proportion of the market value. 15½ is equivalent to about 60¼d. for an ounce of silver, whereas the market price is now 54¼d. The law having fixed an equation, bankers will always be in difficulty when the facts with which they must deal do not correspond to that equation.
Of course, as long as the Bank of France suspends specie payments it does not feel this difficulty. If we may be permitted to say so, it is on a lower level altogether. It is not perplexed by the possibility of having to pay in the appreciated metal, for it does not, except in minor sums and when it chooses, pay in any metal. But as soon as the Bank of France performs its legal obligations, the problem which the defective currency system of France sets before it must be solved. There is, indeed, one obvious mode of solving it. There is something very singular in a difficulty which is caused by holding a commodity which has enhanced in value. The obvious remedy is to sell it in the market, and to obtain the advantage of that value. If the Bank of France could sell its gold for silver at the present price, it would get a large profit; it would have done a capital bullion transaction on a magnificent scale, and the shareholders would be large gainers in consequence. In 1860 the Emperor Napoleon, to whom the accounts of the Bank of France were then constantly submitted, would not permit this natural remedy to be tried, and, therefore, the Bank of France had to forgo the profit, and to change away the dearer metal with the Bank of England. But now there can be no choice; the sums to be dealt with are so large that no such palliative by exchange can be thought of. If cash payments are to be resumed in France, large sales of gold for silver must precede and accompany the resumption.
And the effect of such sales will, of course, be to raise the price of silver as compared with gold. The circumstances of the Bank of France will make the possession of much silver constantly essential to it, and the effect of this new large demand will be a rise of price.
The only alternative is the demonetisation of silver, and if this could be effected, it would give France a currency much better than the present one, according to our notions. The bi-metallic system is, we think, condemned by the very discussion in which we are engaged, for the perplexities which that system entails on the Bank of France are the evils of which we are seeking the remedy. But it may be doubted whether France is now prepared to abandon this system. It would be a very costly operation. The amount of five-franc pieces hoarded in France is probably very large, and if they are to be demonetised, gold must be substituted for them, which, as the example of Germany shows us, is no easy thing to do. Moreover, till 1880, France is bound by a monetary convention with Italy, Switzerland, and Belgium, and can only change as they like. Even after 1880, France would not like to abandon the “Latin Union,” as it is called, which is economically convenient—which is her creation, for it is an adoption of the money she desired, and in which she takes a political pride. Probably, if silver is demonetised at all, it will be so at once, not only in France, but in all those other States, which will be difficult to arrange, and costly to effect. And it will not have the united support of theoretical opinion, for many Continental—and especially French—economists adhere to the two-metal plan. And even strong opponents of that plan (like ourselves) may well doubt whether this is the time to abandon it. The Governments who do so undertake, in fact, to substitute gold for silver, and just now they have unusual difficulty in getting the gold, and in disposing of the silver. Germany is just making the substitution, and it is obviously an operation in which many great nations should not engage contemporaneously. An interval ought rather to be left after the completion of the operation by one before another begins.
It is true that the demonetisation will be facilitated by the clauses in the agreement of the Latin Union, which limit the number of silver pieces less than five-francs to be coined by each State in the union, and which limit the amount for which such subordinate pieces are legal tender. These pieces might, therefore, still be left to circulate as token-money. But, nevertheless, the change, especially in so many States at once, would be a heavy task to accomplish, and not one which it would be easy to get undertaken. And failing this, there is no remedy, except the sale of gold for silver by the Bank of France, of which we have spoken, so soon as a return to specie payments is determined on.
It may, indeed, be suggested that the Bank of France need not return to specie payments at all. But we do not believe that those who have managed her affairs so admirably during the last few years will even consider that alternative. As bankers who have promised to pay on demand, they must wish to maintain their credit by so paying. And Paris can never again be the exchange centre for Europe which it used to be, and which many concurring circumstances render it convenient for it to be, while bills on Paris are paid in a purely local medium like the paper of the Bank of France, and not in the precious metals, which are the money of all the world.
Sooner or later, therefore, we have no doubt that the Bank of France will resume specie payments, and then, unless the fundamental basis of the French currency law shall have been first changed, there will be a very material rise in the value of silver as compared with gold.
[1 ] See Economist, 24th November, 1860, pp. 1301-2.