Front Page Titles (by Subject) V.: THE EFFECT OF A DEPRECIATION OF SILVER ON OUR FOREIGN, AND ESPECIALLY ON OUR EASTERN TRADE. - The Works and Life of Walter Bagehot, vol. 6 (Lombard Street, Essays on Guizot & Cairnes, The Depreciation of Silver)
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V.: THE EFFECT OF A DEPRECIATION OF SILVER ON OUR FOREIGN, AND ESPECIALLY ON OUR EASTERN TRADE. - 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 EFFECT OF A DEPRECIATION OF SILVER ON OUR FOREIGN, AND ESPECIALLY ON OUR EASTERN TRADE.
That the depreciation of silver as compared with gold, which has already begun, and of which we cannot yet predict the final amount, is unfavourable to the Indian Government, is plain. That Government receives a revenue in silver which it cannot easily augment, and it has to find annually, for the interest on its debt and for home expenses, a large sum of gold in London. Whatever lessens the value of silver as compared with gold is therefore very disadvantageous to it. And whatever does so is also detrimental to the holders of Indian or other securities of which the interest is paid in silver. But it is only States or persons in this position—that is, those in receipt of a more or less fixed sum in silver—who will permanently be affected by it. After the depreciation of silver has attained its limit trade will be exactly where it is now, and though during the process there will be much unsatisfactory uncertainty in the trades with the countries whose prices are in silver, and though in some parts our trade will probably suffer, yet other parts will as probably be benefited; and therefore this change, though like all changes in the value of a currency, a troublesome burthen, is, nevertheless, not an evil of the first magnitude, or at all likely to produce the disastrous effects, on English commerce especially, which we sometimes see expected from it.
We must remember that silver is still practically the main currency of a very large part of the world. The whole of the East uses it, not indeed to the entire exclusion of gold, but still much more than gold. It suits the minuteness of the payments which in Oriental countries, and in all countries in which there is no credit, of necessity make up almost the whole of the daily transactions which carry on common life, and for which the smallest gold coin that can be safely and economically used is very many times too great. Over the vast area of the backward pale of the world an incalculable quantity of silver is now scattered, doing the work of daily life, and doing it almost to the exclusion of all other currencies. And we must remember, too, that with this currency, as with all others, the efficiency depends on the value. The more things a rupee exchanges for, the fewer rupees will be necessary to do the work of India. A change of 10 per cent. in the purchasing power of silver would make 10 per cent. more silver necessary in each of these countries; and though we do not know what 10 per cent. would amount to, because we really cannot tell even approximately the quantity of silver circulating in those countries, yet we see that it must amount to something very large, for that present circulation must be reckoned by hundreds of millions. To make a permanent change even of small amount in the purchasing power of silver throughout the world is a most costly matter, requiring much time. No commodity is of so stable a value as a great deal of money diffused over many countries, because as soon as you diminish that value even a little, you augment the quantity required indefinitely. In this case, far more than in any other, an addition to the supply of itself generates an addition to the demand.
And a depreciation of such money is necessarily diffused with more or less rapidity through the various nations who use it. A local congestion, so to speak, is impossible. The laws which distribute the precious metals over the world will gradually lessen the value in all of them, if it is greatly and suddenly lowered in any one. There is a steady tendency to take such a commodity from the country where its purchasing power is small to those in which its purchasing power is great, and in that way this power settles in all countries at its level.
Such a change in the value of a metallic money will even generate a new trade between countries which had none before. The discovery of gold in Australia and California gave those countries a buying power which created a great direct commerce with them; the nations from whom they bought obtained a buying power too; so on with those from whom they bought; and so an unprecedented accession to the previous trade of the world.
It would be absurd to expect any results of similar or approaching magnitude from the new silver mines in America, even were their magnitude and fertility many times greater than even the most sanguine computers make them. But the same cardinal principles will govern this smaller case which we have seen govern the greater. The silver prices of all articles must gradually and slowly be raised all through the silver countries; and the rise will be effected the most quickly in those countries which have most share in the commerce of the world, and which export and import most. Take the case of India at this time. The depreciation of silver in London is an encouragement to English capitalists to buy commodities—jute, cotton, indigo, or whatever it may be—in India. Such commodities are sold in rupees, that is, in silver, in the Calcutta market. Now, an English capitalist must first buy his rupees—for this is the real result of the more complex exchange transactions—before he can obtain these commodities. The cheaper, therefore, he can buy such rupees the better his operation. Supposing an order to buy at a given hour in the Calcutta market to yield neither profit nor loss when rupees were at 2s., it might yield a good profit if the rupee fell to 1s. 8d., because then the gold of the English capitalist would go so much farther in the purchase of them.
The very contrary arises in the case of English exports to India. The English exporter of these is paid in rupees at Calcutta or Bombay, and these rupees, when he brings them home to London, are worth (say) a sixth less than they used to be; and, therefore, he has a steady and certain motive not to export as much as he used to do. And the sure result of these two changes, of the encouragement of exports from India and of the discouragement of imports into India, is a flow of silver from hence thither, which must ultimately raise the general standard of prices there.
It may be objected that this rise of prices will be an evil to India—will throw it out of the world’s market; that Indian cotton, for example, which has thus risen in price, will not be able to compete with American cotton, of which the price will be unaltered. But this objection is fallacious; all which the rise of prices will effect will be to withdraw the exceptional encouragement which, as we have just explained, the present state of things gives to the export of Indian cotton. When silver has settled to its new level of value all trade, whether of export to, or import from India, will go on as it did when it was at its old value. Take the case of the English importer from India, silver having fallen (say) 15 per cent. In its relation to gold, he will get 15 per cent. more rupees than he used to do for his gold, but when he goes into the Calcutta market, he will find that these rupees will only purchase an equal percentage less; his gold will be neither more nor less efficient than at first, and therefore he will neither be encouraged to buy nor discouraged from buying. Conversely, the English exporter to India will not be able to get as much for the rupees for which he sells his goods, when he brings those rupees home here; but on the other hand, he will have, to a corresponding extent, more rupees, and therefore the final outcome of his trade will not be altered.
No doubt it is true that during the process of depreciation our general export trade to some countries will be under a disadvantage. We shall export to them silver instead of goods; but on the other hand, certain other branches of our foreign trade will be augmented. The silver which we send to India we shall have sent to us from America, and we shall have to pay for it. And we shall doubtless pay for it in the same way that we pay America for the rest of the commodities which she sends us. Our present direct trade with America stands thus:—
And against this balance America draws drafts to pay for what she buys in India, in China, or in France, and all over the world. The trade is what is called a triangular trade, because the debt due to one nation is paid for, not by the nation which owes it, but by some other nation or nations which are in debt to that nation. The more, therefore, we augment our American trade, the more we shall have to export in goods, not indeed wholly, or probably principally, to America itself, but to other countries to which she is in debt. And as America always buys more in the East than she sells there, curiously enough one of the trades which will most likely be thus stimulated is the trade with the East, which from the first operation of the new cause—by the substitution of silver for goods in our direct trade—has been discouraged and depressed.
The same fact may be put in another way. The United States have acquired by the extraordinary productiveness of their new mines of silver an augmented purchasing power in the markets of the world. The increase of power they use in buying the commodities which they wish for in the East and throughout the world. But partly owing to her protective system, and partly in consequence of natural causes, America has no direct communication with the countries which produce those goods; she therefore sends the silver to England, and England acts for her as a produce-broker on a vast scale—both sends on the silver to the countries which want it, and pays, indirectly, for what she buys to the countries she buys from. That we are able so to pay is one of the many instances in which, in trade, most is given to those who already have most. Our export trade is so much greater and so much more easily augmented than that of any other country, because we are able to settle any debt in commodities far better than any other nation. If the United States buy of nation B, B is more likely to want something of England than of any one else, or if, instead, B buys of C, C is so likely, and so on through the alphabet, till at last you come to England. Our predominant international trade gives us, in a business such as this, an assured pre-eminence.
This is one compensation for any evil to our present export trade, which may be caused by a change in the value of silver; and another is that a part of our import trade will, as we have seen, be benefited by the same cause; which must either cause—according to circumstances—increased profits to our traders, or diminished prices to our consumers; and either way, be a gain.
In thus writing, we have been content to assume that the American production of new silver will be on the largest scale which has ever been alleged, because we wanted to show how large the area of silver-using countries is; how slow, in consequence, will be the process of depreciation; how much of benefit, as well as of loss, there is to our trade while the process is going on; and how much commerce will return to its antecedent state when the change has run its course, and the depreciation has terminated.