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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.

VII.

THE REPORT OF THE COMMITTEE ON THE DEPRECIATION OF SILVER.

The Report of the Commons Committee on the depreciation of silver is a very able document. It appears to have been drawn up by the chairman, Mr. Goschen, and accepted, with comparatively minor amendments, by the Committee,—and it has the clearness, the precision, and the great information—no matter at what labour acquired—for which Mr. Goschen’s writings on such subjects are remarkable. The Committee was excluded, by the terms of its appointment, from investigating remedies eo nomine, but by describing precisely the events which have happened, and analysing, as far as is possible, the causes of each of those events, they have enormously facilitated the discussion of future policy. In all cases an accurate diagnosis of a disease must come before a discussion of remedies, and in a very complex case like this such a preliminary is especially needful, or else we may find that we have been trying to cure disease A with medicine fit only for disease B, and so have made things no better, or worse.

The most striking cause of the depreciation of silver, and that which the Committee treat of first, is the productiveness of the new mines in America. And looked at in this relation, the most remarkable thing about it is its rapidity. In former analogous cases the effect has been much slower. Adam Smith was of opinion that prices in England did not even begin to be sensibly affected by the American mines till 1570, though the first shipments of specie were made in 1502, and though the mines of Potosi—the most productive of all—were discovered in 1542. And even then the depreciation was slight, and continued to increase only at a slow rate for many years. When gold was discovered in our own time so extensively in California and in Australia, most persons thought it would at once affect general prices. But it did not. Even yet there is a controversy on the subject, and though we believe that, especially since Mr. Jevons’ investigations, there can be little doubt that a rise in gold prices has happened to some extent, we should not like to state its extent precisely, and should fear to exaggerate it.

But now, the American mines were not much heard of in this country till last autumn, and the Committee tell us that the effect on the price of silver has been this:—

and as we write it is 48d., showing a reduction of 16 per cent. from the average of 1875.

But we must observe that in this contrast we are not comparing the same things. This table is a comparison of the price of silver with that of gold only; when we spoke of the previous discoveries we spoke of the general prices of commodities. But there is no evidence whatever that general prices in any country where prices are measured in silver have risen in any such ratio; indeed, as we have understood, careful inquiry seems to show that they have not sensibly risen at all. General prices have obeyed in this case the same law as in former cases; they are being acted on very slowly. Indeed, it is evident that they must be so; if they had risen 20 per cent. over the whole of the countries using silver as their principal currency, or over any very large part of them, 20 per cent. more on the silver currency used would have been wanted to circulate commodities at those prices, which, as there are few “economising expedients” in such countries, would have been a very large amount indeed. But no such new silver exists. The Committee say: “It is, however, an important and remarkable fact, to which it may be convenient to call attention at once, that though the increased production of silver in the United States is a fact beyond question, no actual increase in the imports of silver from the United States to Great Britain has taken place since the year 1873, when the average price of silver was still 59¼d. per oz. Indeed, the amount of the imports into Great Britain from the United States for the year 1875, viz., £3,092,000, is the smallest since the year 1869. In the same way, though the new currency laws of Germany affected a vast silver coinage, the sales of silver actually made up to the 26th of April in the present year do not appear to have exceeded £6,000,000 distributed over several years.”

Except a small amount of silver which goes from San Francisco to China direct, all the silver which leaves America comes here, and therefore it is plain that no such additional silver as would be required by very greatly raised prices over the large areas of the East anywhere exists. General prices there have not risen in any such ratio as 20 per cent.; what has alone so varied is the relation of silver to gold in the London market, and in the markets guided by it.

But even this variation is most curious. Nothing like it happened when gold was discovered in Australia and California. It did not fall then in relation to silver at all as silver has now fallen in relation to it. The course of prices then was this:—

—which is certainly wonderfully little in comparison with what we now see, though the discoveries of gold then were every way as remarkable—indeed, more remarkable—than those of silver now. The difference is certainly not from any excessively quick supply now. As the Committee shows, in 1875 the silver sent from America was less than in previous years, and for the first six months of 1876 the figures have been these:—

—so that, in fact, notwithstanding the great fall of silver in this market, owing in great part to the apprehension caused by the new mines, we have had from them no extra supply as yet at all.

The explanation is that the report of this new discovery came on a market where prices were previously falling, and which was most perturbed and sensitive. The Committee tell us that:—

—showing a considerable fall. And they analyse the causes which were in action, weakening the temper of men’s minds, and preparing them easily to allow of a still greater fall.

The first of these is the introduction of a gold currency into Germany in place of a silver one, of which the report gives a very clear and consecutive account. This cause, as our readers know, has been one peculiarly perturbing, because it has been incalculable as well as powerful. Dealers in silver have never for several years known either what quantity of it the German Government was anxious to dispose of, or what price it would take for that quantity. Nothing depresses the tone of a market like uncertainty, and this subterranean political agency, if we may so describe it, has now for a considerable period been a cause of uncertainty, in incessant action, and of the first magnitude. And its action still continues, for the amount of the thaler silver currency, which will have to be demonetised, is most uncertain, the estimates of it differing by many millions; and, therefore, we do not in the least know either what the German Government have in hand, or what they have to sell, or when they will have to sell it. The silver market is, consequently, affected exactly as the Liverpool cotton market would be if there was an immense unknown quantity to arrive. Such a market always, as the phrase is, lives from hand-to-mouth, sells as soon as it can, and the prices in it fall to an extent and with a rapidity which an observer, acquainted only with the visible supply or the visible demand, would not be able at all to account for.

The second cause is the policy of the Latin Union to which we have so often drawn the attention of our readers. The States comprising it—France, Belgium, Italy, Switzerland (and now Greece)—in 1873 adhered strictly to the principle of the double standard of gold and silver,—that is, they allowed any one to bring to the Mint any quantity of either metal, and they coined it for him. In consequence, at every change they were always coining the metal of lesser value, and that metal, when coined, was used to buy and take away the metal of higher value. In this way, during the cotton famine France was half-emptied of silver which was wanted for export to the East, and was filled with gold which was not so wanted. If these States had continued to adhere to this principle, the great effect on the general silver market produced by the German operations would have been much diminished and rendered scarcely observable. As soon as silver began to fall it would have gone to France and been used there to buy gold which had risen. Thus silver would have been taken from the general market, and gold would have been brought to it, till the former level of comparative values, or something like it, had been reached. But France and the rest of the Latin Union could not endure this. Partly from political, and partly from economical motives, they would not take the “cast off” German silver. They limited the amount of the silver which they would coin, and thus the silver market was at the same moment perturbed by two extra-commercial causes: one set of countries sold off silver as they had never before done, and so increased the supply; and another refused to take it in a way in which they had never before done, and thus diminished the demand.

Thirdly, there has been another cause, also not commercial, though of a very different kind, which has tended to diminish the demand for silver. This is the increase in the amount which the Home Government draws for upon India, as to which the Committee tell us: “The yearly amount payable by India for the disbursements of the Home Government has risen since the Indian Mutiny from £5,000,000 to £15,000,000, a difference of which the magnitude will be appreciated when it is remembered that it is considerably more than half of the total amount of silver annually produced.

“That the full effect of this substitution has only been recently felt, as that effect was retarded by the construction of the Indian railways, which involved an expenditure in India of money raised in England, counterbalancing therefore an equal amount of expenditure in England of money raised in India.

“That the amount of the disbursements which has just been stated appears to represent the present normal expenditure of the Home Government, and that, therefore, unless by some marked change of policy, no diminution of that amount can be looked for.”

The effect of this increase of the tribute, for such economically it is, which India pays to England is peculiar, because the ordinary relation of the two countries commercially has been peculiar. Generally the existence of such a tribute makes no difference in the amount of the precious metals transmitted from one country to the other. Mr. Mill explains this very clearly. “Commerce,” he says, “being supposed to be in a state of equilibrium when the obligatory remittances begin, the first remittance is necessarily made in money. This lowers prices in the remitting country, and raises them in the receiving. The natural effect is that more commodities are exported than before, and fewer imported; and that, on the score of commerce alone, a balance of money will be constantly due from the receiving to the paying country. When the debt thus annually due to the tributary country becomes equal to the annual tribute or other regular payment due from it, no further transmission of money takes place; the equilibrium of exports and imports will no longer exist, but that of payments will; the exchange will be at par, the two debts will be set off against one another, and the tribute or remittance will be virtually paid in goods.”

But in the case of this increase of the tribute from India to England, the primary supposition of Mr. Mill does not hold. The exchanges were not before in what he calls “equilibrium”—that is, one which did not admit of a transmission either way of the precious metals. There was a constant export of silver from England to India—a sum of money constantly paid by the dominant to the dependent country. And in such case the effect of an increase of the sum due from the dependency almost always at first is, and perhaps may permanently continue to be, a diminution of the cash which the superior country has to transmit. This is one effectual mode of rectifying the balance; it is the simplest, it is always the first taken. And it has been so here. From a most careful and valuable examination in the Committee’s report, it appears that—

But on the other hand, the increase in the “tribute money,” as we call it, or the Government drafts, is:—

And the diminution in the demand for silver thus caused has been weighing on the silver market, making it constantly sensitive, and tending more and more to reduce the price.

These, with some minor ones on which we cannot dwell, are the causes why the silver discoveries now have produced so much more sudden an effect on the bullion market, that is, on the relative value of silver to gold, than the gold discoveries did on the relation of gold to silver five-and-twenty years ago. And surprising as that difference is, they are fully sufficient to account for it.

As to the discoveries themselves, the Committee speak with much caution. They very properly abstained from calling evidence from persons connected with the mines, as otherwise their report might have been made a “puffing machine,” to raise the price of the shares in particular companies. They rely on the official documents which the American Government issued, the contents of which we have, we believe, laid before our readers from time to time.

They estimate the total yield of the United States:—

These figures are not very large, and would come to very little when distributed over all the countries of the world which use silver as their standard of value, and in comparison with gold the effect is less, because the yield of gold from the new mines is itself very large. “Mr. Whitehill, the State Mineralogist” for the State of Nevada, the Committee tells us, “states that ‘during the past two years (1873 and 1874) this mine has yielded bullion to the value of $5,000,000, the principal of it since last June. The yield for September was $562,000, and for October $610,000. The daily yield of the ore is about 400 tons; about 44 per cent. of the value of the bullion is gold.’ ”

If in the end the supply of gold from these mines is increased on a sudden nearly equally with that of silver, the ultimate effects will not be at all like that which the recent state of prices has shown.

Now, from full information, we see the nature of the evil from which we are suffering. We are not suffering from a depreciation of silver as against commodities in the countries where silver is the standard value, for there is no supply sufficient to produce such a depreciation, nor time if there had been such a supply to diffuse it, and there is no such depreciation in fact. We are not suffering from a depreciation of silver as against gold caused by a sudden excess in the supply of silver, for the new supplies of silver have been only moderate, and none of them have come here. We are not suffering from a depreciation of silver as against gold caused by a diminution in the cost of production of silver, for there has been no time, or anything approaching to time, to say what the ultimate cost of production will be. No doubt certain mines of singular fertility have been discovered, but it is not silver produced in the best mine which determines the price of silver, as a whole, any more than it is the corn grown on the best land which determines the price of corn as a whole; that which does determine it is the cost of production in the worst mine which can maintain itself in working. The producer in the least favourable circumstances always fixes the price; those in better circumstances take that price, and get an extra profit. And what that mine will be in the case of silver we cannot as yet tell; the experience of years alone can determine it. All that we can now safely say is that, judging from all past similar events, it will not be any of the new mines now discovered, or any of fertility approaching to theirs, but some other far down in the scale, some one which has been in some degree better than some others till now, and therefore will be able to maintain itself when those others are obliged to desist from working.

What we are suffering from is the apprehension of increased production of silver suddenly supervening on a market previously perturbed, upon which one Government had forced an extra supply, from which a union of other Governments had refused to take, as usual, any supply, and in which another Government, by an increase of the tribute it requires from a silver-importing country, has temporarily, if not permanently, lessened the demand.

This explanation of the real malady at once disposes of a crowd of unreal remedies. No competent person can propose a demonetisation of silver in India, and a substitution of gold for it, just at a moment when the price of silver has been thrust down by so strong an apprehension caused by such peculiar circumstances. It would be to require the Indian Government to buy the largest amount of gold ever bought in the dearest market for gold, and to dispose of the largest amount of silver in the cheapest market for silver, which ever existed. The present financial position of the Indian Government is no doubt impaired by this sudden depreciation of the metal in which it receives its revenue; but the remedy for a minor deficit would bring in, in lieu of it, a deficit of the first magnitude; it would be nothing else but financial ruin.

Again, no one would propose to arrest coining silver in the East as a remedy for such a state of things, for this would only disorder the silver market still further. It would add a new political difficulty to those previous political difficulties which have caused so much disturbance, and so make the existing confusion far worse than before. Nor can it be maintained that the Indian Government should now require the ryot, whose rent has been formerly fixed in silver, to pay either in gold itself, or in so much more silver as would purchase the same quantity of gold as that fixed rent would have purchased when the settlement was made. If silver in India had become depreciated as against commodities in general, it might have been possible to say to the ryot, “You are selling your commodities for more silver, and therefore it is not unfair to ask you to pay us—the Government—a proportionate amount more”. Even then the ryot would have been probably discontented; he would have said, “If prices had gone down, the Government would never have let me off, and it is not fair that they should take the benefit of good times when they leave me the misfortune of hard times”. Still, in this case, if the depreciation of silver had been against commodities in general, it would have been perhaps substantially, though not intelligibly, equitable to adopt such a policy. But now that there is no such depreciation of silver as compared with commodities, such a scheme is not feasible. The ryot in India does not sell his produce a bit dearer than he did a year ago; his income, as yet, is just what it was, and it must be so till a vast amount of silver has gone to India to raise the prices of daily life. Clearly, therefore, he must not be additionally taxed because the silver market is apprehensive, and because certain Governments (the Indian Government being one of them) have perturbed it.

The real remedy, as we have shown several times, is to leave the great natural forces of trade to operate unrestricted. The true remedy for an enfeebled market is an access of demand, and in this case the laws of commerce, if not suspended or crippled by State interference, will produce that demand. The necessary effect of a depreciation of silver as against gold is to give a bounty on exports from India and the other silver-using countries to England. An English merchant can now buy many more rupees than he formerly could with the same number of sovereigns, and therefore he can import from India, though prices at Calcutta are not at a level at which it would have paid him to operate if he had not had that novel facility in getting rupees. Similarly, shippers to India cannot afford to sell at the same price in rupees which they could have formerly, for they will lose in bringing those rupees home. And the combined effect of this bounty on exports from India, and of this fine on imports into India, must sooner or later be an unfavourable balance of trade, and a consequent flow of silver to the East. A new demand of great magnitude will eventually relieve the silver market, if we only leave it alone.

It has been objected that as yet this process has not begun. But in this complexly organised world, it is never safe to reason that a force, even of great magnitude, does not exist because its effect may be impeded. No doubt, as the first table we print at the end of this article shows, the exports from India to this country have in many instances not increased, though in some they have; but then table No. 2 shows why. The prices of those articles in England have gone down, and, therefore, though there might be a gain in comparison with last year on the exchange, there might be a loss as compared with last year on the whole transaction. As to the diminution of profitableness of shipments to India from hence, there is, unhappily, no doubt. Every trade circular dealing with the East records—every Chamber of Commerce in cities interested in the East resounds with complaints—that it is so. Sooner or later this must cause a large diminution in that branch—a diminution, no doubt, universally to be much regretted, but nevertheless an evil necessary to be endured, because it is part of the appropriate remedy at the present time. We have spoken of India because that is the silver-using country which comes most easily to an Englishman’s mouth; but the same thing is true of China, of the whole East, and of every other part of the world. To them all, there must ere long be an export of silver. In a time when the speculative part of the business world were eager and animated, this would have happened long ere this; but even the present indisposition to begin new things, and the recent ruin of so many of those who were most disposed to do so, cannot long delay it.

At what price silver will settle down, nothing but experience can determine; but the two cardinal points in the matter are—first, that that price will be determined by the cost in the least good mine which pays to keep at work; secondly, that the extra demand for silver to countries where it is the standard money will require a very large sum, if the value of silver as against commodities is to be depreciated in all of them, because the efficiency of a metal as money depends on it. By whatever percentage you depreciate it, you make it necessary by that very percentage, cæteris paribus, to have more of it. And as the quantity of silver now circulating is immense, even a small percentage on it comes to a good sum, so that ultimately mines of far inferior grade to those now so much talked of will continue to be worked, will settle the value of silver, regulate its price, and in all likelihood prevent any such depreciation of it as the peculiar perturbations of the present moment have led many to apprehend.