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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.

VIII.

THE PROPOSAL OF THE BENGAL CHAMBER OF COMMERCE TO SUSPEND THE COINAGE OF SILVER IN INDIA.

The Chamber of Commerce of Bengal have resolved “that it is expedient for the Government to suspend clause 19 of Act 23 of 1870, which makes it obligatory on the Indian Mint to receive all silver tendered for coinage”; as also “section 1 of clause 11 of Act 3 of 1871, which makes it obligatory on the Currency Department to issue notes against silver bullion sent in, and that during such suspension it be unlawful to import coined rupees”. The weight of the authority of that Chamber has, therefore, been given to the proposal to suspend the coinage of silver, and thus to maintain the value of the rupee by diminishing the numbers of it in circulation, although the silver out of which it is made is falling in value.

The effect of this plan would be, as is obvious, to hold out the greatest stimulus to private coinage which has ever been given in the world. The basis of the whole proceeding is that the silver as a metal is likely to fall much and rapidly in value, in consequence of the new mines in America. But if this is so, the Americans will not lose the Indian market if they can help it. If the Government will not coin these rupees they will do it for themselves, and no law will be able to keep what they coin out of India.

We have also proved that this plan would have the necessary effect of suspending the natural cure for the present evil. The silver market is now disorganised, not by a great supply, but by an excessive apprehension. And the proper cure for such a market (and it is often a rapid one) is a brisk demand. Now the nature of the present fall in the exchange value of the rupee is, as has been at length explained, to give a bounty on exports from India, to give a discouragement to imports into India, and thus to create a balance of trade favourable to India, and a flow of silver thither. As there is no excess of supply in the silver market, the demand thus created will greatly sustain its value.

But there are other objections than these to the plan which, as they arise from its bad effect on Indian trade, should have prevented the Bengal Chamber of Commerce from recommending it. A metallic currency, of which the quantity is artificially regulated, of which whoever likes cannot get as much coined as he wishes, is as much a currency of fictitious value as a currency of inconvertible paper—and a nation which takes it is exposed to the same evil. A rupee “limited”—that is to say, a rupee of which the numbers could not by law be augmented—would do in India much what the greenback has done in America. It would be an appreciated artificial currency, instead of a depreciated artificial one, but it would be an obstacle to commerce, and would tend to isolate the country exactly in the same way.

In dealing with America now, as we need not explain, there are two problems for the English exporter; he has to consider for how many greenbacks he can sell his article, and then how much “sterling exchange” he can buy with those greenbacks. In dealing with a country which has a metallic currency there is always a limit to the fluctuations of exchange. The premium on bills can never rise beyond “the specie point”—the point at which it will pay to export gold or silver, as the case may be. But in the case of a fictitious currency, there is no such final point, for that currency cannot be exported. The premium on bills may rise to any height, as the depreciated paper is more and more multiplied. Upon an average, any extra high paper-price for his article obtained in America by the English merchant will be compensated by an equal loss on turning the paper into sterling. When other things rise in paper-price, the paper-price of gold as a rule will rise too, and with it the price of bills on London payable in gold. But though this is the general tendency, and a perfectly sure tendency on the average, it is only so sure on the average; it may fail in a particular case, and very often does. During the Civil War, and at other times when gold has been an article of great speculation, the fluctuations in the premium on it have been very violent. And there were no corresponding fluctuations in commodities because there was no similar speculation in them. At other times there might be speculation in commodities not shared by gold or bills. And thus the whole trade is confused. The profit is uncertain, because it depends in the long run on the counterbalancing effect of two bargains, and very often the two do not counterbalance.

All persons engaged in the American trade are most anxious to get rid of this impediment, but the effect of the scheme of the Bengal Chamber would be to introduce into the Indian trade a similar impediment—only, so to speak, with the other side turned up. Prices in India would fall, not rise, in consequence of the non-coinage of the rupee. We must remember that the currency of a stationary country requires constant renewal, and that of a progressive country requires constant increase; and therefore, if you keep the quantity fixed, prices are sure to fall. And as the rupee cannot be imported, there is no check on this fall. Smuggling rupees apart—the decline will continue so long as the fixity in quantity of the rupee is maintained, and it will be quicker or slower in proportion as the increase of the country is so.

No doubt the price of bills on England will in the long run fall too, like that of other things. There will be less money as a rule coming to England, because English imports into India have sold for less. But there will be no reliance on this being so in any particular case. The trade will be in confusion. As long as silver can pass as money between the two countries, there is a limit to fluctuation in exchange; but the moment you limit the coinage of the rupee, you prevent that passage. Silver, if the Bengal Chamber have their way, will be quoted with incessant fluctuations in Calcutta, just as gold is in New York, and its price and that of bills payable in it will be as much liable to the influence of speculation.

Though, on the whole, this appreciation of the coin-rupee would probably be better than the depreciation of the greenback, its first effects would be more painful. The fall in prices would make people think that they were getting poorer; whereas, in the opposite case, the rise makes them imagine they are getting richer. And the “contraction,” as Americans call it, would raise the rate of interest. There would be less money to lend, just as in the case of depreciation there is more money to lend—again a painful effect instead of a pleasant. Both are temporary; the change of prices makes the desire of persons to borrow less in the one case or more in the other, and that change likewise makes their power of borrowing less or greater, because the value of securities decreases or increases. Still, for the time, the first effect of an appreciation is not pleasant, and neither the Indian nor any other mercantile community which has been exposed to it has ever liked it.

And then, what is to be the end? Either the depreciation of silver depends on passing causes, and then this appreciation is needless—it would be better not to disturb the ordinary course of trade; or, on the other hand, the depreciation of silver is more or less to be permanent, and then this appreciation of the rupee is mischievous. It will cause a motion of prices in the wrong direction to the natural one. It will cause prices to fall just when, from the legitimate effect of circumstances, they should rise. And this wrong movement will have to be corrected; this artificial rise will have to be undone; and so, in addition to the inevitable fall of the value of the rupee with that of silver, there will be a needless fall of the rupee to that of silver.

An idea seems indistinctly to float in many minds that in this way an opportunity will be obtained for introducing gold. But how will it be gained? The difficulty of introducing gold in place of silver is that you must demonetise silver, and give gold in place of it. But the silver is so great in amount that the Indian Government could hardly get gold to replace it, and could never afford the cost of the change. No doubt there would be fewer rupees in circulation the longer the coinage was suspended; but then each of these rupees would be of higher value as coin than as silver, and when it came after the demonetisation to be sold as silver there would be so much extra loss.

It is asked, too, why should not we do in India as the Latin Union do in Europe; why should we not assume their “expectant attitude”? But the cases are not similar. In India, silver is practically the only legal tender; in France and Italy, it is one of three, and in the rest of the Latin Union, one of two. The main currency in the first two countries, which are by far the greater and richer part of the Latin Union, is inconvertible paper, which is now really the standard, and not metal at all. And in the other countries gold circulates as well as silver, so that practically silver is only a subordinate currency in the Latin Union, taking it as a whole, and therefore the limitation of its quantity does not cause prices to fall, for prices are not measured in it. The scale is so much smaller too, that false coining has not yet operated, any more than it does in our own token coinage. And the whole position is different. The Latin Union was a group of double-standard countries largely using gold, and the question for them is whether they will give up their gold and become silver countries exclusively—which would happen if they were to abandon the limitation of coinage while silver is as cheap as now—or whether they will demonetise silver and use gold as a standard only. This would be troublesome and costly, but still it could be done. But India has no problem to consider; she is irrevocably committed to a sole silver currency, and therefore a similar attitude would in her case, besides being mischievous, have no meaning.

The true remedy, as we have often shown, is not to impede silver’s going to India, but to permit the laws of trade to diffuse silver through India and through the world. This will cause an immense demand for silver, for the countries where it is the only currency are still vast and numerous.