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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.

XII.

THE PERMANENT EFFECT OF AN INCREASE OF “COUNCIL BILLS” ON THE FLOW OF SILVER TO INDIA AND UPON THE INDIAN EXCHANGES.

The depreciation of silver and its effect on the Indian exchanges have been much discussed, and with the best result. The Indian Government, we are glad to say, have announced that they would adhere to right principles, notwithstanding the greatness and suddenness of the difficulty in which they are placed, and the number of wrong schemes obtruded upon them. But another fact, of which the practical effects are inextricably intermingled with those of this depreciation,—the recent great increase of the political payment of tribute which England derives from India,—has not been studied with equal care. It appears from the investigations of Mr. Goschen’s Committee that the “Indian Council” bills, which represent that payment, have increased in the last ten years as follows:—

It appears also from the same authority that most of the effect which this great increase in the payment from India to England might be expected to have upon the exchanges, was delayed by a simultaneous increase in the payments made from England to India. Till quite recently we have been very largely investing capital in railways and other public works; the funds necessary for these were raised in London, and were sent out to India; and so compensated for the increase of the tribute. But now there is no longer any equal transmission of capital to India, and we, therefore, for the first time feel the effect of that increase.

The immediate result has naturally been to counteract the flow of silver to the East. When commerce is left to itself, the imports England takes from India are much greater than the imports which India takes from England, and a part of the balance has to be paid for in specie—the rest being settled in indirect ways, of which we need not speak now. But the increase in the “Council bills” provided a competing remittance with silver; if a merchant wanted to make a payment in Calcutta, he had the choice either to buy bills, or send out silver, and of course so much less silver was sent.

The effect was the greater because the Government of India must bring their money home from India, and, therefore, must sell their bills; whereas “silver,” like any other commodity, may go to many markets, and may be held when its price falls. This is the reason of the saying, “the price of Council bills rules the price of silver—not the price of silver that of Council bills”. It is the price which the more anxious seller must accept that for the moment predominates, and not that which the less anxious can wait for.

So far all is clear, and has been well discussed; but what has not been equally discussed is the question—Will this effect be permanent? How far will the increase of its political payments prevent India from obtaining silver, which is the material of its money? And if it ceases to have this effect, why does it do so?

It clearly cannot have this effect always, or a country like India might be prevented, by an increase in the tribute which she has to pay, from obtaining money altogether. Suppose a dependent country obtains all her supplies of bullion from the dominant country to which she belongs, and that the dominant country imposes an annual tribute equal to the amount of silver which she annually takes—if the consequence of the tribute be to prevent the export of bullion by an equal amount, the dependent country would cease to obtain money altogether, and prices in it would fall and fall indefinitely.

In fact, of course, this will not happen, because as soon as prices fall below a certain amount an encouragement is given to the export and a discouragement to the import trade, and so a new adverse balance of trade is created, which will take bullion to the dependent country. The effects of the imposition of a tribute on the industry of a dependent country are two: first, to drive away all cosmopolitan capital, which can carry on its business elsewhere. It takes for the use of the Government a certain portion of what used to be the profit of the capitalist, and if in any other country capital does not pay an equal tax, that large class of capitalists who now belong to all countries will go to some other, and will carry on their business there. And secondly, the residential capitalists, whom no motive will tempt away, must be content with a less rate of profit than they used to receive. Particular industries, for which the dependent country has special advantages, will to some extent be an exception, but, as a rule, the effect of the augmented tribute will be to lower prices, because as a rule, and for almost all commodities, it will fix profits on a lower range.

A country which has a tribute to pay of £15,000,000 annually must send abroad annually £15,000,000 worth of commodities more than she receives; the profits of her various industries must be less by that £15,000,000; prices must be lessened to effect this; and (supposing, as is the case with India, that this country does not produce the precious metals) prices will be thus lessened by a corresponding reduction in the import of those metals.

Thus, in the case of India, the effect of her augmented political payments will be to lower the level of prices, till her exports rise above her imports by an equal sum. Till that level is reached, silver will not be sent from England, but when it is reached silver will be sent at once. The effect of the augmentation, therefore, is not to lessen the export of silver from England to India permanently, but only to diminish it temporarily and till the course of commerce has adapted itself to the new circumstances. India will not, indeed, receive quite as much as before the increase of her tribute; she will have a somewhat smaller stock of silver to maintain, in order to carry on her trade, as prices are lower (which means that less silver does the same work), and, therefore, the annual supply requisite to maintain prices at that level will be less. But this is but a very minor effect, which is not of much practical account, and, except so far as its influence extends, the import of silver into India will eventually be as much, now that Council bills are £15,000,000, as it used to be when they were £5,000,000.

Some persons who have been much in contact with the recent phenomena of the silver market, but who have not considered the more permanent parts of the subject, will probably be surprised at this conclusion, but this is only one of very many instances in which a great familiarity with the momentary facts of a particular kind of business is a wrong, rather than a right guide, as to what the course of that business in the long run will be.

It will be seen that the case of India is a very peculiar one. Not only is she, politically, dependent on England, but she derives her silver from hence, too. The country which imposes the tribute, and thereby tends to take money, is also the country which supplies money. Ordinarily the imposition of a tribute on a subject-country is much simpler in its effects. The dominant and the subject countries are only connected by the usual trading relations; coin and bullion only pass to settle the balance of trade, and, in the long run, pass about equally both ways. In this case the effect on the flow of bullion is, on the face of it, only temporary. There being no continuous export of bullion from the dominant country to be arrested, the question whether it will or will not be arrested does not arise. The dominant country simply takes a portion of the produce of the industry of the dependent, and so far renders it less profitable. The range of prices in the dependent country must necessarily be lowered to effect this end, and for a time the supply of the precious metals to it will be diminished. But upon its permanent import of those metals the imposition of the tribute will have no effect. As soon as the proper range of prices is reached, the bullion trade will go on as usual. And so it is in the case of India also, though England’s being the country which supplies bullion as well as that which imposes the political payment, seems at first to make a difficulty. Substantially the effect of the new tribute will be the same in this case as in all others.

But though the increase of the Council bills will not, as we have thus shown, change the quantity of silver sent to the East, it may have lasting effects on the Indian exchanges, and next week we will examine whether it has or not.