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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.

XIV.

THE MINUTE OF THE INDIAN GOVERNMENT ON THE DEPRECIATION OF SILVER.

The Minute in which the Government of India have replied to the petition of the Bengal Chamber of Commerce that they would suspend the coinage of silver for private persons is a very able document. It shows with admirable clearness that the effect of the plan proposed by the Chamber would be to give the rupee an artificial value, to lower prices, and to disorder trade. It observes that “it is essential to a sound system of currency that it be automatic. No man, or body of men, can ascertain whether, at any particular moment, the interests of the community, as a whole, require an increase or diminution of the currency; still less, how much increase or how much decrease is, at any moment, exactly needed. No Government which aspires to keep its currency in a sound condition would be justified in attempting that impossible task; or, in leaving the community, even for a short interval, without a fixed metallic standard of value. Under an ‘open-coinage system,’ these things regulate themselves without official interference.”

And on this ground it declines to become the sole coiner of rupees in India, and says that the amount of the silver coinage must be left as before, to the action of the Indian people, who are the best judges of their own wants.

The Minute shows also by a careful review of all the circumstances, that there is, at any rate as yet, no reason for a change in the Indian currency, as no one can yet say what will be the value of silver, either as compared with gold or with commodities. As has been abundantly proved in this country, no action in the matter is at present required of the Government of India, and by far the preponderant probability is that no action will ever be required of it.

The newest, and to us the most interesting, part of the Minute is that which is devoted to explaining that, in the judgment of the Indian Government, it is not yet proved that there is any depreciation at all, certainly not a depreciation to the extent which is commonly believed: “The divergence now noticeable in the values of gold and silver does not necessarily prove a diminution in the value of silver. It may be equally well accounted for by a rise in the value of gold; and, in fact, it is probable that, since the commencement of this divergence in November, 1872, there has been an increase in the value of gold as well as a decrease in the value of silver. The actual values, measured in silver, of general commodities, whether in India or in England, afford, as yet, no evidence of any recent, sudden, or violent fall in the value of silver; and, if a priori considerations strongly indicate that silver must have fallen, such considerations also make it probable that gold must have risen in value. Appended to this resolution is a series of tables of prices in London and in India, the information contained in which points to two conclusions: First, that gold has risen in value since March, 1873, and especially since last December.1 Secondly, that it is not shown that silver has fallen in value, i.e., as compared with commodities in general, either in London or in India, during the same period. These conclusions are open to correction on a wider review of the economical causes which have been at work during the period; but they appear to indicate a rise in the value of gold as at least one of the causes which have disturbed the equilibrium of the two metals. The bearing of both conclusions upon the questions now before the Government of India is important.”

As far as gold is concerned, the tables which are given by the Government are ostensibly those which we have often laid before our readers. It is undeniably true that the gold-prices of commodities are, as a rule, less in 1876 than they were in 1873. And in this sense it is true that gold has appreciated, as against commodities. But then it is equally true, and equally shown by the figures of the Minute, that the gold-prices of commodities were more in 1873 than they were in 1869 or 1870. And if we are to say that gold is appreciated now as against 1873, we must, by parity of reasoning, say that it was depreciated in 1873 as against 1869. In fact, as all our readers are aware, 1873 was the culminating point of one of the rising periods of price, just as 1869 was the lowest point of the falling period. We wrote on the subject at the time—on the 4th January, 1873:—

“The main cause of these cycles in price and trade is, as we have often shown, the different amounts of loanable capital which are available at different times for the supply of trade. After great panics like 1847, 1857, and 1866, for a very long period enterprise is so slack and credit so bad, that there is no possibility of employing an increasing capital to advantage. Trade continues much as it was, whereas the savings of the country are accumulating constantly. Accordingly there is at such seasons a constant excess in the supply of loanable capital over good bills and other accredited securities; the rate of interest, which is the barometer of the relative supply of these articles, continues very low generally through a series of years. After a certain period some circumstance more or less powerful occurs to augment trade; and then the effect of that capital is felt. Enterprise revives as credit grows, and that capital is lent largely. Till some stimulating event happens, experience shows that such capital may lie almost idle, and that in consequence for years the rate of interest may continue long very low. Bankers—the principal holders of that capital—do not and cannot manufacture securities; they remain quiet and passive till securities of what they consider a substantial kind are offered to them. But when from some cause peculiar to itself trade does revive, bankers are only too eager to lend, and trade, so far from wanting the money which it requires, finds the accumulated capital of bankers lying ready and waiting to be used by it. The development of one trade, too, is never isolated. If any one great industry—say the iron trade—starts into sudden prosperity, the purchasing power of all persons connected with the iron trade is largely augmented, and all the dependent trades, and all the trades in which those concerned in the iron trade lay out their money increasingly, thrive in consequence. And these second and dependent trades quicken other third trades dependent on them, and so on through the industrial world. The first period of every industrial cycle is a period of immense new production, and of great prosperity running through and permeating all trades.

“This period is also one of very high price. The loanable capital—the deposits which have accumulated in the years of depression—are then poured into trade. These have the effect of new money. They are a new purchasing power, which augments all prices dealt in, and especially the prices of wholesale articles, which are those upon which enterprise most acts, and in which speculation is quickest and most constant. Experience shows, too, that the rise in prices so produced is a cardinal element in every investigation of the value of money. The effect of the Australian and Californian gold cannot, as Mr. Jevons was the first to show, be even tolerably investigated unless this periodical cause of elevation in price is first eliminated, and its effects separately set aside.”

And in the same way now we must be careful not to confound this sort of appreciation of gold with that which would arise from a diminished production consequent on increased difficulty of attainment. This last would have a tendency to be permanent—at least, to last as long as the increased difficulty of attainment lasted; but the appreciation, which is part of the cycle of prices, is sure not to be permanent; it is only a passing incident in the mercantile world, and is sure to be followed by an equal depression.

It may be said that the present appreciation of gold is due to the new demand for it in Germany and elsewhere. But this demand tells two ways. What we are comparing is the high range of prices in 1873 as compared with the low one in 1876; and one of the effects of the German demand for gold in 1872 and 1873 was to make the rate of discount often much higher in Lombard Street than it would otherwise have been, and so to reduce the prices of all commodities which rise in the speculative times. If it had not been for the German demand for gold, the range of prices in 1873 would have been higher than it was. We cannot, therefore, attribute the fall in prices since 1873 to that demand, for it was then already producing a great effect—a greater, indeed, we think we could show if necessary, than it ever did afterwards.

The gold-price of silver has now been affected in the same way as the gold-price of other commodities for the first time, because it has been now for the first time a commodity in the same position as other commodities. Formerly, the existence of a “double standard” in various important countries took off from the market part of any sudden extra supply of gold or silver, replaced it by an equal supply of the other, and so equalised the price. But now that the “equilibrating apparatus” has been withdrawn, the price of silver in gold upon the London market will be affected by the causes which produce cycles of price, just like anything else. How far in this case it has been so affected it is difficult to say, because we have no experience. All commodities are not equally affected by these cycles; some are more so, some less, and we cannot say beforehand what will be the effect on any one. The causes which determine this are too many, and their proportions too unknown, for a priori reasoning.

But, as far as we can judge, we should not be disposed to attribute so much effect to this cause as the Indian Government would seem, from the prominence they have given to it, to be inclined to do. So long as silver is largely used as a currency by many countries, it is likely to be a commodity superior to the average of commodities in stable value. All currency commodities, so to speak, are so. Their efficiency in exchange diminishes with any decrease in their value, and a greater quantity of them is required. In no other kind of article does a fall in price generate so large an increase of demand, and therefore so much tend to be its own cure. We should therefore expect silver to be ordinarily much less affected by the causes making “cycles” of price than other commodities.

The figures contained in the table attached to the Minute confirm this view. They show that, taking the prices of each article in March, 1873, as 100, the price of the following articles in the London market was:—

From this we see that silver has not, in matter of fact, changed as much during the time we are considering as many other articles. And upon the whole, the well-known causes tending for the moment to depreciate it—the extra supply from Germany, the want of demand from the “Latin Union,” and the apprehension of the new mines—seem to us, as far as we can measure them, causes of a far greater probable effect than the cyclical causes, as far as they affect silver. The utmost we should be inclined to say is, that the cylical causes produced a weak market, and that the effect of the other causes was in some degree aggravated by this weakness. We believe the special causes affecting silver to be those to which its depreciation is principally owing, and that the causes acting on the value of all commodities only in a minor degree contributed to it.

We are not indeed sure that the Minute was meant to claim for the appreciation of gold more than this subsidiary effect; but the prominent place which is given to it might mislead unwary readers into thinking otherwise. As a whole, both in its conclusions and its reasonings, the “Minute” is most admirable. India is singularly fortunate in having rulers so well able to understand and to cope with a difficulty so peculiar and so little expected.

[1 ]i.e., December, 1875.