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Subject Area: Economics
Topic: Free Trade

CHAPTER XV: THE PANACEA OF BIMETALLISM - Yves Guyot, The Comedy of Protection [1906]

Edition used:

The Comedy of Protection, trans. M.A. Hamilton (London: Hodder and Stoughton, 1906).

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CHAPTER XV

THE PANACEA OF BIMETALLISM

Advantages of depreciated currency—M. Méline and Edmond Théry—Aberrations of the agrarians—Bimetallist agitation—Saved by England—Example of Spain—Bad money is not wealth.

In the eighteenth century David Hume’s “Essay on the Balance of Trade” demonstrated the absurdity of the means employed to encourage the exportation of goods and the importation of precious metals. His theory, completed by Ricardo and John Stuart Mill, may be briefly summarised: If one nation, A, imports more from another nation, B, than it exports to it, the balance must be adjusted by the transference of coin; then A having less coin, prices in A will go up, while the importation of coin causes prices in B to go down. A will then buy from B until equilibrium is re-established. The transport of the precious metals is troublesome; as far as possible it is superseded by the use of credit notes or bills of exchange. Between countries with a sound currency the limit to the price of these notes is fixed by the gold point, the cost of transporting coin. Some countries, however, employ a depreciated currency. Mexico, for example, uses silver, Spain paper. In such a case the price of a sovereign or Louis-d’or has to be reckoned in silver or paper pesetas. The limit of profitable exchange between countries with a sound currency is the cost of the actual transmission of bullion from one to the other; the limit does not exist between them and countries with a depreciated currency (as was the case in Mexico and still is in Spain). A depreciated currency has no fixed value, steady or liable only to slight fluctuations, after it leaves the country; the price of an English sovereign or French twenty-franc piece in silver or paper varies in amount—it is difficult to state it beforehand.

Economic doctrine thus enunciated did not suit the owners of silver mines all over the world, exporting more and more every year. The United States, which produced more than a third of the world’s silver, convened a currency Congress to meet at Brussels with the idea of establishing an international agreement on a fixed ratio of 151/2 between gold and silver, and then throwing open the mints of the world to the latter. This Conference, like others previously held in Paris, ended in nothing. But the silvermen were not discouraged by this check, and they found enthusiastic partisans in the French agrarian party, inspired by the twofold hope of explaining the failure of the Customs tariff and discovering an expedient for again raising the price of agricultural produce. MM. Méline and Théry proclaimed that the fall in prices was due to the advantage possessed by countries with a depreciated currency in competition with a country with a sound currency. Their theory was this: a Spanish merchant sells 1,000 francs’ worth of oranges in France and draws a bill for 1,000 francs. Then he goes to his banker and says, “1,000 francs are worth 1,300 pesetas, give me 1,300 pesetas,” and thus he gets over and above his profit on the sale a bounty of 300 pesetas. On the other hand, a Frenchman sells 1,000 francs’ worth of silk in Spain, and when he presents to his banker the bill for 1,000 francs he only gets 700 francs’ worth of pesetas. This theory was hailed with delight by Méline and such Protectionist professors as M. Cauwès.

In 1894 M. Edmond Théry published a book called the “Currency Crisis.” In it he declared that “a crisis in the foreign credit market, a rise in the rate of exchange, is favourable to the country in which it takes place,” and this became an article of faith in the creed of those bimetallists who involved the Spanish and the Mexican bogeys. They proposed a tariff which should vary with the rate of exchange to protect France against the bounties given to Spanish exporters by the depreciation of their currency. The landed and farming interest, and even thoughtful men, in their own opinion able, and indeed accustomed, to reason, men who despised what they would call adventurers or Bohemians, declared solemnly—and men who stood high in business and politics agreed with them—that a country grows rich in proportion as the inferiority of its currency gives a greater or less bounty to its exports. The system of assignats is ideal. In 1894 the Agricultural Society of France, whose members were as a matter of fact rich proprietors who let out their estates instead of working them themselves, issued a memoir in favour of bimetallism. Their action was imitated by the French Association of Agriculture and Industry, a society dedicated to Protectionist propaganda, and the Society for the Encouragement of Agriculture. These three societies, in February, 1895, approached the Government with a view to the creation of an international agreement for the following objects: (i.) The establishment of a fixed ratio between the standards; (ii.) free coinage of silver by every national mint. Should this attempt fail, the Agricultural Society “drew the attention of the French Government to the possible economic consequences for France of a return to the free coinage of silver.”

The National Bimetallic League was founded on March 25, 1895, with the Cashier of the Bank of France as its treasurer, and it summoned a preliminary meeting of the English and German leagues for December 10, 1895. The resolutions then passed led to a discussion in the House on March 17, 1896. M. Méline laid a projected resolution on the table which was signed by 348 members out of 581; but in the Chamber of Commerce the discussion went against him, the resolution not being so much as considered. In 1897, when McKinley sent envoys to Europe to consider the possibility of summoning an international conference, the bimetallists thought that their case was won. But at the very time of the arrival of the envoys from France in England, silver, by a curious coincidence, fell to 2s. in the London market, while the price of wheat in Paris rose to 30 francs—a convincing proof that the fall in the price of wheat did not depend on a fall in the price of silver. On the refusal of the English Government, the American envoys did not trouble to go to Germany, and it was left for M. Méline and the bimetallists to deplore that English blindness refused to throw overboard half her foreign bills of exchange. The death of bimetallism was celebrated by a dinner in Paris on January 28, 1903, the result of a wager I made with Edmond Théry in 1897; but if England had not saved us, M. Méline and his friends would have imposed on France the system of silver assignats. In a book called “Prices and the Foreign Exchanges,” M. Jacques Pallain proves, with the aid of irrefutable documents, the absurdity of the contention of the French bimetallists. The example of Spain certainly shows that prices rise in a country where there is very little currency; but they rise not because of the lowness of the currency, but because of the quantity of paper money in the hands of people who distrust their power of converting it into coin.

M. Jacques Pallain’s conclusions are based on fact. The rise in the exchanges which denotes a depreciated currency does not create an important or lasting bounty to the exporters from that country. In such a case the high rate of exchange only shows the variableness of the ratio between two currencies. The depreciated money cannot be exported; it increases daily in amount, and remains in circulation at home, where it is absorbed by a gradual rise in the price of all commodities. Currency depreciation cannot be looked upon as a means of developing trade, or as a menace to countries with an appreciated standard.

The founders of the Bimetallic League of 1894, MM. Méline and Edmond Théry, and the agrarians who followed in their train, declared the more depreciated the currency the larger is the bounty to exporters, the more rapid the development of the country. But all recent experience comes to reinforce the experience of the past, that bad money is not a source of wealth.