The Economic Crisis

Front matter

Bitva fork

Hatt College of Agriculture

Hthrary

Preface

While in India last winter I wrote for the Pioneer a series of articles on the Economic Crisis. It has been suggested to me to republish these in book form, and this I have now ventured to do, because, however incomplete as a statement of the present currency conditions, I hope that at least it may possess some value as coming within the comprehension of the average reader.

The first ten chapters are republished from the Pioneer with but few alterations ; the concluding chapter on " The Socialism of To-morrow " has not been published elsewhere. It is intended as a timely protest against the dogmas of the individualist school of writers, viii PREFACE.

and to show that there is an alternative neither unscientific nor necessarily uneconomical, if the excesses of that gigantic "sweating system," induced by unrestricted competition, and now so universally obtaining, are found to admit of no remedy short of State intervention.

Chapter I. Depression Of Prices By Legislation

Universal prosperity resulting from Californian and Australian Gold supplies — Mr. Disraeli on the effects of recent monetary legislation — Mr. Goschen in agreement as to cause of depression — The Money Famine — The " Quantity " Theory — Hume — J. S. Mill — Rapid growth of political intelligence in the United States and the victory of the " Silver men" — Increasing tyranny of the Money Power in Europe — Simultaneous legislation in 1883 to demonetize Silver — As showing effect of similar legislation on prices — Analogy of change of values of beef and mutton — The enrichment of the few by the impoverishment of the many p. 1

Chapter II. The Bland Bill

Widespread educational results following from agitation over Bland Act — Interest of Europe in the continuance of this Act — Mr. Evarts at Paris Conference — Mr. Goschen at Manchester in 1885 — The real Silver Crisiswas in 1884 — Triumph of Anti-Contraction Party in the United States — Surreptitious demonetization of silver at Washington in 1873 — Why it escaped notice — Exactly similar reasons permitted Lord Liverpool's legislation in 1816 — Resumption of specie payments in England — Mr. Western and Mr. Attwood in 1822 on the cause of the sufferings of the agricultural interest — Warning to Congress to resume specie payments on basis x CONTENTS.

not of one, but of both metals — Bland Act vetoed by President Hayes — But repassed by a two-thirds majority in Congress — Entire collapse of "law of Gresham" as understood by the Wall Street economists — Extraordinary sustained attack in English press upon the bona fides of Congressional majority — Bland Bill merely an effective makeshift, awaiting finality p. 10

Chapter III. Prices

Short history of prices — Historical interdependence of volume of money and prices — Steady rise of all prices for a thousand years, pari passu, with mechanical improvements — Alison on Californian discoveries — His bright expectations not verified, consequence of anti-Silver legislation — Disinherison of Silver — Prices and the currency before and after discovery of America — Potosi — Jacob's history of precious metals — His recognition of currency conditions which theoretically should have depressed prices — But the discovery left to Newmarch and Jevons that this fall of prices had actually taken place — "Over-production" theory — Years between 1830 and 1850 were years of maximum "cheapness," of maximum distress also — Mr. Disraeli on the situation in 1832 — Opportune gold discoveries in California in 1845 — The "Golden Age" — Index numbers, Soetbeer — Jevons— Economist — England's stock of legal tender money in 1878, 1884, 1888 — Lord Iddesleigh's Royal Commission — M. Sauerbeck's index numbers — Are we returning to the prices of the 15th century ? p. 24

Chapter IV. Fall Of Prices

Fall of prices according to Messrs. Fowler, Mulhall and Wells — Their theory enormously emphasizes the importance of guarding against a currency contraction — Otherwise entirely irrelevant— Mistakes of Mr. Wells— Mr. Mulhall on ratio of metallic money to business done — Increase of banking system may even require increase of metallic money —

CONTENTS. xi

Mr. Wells on gold deficiency — Importance of statistical accuracy — Mr. Wells' misconstruction of statements of MM. Cernuschi and Sauerbeck — Lower freight charges may either be the cause or the effect of lower prices — Jevons on the depreciation of Gold — Probable direction of future legislation p. 37

Chapter V

MR. DAVID A. WELLS ON "BIMETALLISM.''

Bimetallism omitted from his inquiry — Chevalier's testimony that the automatic action of French bimetallism was the parachute which broke the fall of Gold, and thus prevented in gold countries a catastrophic rise of all prices — Mr. Wells on the automatic action — Admits however the recent steadiness of Silver as a measure of prices — Therefore Gold has appreciated, not Silver depreciated — Fall of price of Silver must induce fall of wheat prices — The Hindoo riot and the interests of the English and American farmer — " Perversity " of rupee — Conclusion derived from Mr. Wells' mistakes — Science of statistics inductive — But economic science why analytical and deductive — Mental method of statisticians probably defective — Importance of statistical accuracy p. 56

Chapter VI. National Debts And The Growth Of Socialism

What is National Debt — National debts actually though not nominally increase their burden with every fall of prices — ■ Amount of our National Debt measured in wheat at the time the debt was being contracted — National Debt of the United States — Its rapid dollar reduction — But its persistent increase in terms of commodities — Argument of the bondholder refuted — Premium on his patriotism measured by the premium on Gold — That almost the entire amount of taxation is deducted from that share of production which is paid to Labour — Lord Derby on the coming Repudiation — The argument that being a creditor Nation, England profits by appreciation of Gold — Turkey's reply to this — xii CONTENTS.

Violation of contract involved in the National Debt — Nonresponsibility to the State, of mere owners of gold as compared with owners of other forms of fixed capital — The Appreciation of Gold and the Egyptian finances — British treatment of a similar disease in Ireland and Egypt — Prospective emergence of Socialism, on a scientific basis p. 70

Chapter VII. The Two Groups Of " Bimetallists."

Misapplication of the term " Bimetallist " — Reformers favour Unity of Standard, but monometallists favour two distinct Standards within one Empire, one in England, the other in India — Inconvenience of the two standard system increases as the distance increases — Profits of Trade depei:d on such subjective causes as a speech from Mr. Goschen — Buying "forward exchange" a costly form of Insurance against risk — Alleged differences of opinion amongst bimetallists accounted for — Two distinct standpoints — Those who merely assert Mills' quantity theory, and those who attach the greater importance to the dislocation of the par of exchange — A " Gold question " and a " Silver question" — Issue of pound notes, inoperative qua prices, mischievous in this, that they would displace and drive out Gold — Cernuschi's attitude p. 81

Chapter VIII. The Fixed Ratio— Is It Practicable?

Origin of word "pecunia" (pecus) the legal tender of Cattle — Why impossible that State could establish ratio between value of sheep and cattle — Cost of production decides such values — But not so the precious metals — Cost of production of Gold or Silver greater than value when produced — How this can be — Gambling propensity inherent in human nature — Leadville— Comstock Mine — Within what limits therefore is it in the power of the State to fix ratio — Suggested between one to seven, and one to thirty — Wolowski on importance of Money — But what should ratio be ? ... p. 90

CONTENTS. xiii

Chapter IX. The Fixed Ratio — Its Proportion

Sudden considerable disturbance of ratio, twice only in six hundred years — To be referred each time to monetary legislation at (i)' Venice about 1290, (2) in Berlin in 1873 — Alterations in comparative supplies of precious metals, inter se, have never considerably affected ratio- How to restore ratio without injustice — M. Cernuschi — Silver legal tender in terms of Gold — Clearly thereafter Silver could never fall — Reason why it would immediately rise — Automatic action of bimetallism — Neither metal can fall if given prerogative of legal tender — Therefore inter se neither metal can rise — Finality of 1 to 15J established by legislation now hundreds of years old — The " Warner compromise" — Endorsed by Earl Grey p. 99

Chapter X. India And The Silver Question

The stimulus afforded by a falling exchange to exports of wheat and yarns from India — The position of the Bombay Cotton Industry — Mr. J. G. Scott on the conditions of cotton manufacture in Bombay — Stimulus, however, merely affects export Trade of India, which is only five per cent, total commerce of India — Increased taxation and uncertainties in all trades — Quarterly Review on the production of wheat — Mr. Edward Atkinson — Brisk railway construction by immense expenditure locally, has served to raise local prices in the wheat growing States of America, and thus to protect them from agricultural collapse' — By diminishing wheat cultivation, production of meat has been stimulated in the United States, consequently increased competition and fall of prices in Ireland 108

CHAPTER XI. INDIA AND THE SILVER QUESTION {continued)

Prodigies of modern production — Consequence of (1) improved modem machinery, (2) cheap loanable capital— Cheap xiv CONTENTS.

capital enabhs modern manufacturer to operate profitably with very low margin of profits— Present difficulty of exchange is checking flow of capital from England to India, and thus makes borrowing rates in India artificially high- Consequences of the Economic Crisis in England and India summed up P- n 9

Chapter Xii.; Depreciated Currencies And Their Effect On Prices

The Russian currency — Mr. Harris on imported wheat— Argument of Mr. Harris considered— Remedy for increasing premium on Gold, to restore Silver everywhere to legal tender — Interest of Germany in Russian finances — Depreciating currencies, however stimulating to export trades, destructive of domestic trade and of foreign credit- Argentine finances — Rapidity of variations in gold agio — Profitable exchange operations in consequence of these variations P- 125

Chapter XIII. The Socialism Of To-morrow

Socialism and the future of legislation— Socialism not necessarily unscientific — Extension of Franchise has deprived middle classes of paramount influence — Working classes have little to fear from experimental legislation — A form of Socialism which is not anti-social — Not re-distribution but a more equitable distribution in future— Success of the State Post Office — The State an efficient " middle man " — Production the domain of the individual, distribution the domain of the State — The State not in sympathy with " the masses." Why ? — The State ownership of railways — An incident of a recent "rate war" in the United States — Cost of purchase practically a " conversion " scheme — Elimination of brokers and other commission agents — Moment for such changes opportune in United States — Utilize surplus revenue — industrial aspects — Social and moral aspects — The tyranny of " Rings " of middle men — Only remediable if railways in the hands

CONTENTS. nv

of the State — State purchase of Banks — Bagehot's inquiries as to profit of banking — Present profits of London Joint Stock Banks would rapidly redeem our National Debt — Banking even now subject to frequent State interference — Injustice of Peel's Act of 1844 — Lord George Bentinck on Peel's Act — Land Socialism uneconomical until a better distribution of products is secured — State regulation of hours of labour — Free Trade was a remedy devised in the interests of the middle classes — Which classes should most fairly be called on to emigrate, middle men or working men ? — Limitation of State functions. Where ? — Limited Liability principle failure, except in cases where State could operate more profitably still — Bagehot on the Joint Stock principle — Bismarck and Industrial Insurance Offices — Profits of Insurance Companies — The Credit of the State is so much better than that of the individual that the entire revenue might be derived from the State Credit — Political aspects of State Socialism — Example of France — Our present experience of State control — The Professors and laissez faire — Value of legislative decentralization, but of industrial centralization — Value of a distinct political issue — The demands from below inevitable p. 131

Appendix

THE ECONOMIC DISTURBANCES SINCE 1S73 ... p. 1 65

(Reprinted from the New York Commercial Chronicle.)

THE ECONOMIC CRISIS.

THE DEPRESSION OF PRICES BY LEGISLATION.

More than eight years ago a writer in the Edinburgh Review closed a very elaborate statement of the social and industrial effects of the great gold discoveries in California and Australia, with these words : " The world has come to the close of a very memorable epoch : the present generation has seen come and go the most remarkable outburst of material prosperity which has ever visited the nations of mankind. The epoch has been short-lived as a northern summer, and the world has fallen into winter again ; but a large portion of the fruits of the golden summer enduringly remain a rich heritage for subsequent generations."

At the time those lines were written the connection between the prevalent high range of prices and gold "cheap," because abundant, was little considered, except by a few professors of the " dismal science ; " the collapse of all prices which has since taken place, and which has produced not only in Ireland but in America and on the European continent, such an extraordinary social upheaval, could not at that time have been foreseen by the writer, nor had the question of the legal tender position of silver and the agitation over the Bland Bill become, as to-day, the chief political issue in the great Republic of the Western Hemisphere. Almost alone among our public men Mr. Disraeli appears to have foreseen the troubles which were to follow from the effect of recent monetary legislation on prices. Speaking at Glasgow in November 1873, just after the change of her standard by Germany, to which I shall refer later, Mr. Disraeli said : —

" I attribute the monetary disturbance which has occurred, and is now to a certain extent acting very injuriously upon trade, I attribute it to the great changes which the Governments of Europe are making in reference to their standard of value. Our gold standard is not the cause of our commercial prosperity, but the consequence of that prosperity. It is quite evident that we must prepare ourselves for great convulsions in the money market, not occasioned by speculation or any of the old causes which have been alleged, but by a new cause with which we are not sufficiently acquainted."

Six years later, in March 1879, when the monetary morbus had become evident, Mr. Disraeli, then Lord Beaconsfield, said : —

" All this time the produce of the gold mines of Australia and California has been regularly diminishing, and the consequence is that, while these great alterations on the continent in favour of a gold currency have been made, notwithstanding that increase of population which alone requires a considerable increase of currency to carry on its transactions, the amount of the currency itself is yearly diminishing, until a state of affairs has been brought about by gold production exactly the reverse of that which it produced at first. Gold is every day appreciating in value, and as it appreciates the lower become prices. It is not impossible that, as affairs develop, the country may require that some formal investigation should be made of the causes which are affecting the value of the precious metals — and the effect which the change in the value of the precicus metals has upon the industries of the country, and upon the continual fall of prices."

Lord Beaconfield's view thus expressed, that prices were falling not because of any general over-production of commodities, but because of a rapid local diminution of the supply of that precious metal which measures values, was accepted at once by Mr. Goschen, one of the ablest financiers of the age. The production of gold from the mines was known to be diminishing; its yearly consumption in the arts and manufactures had increased, till it was now nearly seventy per cent, of the entire annual yield, and coming on the top of these causes of appreciation, two great nations, Germany and the United States, had discarded, the one her silver money, the other paper money, and had come to market to buy gold instead. Their purchases of gold have been on such a vast scale, that to-day these two nations are retaining more than a quarter of all the gold currency of the world. To use M. de Laveleye's words, gold like water being now spread over a larger area has lowered its level at its original basin. If concurrently with an immense new demand for bread, the wheat harvest of the world was for several years a failure, surely bread would be very dear, and in the same way an increased demand for gold, side by side with supplies rapidly diminishing, has brought about a gold famine which shows itself more and more every day in a constant shrinkage of prices. More cotton or wheat, more labour or land, must be given for gold because gold is scarce. The statesmen having satisfied themselves that such was the origin of the growing financial disorder, we v>ere induced to turn to our school-books to find that Cairnes, Newmarch, Jevons and a score of others writers were in complete agreement.

Hume more than a century since wrote: "Suppose four-fifths of all the money in Britain to be annihilated in one night. Must not the price of all labour and commodities sink in proportion ? " More emphatic still is John Stuart Mill's statement of the " quantity theory." " That an increase of the quantity of money," wrote Mill, " raises prices, and a diminution lowers them, is the most elementary proposition in the theory of currency, and without it we should have no key to any of the others." But where eight years since a few students and professors understood the significance of the "Silver question," to-day the subject is attracting the intelligent interest of ten thousand .business men. In the United States, where, under the tutelage of manhood suffrage, a very advanced condition of political enlightenment has been arrived at, the so-called " Silver men," the opponents of a contracted currency, have simply swept the field from Maine to California, from Puget Sound to the Gulf of Mexico. It is now recognized in America that the money power may become a most dangerous tyranny, and that in Europe it is this power, wielded to-day by half a dozen financial houses, which controls to an ever increasing extent the legislatures of Europe, which directs the movements of armies, and was even beginning to make its influence felt in the lobbies of the Capitol at Washington. Gold was appreciating from natural causes, from a falling-off in the output of the mines ; as the sovereign became more valuable, those who either owned, or had loaned sovereigns, were becoming richer, while the debtor classes of the communities were suffering.

The man who had borrowed a sovereign when it represented only a week's work, was to return it when it required the labour of ten days to procure it. But as if the nitural causes for the appreciation of gold were not sufficient, class legislation of a most complex and insidious kind was now to be secured in order to bring about a further fall of prices, and a further impoverishment of the industrious ; if silver could be deprived of its legal tender position as a money metal, then the work previously done by silver would have to be done by gold, all property measured by the gold standard would be shorn of half of its value, and bankers and bondholders would see their fortunes double in a day. The agitation for the repeal of the Bland Bill in 1883 and 1884 was intended to supplement the monetary legislation at Berlin in 1873 ; Germany was formerly, as India is to-day, on a silver basis, but legislation had been procured so that Germany had sold her silver en masse, and bought gold with it. This artificial demand for gold was every day driving gold to a famine price, while forcing down the price of all other commodities. If only it were possible to arrange similar legislation in the United States, so that fifty millions sterling more of legal tender silver could be pitched upon the world's silver market and sold for gold, then, while the price of the rupee might fall towards sixpence, the value of every sovereign to buy land, labour or any commodity would be doubled ; those debtor classes of the community who owed fixed amounts of gold would be insolvent, their creditors the " Gold Bugs," according to the current phraseology in America, would become the universal owners ! Is it any wonder that a nation which had shed blood like water to emancipate black men was found to recoil from legislation which aimed at the enslavement of nine-tenths of the white community for the benefit of the other tenth.

The currency problem is supposed even by many intelligent men to be so dismal and inscrutable, that even the doctors disagree over fixed ratios and other subtleties. As regards the main issue, however, the question of two legal tenders or one — the question of money cheap or money dear — the question whether the burden of all debt, national or private, is to be aggravated by anti-silver legislation — this question is, in its broader aspects, clear to the most ordinary intelligence. Silver and gold have been produced for a thousand years for purpose of legal tender money ; cattle and sheep have been produced for food. If we substitute the meats for the metals, the analogy holds good ; legislation is demanded which will prohibit the consumption of mutton, because, then, as mutton becomes worthless, beef will rise to a famine price, and the cattle owners will become suddenly wealthy at the expense, not merely of the owners of sheep, but of the general community. To carry the analogy further: this job was to be contrived at a time when cattle were unusually scarce and sheep more than usually numerous. Such a process — the enrichment of the few by the impoverishment of the many — had been successfully inaugurated by the monetary legislation of Germany in 1873 ; a new and unexpected demand for gold had been created by law ; prices were falling because the value of gold was rising ; gold owners and mortgagees were in clover; it was only now necessary to achieve similar legislation at Washington, and such a collapse of prices would be brought about that the bondholder, the banker, the mortgagee, would be in complete possession of the redistributed assets of the entire communities ! And this fresh raid on silver in the United States only failed to achieve a similar success and a similar result, because no sufficient allowance had been made both for the general intelligence of the American community, and for its prompt recognition of the sinister nature of the proposals. The bird itself was wary and the net was set in full view.

II. The Bland Bill

Without some consideration of this Act of 1878, which takes its name from Mr. Richard Bland, a member of Congress from the State of Missouri, it would be hardly possible to make clear from what an acute monetary crisis the world has escaped, and from what dangers the business community have been saved, if indeed there is safety to-day.

And, too, from the political passions roused by this Bill, one invaluable result has followed, a result which neither its sponsors nor its opponents contemplated. Not in the United States merely, but eastward beyond the Atlantic, and westward across the Pacific, entire communities have been educated by the struggle at Washington to the recognition, that currency laws are not of local but of international importance ; that prices universally can be made the mere football

THE BLAND BILL. u

of the Legislatures, rising as the volume of legal tender is expanded by legislation, falling as it is contracted; and that on account of this interdependence of prices all the world over, great nations, England, France, India, have an interest not less, but I think on the contrary much greater, in the continuance, or the repeal, of the Bland Act, than have the Americans themselves. At the close of the last International 'Monetary Conference in Paris in 1881, when all the other Great Powers represented there were in favour of concerted action to make silver legal tender money, while England alone held aloof, Senator William Evarts, of the United States Commission, said to the representatives of Great Britain : " Very well, gentlemen, you will soon learn that this is not Uncle Sams funeral" and in 1885 Mr. Goschen, when addressing the Manchester Chamber of Commerce, frankly admitted that any statement as to the future prospects of the Lancashire cotton industry was mere guess work, until the then active agitation for the repeal of the Bland Bill was in one way or the other decided. It was a great black cloud this, in the West, a cloud with a silver lining. If it broke, the exchange value of the rupee would fall to a shilling, while half Lancashire was unemployed, and trade between the East and the West paralyzed, pending a slow — an infinitely slow — process by which prices might re-adjust themselves to the altered state of the exchanges. I think, therefore, that history will later take the view that the crisis of the " Battle of the Standards " must not be referred back to Lord Liverpool's Act, which in 1816 first degraded silver from its legal tender prerogative, not even to the action of Germany in 1873, when, the pockets of that nation being stuffed with the French war indemnity, paid in goldj she sought to strike down that silver standard which had helped to carry her to Paris.

These were not the real crises, though they directly led up to it. And similarly the efforts of Wolowski, Cernuschi, of Arendt and Haupt, and of Laveleye, to awaken public opinion on the Continent, of Seyd and Grenfell, of Samuel Smith and Gibbs, to whom chiefly it is owing that the present silver party in England has been collected — these were not the efforts which principally availed to prevent a monetary collapse. The real fight has been fought at Washington ; I believe it has been won, and to my mind there is nothing so encouraging, pointing as it does the direction of universal progress, when other nations also shall have been educated by the possession of the franchise, as the way in which the mass of the American electorate has pronounced itself upon this subject, — a subject at once the most complex and the most momentous of existing political issues. The battle has been the battle of long hours of labour, at low wages, versus short hours, at full wages ; the battle of a faulty distribution of wealth, mere gold collected in a few hands, against a wider and a more equitable distribution — a battle where the forces of avarice allied with ignorance had decided to increase the burden of all national debt and fixed debt, by securing a huge " unearned increment " in the purchase power of gold. Such was the nature of the conflict won by the Congress of 1884 against the united front of the banking houses of New England, against the active partisan opposition of the officials in the Government department, against nearly the entire Press of the Eastern States, and against the dictum of the President- Elect ; and it was not only won but won handsomely. The silver men controlling the Central States of the Union, the West and the " Solid South " were found to constitute a full two-thirds of the Lower House, and a large majority of the Senate.

A few words now as to the Bland Act itself. In 1873, the United States currency being still dominated by the immense paper issues — " greenbacks " — the relict of the late war, gold and silver had left the country, or at least, were never seen. Germany the previous year had struck down silver, and the same thing was now to be effected in the United States. The manner in which this demonetization was brought about is very curious reading. Congress had agreed to a mere abstract proposal that, for the sake of public convenience, the various Mint laws should be codified. The silver dollar had, up to that time, been always and everywhere legal tender, and was expressed as such in all the old Mint statutes. Was it by accident or design that the new Code omitted all mention of the silver dollar as one of the coins which the Secretary of the Treasury might allow to be coined ? The old laws, thus mutilated in codifying, were passed heedlessly through Congress, and it was not till President Grant's signature had been given that the nation awoke to the fact that the "dollar of the fathers" had, all unknown to it, been legislated out of existence. Whether the important omission was fraudulent or was really accidental, will no doubt be made clear at some later day. Senator Beck of Kentucky has declared repeatedly that Grant detected the fraud when too late, and admitted that he had been tricked into giving his signature.

It is extremely important to bear in mind that Lord Liverpool and the English Parliament in 1 8 16 were in a position precisely similar to that occupied by President Grant and Congress in 1873. Each nation had at the time suspended specie payments, and under these circumstances the "outlawry of silver" by legislation failed to attract the attention of the constituencies, because it involved no present and visible change. The legislation was prospective only ; in both cases it merely said : " When the time does come that we resume specie payments, then we will employ gold, and gold alone, as legal tender money." England heedlessly permitted Parliament to do this deed in 18 16, ignorant of the consequences to follow later, just as the United States permitted Congress to demonetize silver in 1873. In England the resumption of specie payments on a gold basis had been the signal for an immense fall of prices and for universal sufferings. Mr. Western said in a debate in the House of Commons in July, 1822,, that as a consequence of resuming specie payments