The standard of value

Preface

In commenting on the First Edition of the following Paper on " Lord Liverpool's Oversight " a few days ago, a London reviewer alludes to it as a "defunct controversy." If, however, the reviewer will look a little more closely at the book, he will find that it not only is not the defunct controversy he supposes, but that it is the discussion of a question which was never dreamt of in the philosophy of William Cobbett, Sir Robert Peel, or John Stuart Mill ; and that it is not only a " living question," but what the Lord Mayor of London has recently, at a public meeting at the Mansion House, declared to be " a question which he thought there could be no denying was the most important of the present age."*

• The Times, nth March, 1882. See footnote on page 78.

The Pound Sterling : its History and

Character 75

Appendix

Replies in Discussion and other Articles .. 97

LORD LIVERPOOL'S OVERSIGHT

AND

ITS CONSEQUENCES.

A Paper read before the English Literary Society of Buenos Ayres on the 14th of June, 1882, in support of the following resolution : —

" The restoration of the Double Standard of Value which was discarded in 1873, is desirable."

LORD LIVERPOOL'S OVERSIGHT

ITS CONSEQUENCES.

I

A Letter addressed to King George III. by the first Earl of Liverpool was the prevailing influence which induced Parliament to abolish the silver standard and to make the gold sovereign the sole representative of the Pound Sterling ; and the present mint regulations, which were established by Sir Robert Peel's Act in 1816, are in exact conformity with the principles advocated by Lord Liverpool in that letter.

My present object is to point out what I will rather call an oversight than a mistake made by the Earl of Liverpool ; and also the very pernicious effects which it has recently begun to produce throughout the British Empire, and to a lesser extent throughout the civilised world.

To illustrate the oversight in question I will quote from Lord Liverpool's letter an extract, in which his principal argument is clearly stated.

B 2

Lord Liverpool says : —

", Coins must bear a due proportion to the wealth and commerce of every country in which they are current. In former times it was found necessary gradually to introduce into the currency of this kingdom, silver coins of a greater weight and value, in proportion as the wealth and commerce of it advanced. Thus pennies, half-pennies, or mailles, and farthings, were at first the only silver coins in currency. Groats and half-groats were afterwards introduced, and in subsequent periods, first shillings or testoons, and afterwards crowns and half-crowns were coined, and for the same reason brought into currency. In like manner, when the commerce of the kingdom had increased to a certain extent, coins made of gold were first struck at the English mint, and introduced into circulation. It was natural, that gold coins, as of less bulk, and of greater value, should be so introduced, and should become legal tender, equally with our silver coins ; and, in proportion as our commerce continued to augment, that they should gradually take the place of the silver coins ; and at length, when our trade had attained the very great degree of extent and splendour at which it has arrived in the course of the last fifty years, that they should become the principal measure of property and instrument of commerce, and leave to the silver coins the function of being employed only in the smaller and inferior branches of it."

LORD LIVERPOOL'S OVERSIGHT. 5

The oversight which Lord Liverpool seems to have made is that he does not appear to have perceived the intrinsic and very important difference between the character of a change by which silver shillings are coined to displace silver pennies, or silver crowns to displace silver shillings, and that by which gold sovereigns are coined to displace silver shillings or crowns.

By the changes from silver pennies to silver crowns the value of the silver of which the coins are made is not affected, and therefore the value of the standard unit remains unaltered.

But though the abolition of silver pennies and their substitution by larger silver coins does not affect the value of the standard unit, the effect of a change in the coinage is very different when it is decreed that the silver coins (except a small amount issued at a fanpy valuation) are to be abolished and substituted by gold coins.

In the latter case the demand thus created for gold to supply the circulation which would otherwise be supplied by silver gives gold a higher value than it would otherwise have ; and, therefore, the decree which substitutes gold coins for silver coins raises the value of the standard unit.

This principle, apparently overlooked by Lord Liverpool, I do not suppose anybody, whose attention has once been directed to it, can fail to perceive to be true in theory, however slight its practical effects might be. And before endeavouring to show to what extent it may reasonably be estimated that the value of the standard unit has practically been raised by the abolition of the silver standard, I beg to draw your attention to a special reason why any change in the standard of value ought at that time to have been strictly avoided.

II

For the above purpose I cannot do better than refer to the conversation which took place between the representatives of the International Congress for the simplification of coinage which met in Paris in 1866, and Mr. Goschen, then Chancellor of Her Majesty's Exchequer.

It was suggested by the above-mentioned Congress that the weight of the English sovereign should be reduced sufficiently to make twenty shillings exactly equal to twenty-five francs. This would be so slight a reduction that the suggested new sovereign would still be heavier than many of the sovereigns which, though worn by ten or twelve years of use, are nevertheless not so much worn as to cease to be of full legal tender weight.

Notwithstanding the very slight amount of the suggested change, Mr. Goschen, representing Her Majesty's Government, replied that the reduction in the weight of the sovereign would constitute a breach

THE RIGHT HON. G. J. GOSCHEN. 7

of faith with the national creditor, or holders of the National Debt, and that, therefore, it could not be for a moment entertained.

I take the liberty of expressing my perfect sympathy with Mr. Goschen in his zeal for maintaining strict faith with the national creditor, and paying to him every farthing to which he is equitably entitled by the terms of the national loan.

But the same National Debt which caused Mr. Goschen so zealously to refuse to allow of the slightest change in the standard of value, existed when the law was enacted which substituted gold for silver coins and thus changed the standard of value.

The simplest dictates of common sense tell us that if the slightest reduction of the standard of value constitutes a breach of faith with the national creditor which ought to be strictly avoided ; then it ought, with the same zeal, to be maintained that the slightest enhancement of the standard of value constitutes a breach of faith with the national debtor which should have been just as strictly avoided.

I now beg your attention whilst I endeavour to estimate how much the abolition of the silver standard has raised the value of the standard unit, thus increasing the value and the burden of the National Debt whilst leaving its nominal amount unaltered.

THE STANDARD OF VALUE.

III

The gold sovereign is at present worth about 15 per cent, more than the market value of the silver pound in which the debt could be discharged but for the adoption of Lord Liverpool's system. Thus the National Debt of 750,000,000/. is equivalent to what would be the value of a debt of 862,500,000/. if the interest or capital could be discharged in silver of the relative value which actually rules in the market.

It must not however be immediately inferred from these facts that Lord Liverpool's system has made so great a real increase in the burden of the debt as 1 12,500,000/. ; thus giving so large a bonus as that to the bondholders ; for a part of the present difference between the value of the gold, and that of the silver pound might be due to a fall in the value of the silver pound also caused by that system.

To arrive at a just estimate of the extent to which the value of our standard unit, and consequently the value of the National Debt, has been increased by the adoption of Lord Liverpool's views, it is obviously useless to enter on the vexed question as to how much of the relative difference of 1 5 per cent, between the silver and the gold pound sterling would immediately disappear if Lord Liverpool's system were abrogated. All that is requisite is merely to estimate

THE EDINBURGH REVIEW. 9

how much the absolute value of gold has been enhanced by that system.

For this purpose I now ask your careful attention in the first place to the following extract from the Edinburgh Review for April 1879. The reviewer says : —

" In this country, and generally, it has been taken for granted that there has been of late years an absolute depreciation of silver, and that gold is simply maintaining its old value. ... A very different conclusion, however, was arrived at by the commission appointed in 1876 by the Congress of the United States. They maintained that there had been no depreciation of silver, and that the difference between the values of the two precious metals was owing to a rise in the value of gold.

" They reported as follows : — .... 'In order to ascertain whether silver has fallen or gold risen since 1873, not relatively to each other, but relatively to all other things, a comparison must be made between general prices in gold and silver respectively, then and now. Such a comparison would show that the purchasing power of gold has increased since then in all countries, and that the purchasing power of silver has decreased in none.'

" Startling as this statement appeared at the time, there were even then many facts which tended to support the conclusion arrived at by the American Commission. ... To say the least, silver had not fallen in value in India. And it is equally manifest that there had been a considerable diminution in the value of silver compared with gold. . . . There had been no depreciation of silver in India, but an appreciation of gold. And this is the view of the matter at present maintained by the Government of India.

" The American Commission maintained that this state of matters was universal — in their own words : 'that the purchasing power of gold has increased since 1873 in all countries, and that the purchasing power of silver has decreased in none.' "

To the views so clearly expressed throughout the article in the Edinburgh Review from which I have quoted, I will add a short piece of evidence as a practical indication of a rise in the value of gold in England.

According to the Board of Trade returns the total value of British and Irish produce exported in 1872 was 256,250,000/. sterling, and in 1880 223,060,000/.

But the Economist of 19th November last gives the relative value of the exports for those two years, if calculated at the same prices, as 220,490,000/. in 1872, and 258,520,000/. in 1880.

This shows that there was an increase of 17 per cent, in the quantities exported, though there was an apparent fall of 13 per cent, in the total value exported.

This shows a fall of 26 per cent, in the average

MONEY VALUE OF EXPORTS. ii

prices of the exports ; which is equivalent to a relative rise of 35 per cent, in the value of the pound sterling by which the value of those exports is measured.

It seems almost self-evident that this change in nominal value must be in a great degree due to a rise in the absolute value of the pound sterling rather than to such a wholesale fall in the absolute value of the articles exported ; and almost forces on us the conclusion, suggested by the evidence I have extracted from the Edinburgh Review, that though gold has risen only 15 per cent, in relation to silver, its rise in absolute value is greater.

This conclusion can be corroborated in a very simple manner ; for as it is notorious that the closing of the mints against silver has prevented a very large increase of silver coins from being effected, it is evident that the refusal to allow silver the same unlimited coinage as gold, has not only caused a relative rise of 1 5 per cent, in the value of gold as compared with silver, but has, at the same time, indisputably given a higher average value to gold and silver coins than they would otherwise have, and almost certainly caused an absolute rise in that average value, by preventing the supply of coin from being equal to the increased requirements for it.

Taking this latter effect into consideration in conjunction with the previous evidence, it seems indisputable that Lord Liverpool's system has had the practical effect of raising the absolute value of the pound sterling at least i S per cent., and perhaps even to the extent of 20 per cent, or more.

It thus appears that 15 or 20 per cent, higher taxation is required to meet the interest on the National Debt than would be required if Lord Liverpool's system had not been established. That system changed the standard of value under which the money was borrowed, and has made it requisite for the debtor to pay 1 5 or 20 per cent, more than the value due under the original compact : the change of the standard of value being equivalent to an increase of the National Debt which, as above shown, m'ay reasonably be estimated at not much less than 1 50,000,000/. sterling.

How can any thoughtful man fail to perceive the injustice of such a system and the national loss it inflicts ?

IV

With a view to remedy the acknowledged evils of the present position. Her Majesty's Government now offer to bind themselves,, by agreement with other nations, to keep the Indian mint open for the unlimited coinage of silver if a number of the principal States will bind themselves to keep their rnints open for the unlimited coinage of both silver and gold.

This is really tantamount to a declaration to the effect that Her Majesty's Government will passively leave it to other Governments to decide whether those

HER MAJESTY'S GOVERNMENT. 13

other Governments will or will not remedy the injustice done to ourselves by our own Parliament For though the practical establishment of bimetallism at the former ratio by any nation would practically remedy that injustice, and the rejection of gold coins for silver coins by other nations, might even make the gold pound sterling less valuable than the silver pound, the unlimited coinage of silver by the Indian mint (in the absence of such action by other nations) cannot have any effect on the absolute value of the gold sovereign, but must tend to increase the difference between the relative value of the gold sovereign and the silver rupee.

The peculiarity of the position is unique. The British Parliament first create an immense amount of debt under a certain standard of value ; then, in a perfectly arbitrary manner, they change that standard of value. This change brings about an obvious and serious injustice to the British nation to the benefit of the British bondholder, and acknowledged embarrassment and heavy loss to the Indian Government. A restoration of the standard of value under which the debt was contracted forms an obvious remedy for these evils ; and, under these circumstances, Her Majesty's Government declare themselves prepared, by Indian legislation, to assist such legislation by foreign powers as may bring about a practical restoration of that standard of value, but they will not themselves legislate for its legal restoration in England.

The reason for this peculiar course seems to be a prevailing opinion that the restoration of the former equilibrium is more requisite for the benefit of India and some foreign nations than for that of Great Britain. This opinion results from a misunderstanding of the actual situation.

The Indian Government requires an increased amount of revenue, because a part of their expenditure is payable in the pounds sterling which have been raised in value, and the Indian nation have therefore that extra burden laid on them. But their currency has not suffered the important change in value which the English currency has experienced ; and though the extra amount to be raised by taxes causes great embarrassment to the Government it is not so great as to form a great national calamity. In this India suffers in the same manner as England suffers by having to pay an increased value of interest on the National Debt in consequence of the increased value of the pound sterling.

But, besides this, England has been involved in disasters by which India has not been touched ; for the rise in the value of the English currency has not only created confusion by altering the value of all contracts, but has also disorganised trade and industries of all descriptions, so that it is not India but Great Britain that has been the chief sufferer from the repudiation of silver.

It is asserted by many that the bad harvests

MONEY VALUE OF LAND. ij

experienced recently are the cause of the fall in the value of land, but the recent legislation for Ireland sufficiently proves that that is not practically accepted by Parliament as the cause. And, is it more likely that tenants have, in a wholesale manner, contracted to pay 1 5 to 30 per cent, more rental than their lands are worth, than that the value of their contracts has been increased by the increase of the value of the pound sterling indicated by the evidence already referred to ?

Is it not more reasonable %o regard the difficulties experienced by tenants in paying their rents as further evidence of the increased value of the pound sterling ?

The simple reason for making only gold coins full legal tender in England is clearly given in the extract I have given from Lord Liverpool's work. But what are such considerations worth when weighed against those to which I have just alluded 1 Or what, indeed, are any considerations based on commercial convenience worth when weighed against the rights of the national debtor ?

i6 THE STANDARD OF VALUE.

V

Lord Liverpool's oversight in not perceiving that the abolition of the silver standard changes the value of the gold standard is made strikingly apparent by the fact that, throughout his long letter, he only once alludes to the question of the National Debt, and that when he makes this allusion he does so for the purpose of pointing out that the bondholders have no reasonable ground for objecting to the change from th? double to the single standard.

His Lordship does not appear to have noticed that though the national creditor had no reason to object to the change, seeing that it deprived him of no right which he previously possessed ; the national debtor,' on the other hand, had good reason to object, seeing that it deprived him of the right to pay in silver ; and if it were not that the debtors were too ignorant to understand the value of the right of which Lord Liverpool proposed to deprive them, they would doubtless have made their voices heard in such a manner as to prevent the perpetration of the injustice.

The glaringly one-sided character of Lord Liverpool's arguments on this point makes it almost appear that though he was writing just after the close of the great war with France, he had not learned the lesson taught by the scenes of anarchy in which the French nation had been involved in consequence of their

LORD LIVERPOOL^ OVERSIGHT. 17

nobility having persistently acted as if they considered that no injustice could be done to the labouring classes, seeing that they had no right to be injured.

His Lordship was very careful to point out that his proposed measures could not injure the national creditor ; and, having decided this point, he does not seem to have thought it worth his while for a moment to consider whether those measures would or would not injure the national debtor. His arguments on this point are those of a special pleader for the enhancement of the value of the bondholder's property, and not those of a statesman endeavouring to mete out impartial justice between the nation, which had just been so heavily burdened with debt, and the nation's creditors, whose loans had brought a desperate war to a successful conclusion.

Those loans, which formed nearly three-fourths of the whole debt, had been issued at an average price of about 60 per cent. — that is to say, the nation acknowledged an amount of debt about 66 per cent, greater than the, amount of capital received ; and besides this the money was received in paper, which was then depreciated to an extent variously estimated at different times at from 10 to 30 per cent. ; and, indeed, at one time estimated by some as depreciated to the extent of 50 per cent.

Neither the extent of this depreciation, nor the price at which the loans were issued, directly concerns my present argument. I allude to these points merely to

c show that if, at the close of the war, specie payments had been resumed under the same standard of value which existed before the war commenced, the bondholder would have been very handsomely rewarded for his patriotism. To the profit made on his depreciated paper he was fairly entitled, because at the commencement of the war specie payments were not abolished, but merely suspended, it being understood that the paper notes would be redeemed at par in case of a successful termination of the war. And to the profit made on the price of issue he was fairly entitled also, seeing that it formed an explicit condition of the loan. But these enormous profits he would equitably have obtained by a return to specie payments under the standard of value which existed when those specie payments were suspended.

The resumption of specie payments under the sole gold standard instead of the double standard, changed the debt of 850,000,000 pounds sterling into a debt of the same number of gold sovereigns, which are worth 15 per cent. more than the silver pound sterling, and, as before shown, at least 15 per cent., and perhaps 20 per cent., more than the pound sterling would be worth if specie payments had been resumed under the previously existing double standard.

LORD LIVERPOOVS OVERSIGHT. 19

VI

The same oversight which kept Lord Liverpool from perceiving that the abolition of the silver standard was an alteration of the standard of value which practically enhanced the value of the pound sterling, is apparent throughout the historical portion of his letter, notwithstanding that we find in one of his paragraphs such well judged statements as the following (p. 151). His Lordship says : —

" Frorn the time when gold coins were introduced into currency .... the pound sterling in tale represented a certain quantity or weight of standard gold, in like manner as it represented a certain quantity

or weight of standard silver And from that

time the gold and silver coins were in fact, as well as by law, equally the measure of property."

But his Lordship afterwards goes on to say : —

" It sometimes happened, however, that both gold and silver coins were, by various causes, alternately driven, in a great degree, out of circulation ; and one of them remained in currency, and became in fact the principal measure of property."

Thus Lord Liverpool says, the gold coins having been driven out of circulation : —

" From the year 1663 the silver coins became in fact the only principal measure of property."

And, in 1805, he says : —

" The gold coins are now become, in the practice

C 2 and opinion of the people, the principal measure of property."

His Lordship really does not seem to have perceived that though at one of those epochs chiefly silver, and at the other chiefly gold was in circulation in England, the two metals were nevertheless at all times jointly the measure of property, both by law and in fact ; for debtors could suit themselves as to which metal they reserved for their home debts, and which they exported for their foreign debts. The one metal rather than the other being kept in circulation in England, instead of being exported, depended on the changes of the relative value arbitrarily given to the metals at the respective mints. The " measure of property " was not affected by these changes of the relative value of the two metals at the respective mints, but remained the same double standard measure, though the changing prices and charges at the different mints made any given mint sometimes the best market ,for gold, and at other times the best market for silver. If every mint had been either only a gold mint or only a silver mint, then in some countries gold alone, and in other countries silver alone, would practically have been the measure of property, instead of the two metals jointly being the measure of property in all countries.

For these reasons also, notwithstanding that the double standard was abolished by law in England in i8i6, gold and silver nevertheless continued in fact to

LORD LIVERPOOL'S OVERSIGHT. 21

be jointly the measure of property ; because, though the English mint coined only gold, the holder of silver could always get the equivalent of the silver pound sterling in the gold pound sterling as long as the French mint was an open and unlimited market for silver at that relative value. This continued to be the case until the French mint was closed against silver in the year 1873 ; and then, for the first time, gold and silver became two separate measures of property, and gold alone, instead of gold and silver jointly, became practically, as well as by law, the principal measure of property in England ; and this sudden alteration of the measure of property almost immediately brought about a fall in the money value of land, and also, as before shown, of the aggregate of the money value of our exports ; whilst at the same time fixed amounts in money, such as land rents and the National Debt, were enhanced in value.

As Lord Liverpool did not understand that though at one of the epochs alluded to by him silver was chiefly in circulation, and at the other gold, the two metals were nevertheless at both epochs jointly the " measure of property," he therefore overlooked the fact that the abolition of the silver pound would naturally tend to enhance the value of the gold pound.

THE STANDARD OF VALUE.

VII

It was because the members of the Paris Conference of 1866 did not understand the nature of the oversight made by Lord Liverpool that they began the propaganda for the general repudiation of silver, and the extension of the gold standard to all countries* And the German Government soon afterwards removed the question from the domain of theory, by initiating the practical application of the views advocated by the Paris Conference.

The late Mr. Ernest Seyd and perhaps not more than half a dozen other bimetallists stood at first alone as opponents of the course advocated by the Paris Conference, regarding which I remarked when I had the honour of addressing you on this subject, two years ago : — " No such gigantic, bold, and mischievous injustice has ever before been attempted in the history of the world." I am glad to say that there is not now the vestige of a chance of the attempt to perpetrate that injustice being continued. For the victory of the bimetallists on that point has been complete, and the course advocated by the Paris Conference has now no defender. The repudiators of silver are completely defeated as regards the question of any further repudiation, and the question now at issue is as to whether silver is to be restored to the position it held before the first act of repudiation was effected by

POSITION OF THE FRENCH MINT. 23

the British Parliament, under the advice of Lord Liverpool.

The rapid and complete collapse of the repudiators, on what is really the main point, has brought about an all important change in the practical position of the question, which does not appear to have been as yet clearly recognised by either party.

For it was the prospect of further attempts to repudiate silver that caused the French mint to be closed against it. But now that that prospect has vanished, the French mint might at any moment resolve to abandon any further attempt to restore the recent rate between silver and gold, and reopen for the unlimited coinage of silver, in exactly the same coins as are at present current, sharing with the holders of French gold coin enough of the profit on its recoinage, at a new ratio in respect to silver, to pay the cost of recoinage.