The silver situation in the United States

Front matter

DAY.

QUESTIONS OF THE

(The numbers omitted represent Monographs no longer in print.)

PART I.— THE ECONOMIC SITUATION. I. — The Act of 1878

Provisions of the Act . 2

Causes of the Act . 5

Wherein Peculiar . 6

Expected Effects . 8

II. — The Silver Circulation.

Position of the Eastern Banks . 11

Explanation of the Chart . 13

Regular Autumnal Increase of Silver Cir¬ culation . 14

Limited Circulation for the Dollar Coins. . . 15

Four Periods in the History . 17

First Coinage and Circulation . 18

Large Certificates Return to the Treasury. . . 18

Upward Movement in i87g-’8i . 19

Treasury Offer to Carry Silver West Free.. 20

Prosperous Conditions of this Time . 22

Consequent Increase of Silver Circulation. . 24

Crisis of May, 1884 . 25

Silver Circulation Ceases to Grow . 26

Explanation of this . 26

Treasury Gold Receipts and Holdings Shrink 27

Policy of the Treasury . 28

Effort to Get out Silver Dollars . 29

Redemption of Public Debt Ceases . 30

Hoarding of Silver . 31 v

VI

CONTENTS.

PAGB

Made Possible by Surplus . 32

Banks Lend Gold to the Treasury . 32

Suspension of Gold Payments Feared . 33

Position of the Greenbacks . 34

The Gold Reserve of 100 Millions . 35

Embarrassment Ceases in 1 885 . 37

Decline in the Bank-Note Circulation . 38

In what Way it Takes Place . 39

Small Denominations of Silver Certificates

Authorized in 1886 . 41

Revival of Business, 1886 . 42

Growth of Money in Circulation, 1878-92. . 43

Rate of Growth and Annual Increment. ... 46

How much Additional Money the Growth

of the Country Calls for . 47

VI. — The Act of 1890.

Provisions of the Act . 49

Effect of the Price of Silver . 50

Amount of the New Issues . 52

Decline of the Gold Reserve, 1890-92 . 55

Customs Gold Receipts Shrink . 56

Use of the New Notes in Clearing-house

Transactions . 59

Denominations of the Notes . 61

Crisis of 1890 and its Effects . 63

Redundancy of Currency in 1891 . 65

Exports of Specie . 66

Efforts of the Treasury to Get Gold . 66

Heavy Crops and Exports of the Fall of

1891 . 67

Renewed Redundancy of Currency in 1892. 69

VII. — General Conclusions.

Silver Issues have Followed, and not Caused,

Rising Prices . 72

Bearing of this Fact on the Theory of Prices 73 Effects of Bank Deposits . 74

CONTENTS. vii

PAGE

Analogy of Silver Currency to Subsidiary

Coins . 75

Silver Issues under Act of 1878 not Exces¬ sive . 77

What would have Happened, if No Silver. . 78

VIII. — The Probable Future — Free Coinage.

Bank-Notes will Shrink for a Few Years more 79 Possible Effects of the Use of New Notes in

Bank Reserves. . . 79

The Issues of 1890 probably Excessive . 81

A Gold Premium eventually Probable . 81

How a Gold Premium maybe Reached. ... 83

No Contraction from a Gold Premium . 84

Amount of Gold in the Country . 85

Possible Effects on Credit . 87

The Financial Position of the Treasury

Important . 87

The Sale of Bonds to Maintain Gold Pay¬ ments . 88

A Permanent Break-down can Come only

from a Foreign Drain of Gold . 88

Eventual Rise of Prices under Silver

Standard . 90

Probable Effects of Free Coinage . 91

Early Break-down of Gold Payments . 92

Slower Effect on Prices . 93

PART II.— THE ARGUMENT FOR SILVER. I. — The Bimetallist Argument

The Argument from Falling Prices . 96

The Burden of Debts Increased . 97

Depression of Industry Alleged . 99

Is the Silver Dollar Dishonest ? . 101

Extent of the Fall in Prices . 102

II. — The Effects of Improvements in Pro¬ duction.

The Fall in Prices at First Denied . 104

Then Ascribed to Improvements . 105

CONTENTS.

PAGE

The Appreciation of Gold not so Disproved 106

Real Bearing of Improvements . 107

Inverse Movement of Wages and Prices . . . 108 Case Different from that of a Simple Fall

in Prices . 109

Improvements and Depression . no

III. — The Case of the Farmer.

Improvements Affect Agriculture differently

from Manufactures . 113

Effects of Agricultural Improvements . 114

Causes of Agricultural Depression . 116

Transition in Agricultural Methods . 118

IV. — Silver and Gold as Standards of Value.

Negative Reasons against Use of Silver. ... 120 Positive Reasons. The Effect on Creditors 121

The Increased Production of Silver . 122

Difference between Gold in 1850 and Sil¬ ver now . 123

Gold a Satisfactory Standard of Value. . . . 124

A Multiple Standard not Needed . 125

The Morale of Silver Agitation . 126

V. — The Expansion of the Currency.

The Growth of the Currency . 128

Increase of Bank Deposits . 129

Sufficient Gold for Bank Reserves . 130

How to Secure Growth of Large Change. .. 131 Proposal of Mr. Fairchild on Silver . 132

THE SILVER SITUATION IN THE UNITED

STATES.

PART I.

THE ECONOMIC SITUATION.

I

A discussion of the silver situation in the United States divides itself naturally into two parts. On the one hand, we have the purely economic aspects of the problem, — the working of the silver legislation, its history, the results that have flowed from it in the past or may be expected in the future. On the other hand, we have the intricate and difficult ques¬ tions of policy involved, — the right and wrong of the legislation, the evils or benefits that have ensued and may be expected, the best course to be followed in view of all the emergencies of the situation ; the treatment of the problem not only from the eco¬ nomic, but from the wider social and political point of

THE ECONOMIC SITUATION.

view. Here, as in almost every subject which the economist has occasion to examine, it is advantageous to distinguish between these two classes of considera¬ tions. Accordingly, the present monograph will discuss them separately, undertaking first an exam¬ ination of the economic phenomena, and proceeding thence to a discussion of the questions of policy.

The economic discussion may begin with an ac¬ count of the act of 1878, familiarly known as the Bland Bill. Although the silver dollar of which the coinage was resumed in 1878 dates back as a coin to the earlier days of the Republic, its reissue in that year marks a policy so radically new that the ex¬ perience of previous years throws practically no light on its working. The act of 1878 1 provided for the purchase by the government, each month, of not less than two million dollars’ worth, and not more than four million dollars’ worth, of silver bullion, for coin¬ age into silver dollars at the rate of 41 2\ grains of standard silver (or 371} grains of fine silver) for each dollar. The amount of the purchases, within the specified limits, was left to the discretion of the Sec¬ retary of the Treasury. As every Secretary of the Treasury, throughout the period in which the act was in force, kept to the minimum amount, the practical result was a monthly purchase of two million dollars’ worth of silver bullion.

1 On the general history, up to and including the act of 1878, the reader should consult Professor J. L. Laughlin’s History of Bimetal¬ lism in the United States ( New York, 1885).

The text of the act is conveniently found in Dunbar’s Laws of the United States Relating to Currency, Finance , and Banking, p. 246.

The act is sometimes described as having called fora monthly issue of two million silver dollars ; but this was not the exact situation. The amount of silver obtainable with two million dollars obviously varies according to the price of the metal in terms of the dollars with which the purchases are made. In February, 1878, when the first purchases were made, those dollars were the inconvertible United States notes, or greenbacks, worth something less than their face in gold. The amount of silver bullion obtain¬ able with two million such dollars depended, on the one hand, on the price of silver bullion in terms of gold, and on the other hand on the value of the dollars themselves in terms of gold. When specie payments were resumed, on the first of January, 1879, and the greenbacks became redeemable in gold, the measure of value in the United States became gold, and the extent of the coinage of silver dollars under the act of 1878 became simply a question of how much silver bullion could be bought with two million dollars of gold. The price of silver in 1878 was, in terms of gold, not far from a dollar for an ounce of standard silver. After 1878 it went down almost steadily, and at its lowest, toward the close of the period during which the act of 1878 was in force, was barely above 80 cents an ounce.1 The silver dollar of 41 2 \ grains contains less than an ounce (480 grains) of standard silver. The monthly purchase of two million dollars’ worth of silver there-

1 I have stated the price here, for simplicity, in terms of so much per ounce of standard silver, i. e ., silver containing 10 per cent, of alloy. The usual quotation in the United States is per ounce of fine silver.

THE ECONOMIC SITUATION.

fore yielded more than two million silver dollars, the amount being obviously greater as the price of silver went lower. On the average, the monthly yield was not far from two and a half millions of silver dollars. So much each month, therefore, or thirty millions of silver dollars a year, was roughly the addition to the currency of the community from the act of 1878.

An important provision of the act of 1878 was that authorizing the issue of silver certificates against the deposit of silver dollars. This authority was limited at the time to certificates in denominations only of ten dollars and upward : a restriction which, as we shall see, proved to be of great importance. At the time it does not seem to have been expected that the silver certificates would enter directly into the circulating medium ; we may infer from the restriction to large denominations that no such ex¬ pectation was entertained. But in fact it has been chiefly in the form of certificates that the silver has entered into circulation. These certificates, it is true, are not, like the dollars themselves, a legal tender ; but they are receivable for all public dues, customs included, and they pass from hand to hand at least as readily as the bulky pieces which they represent. The government pays them out directly, retaining an equal amount of silver dollars in its vaults, and treating these as a special deposit by the holders of the certificates. The quantity of actual coined dollars which the community would use reached an early and stubborn limit ; but in the form of certificates, much wider play was given to their use. The dollars and certificates between them constitute what we may call the silver currency of the act of 1878.

The passage of that act was due to causes easily described. It was part of the opposition to the contraction of the currency and the resumption of specie payments, which -forms the most important episode of our financial history between 1867 and 1879. The resumption of specie payments had been provided for by the act of 1875, and was to take place on J anuary 1 , 1 879. In the meanwhile, the longcontinued depression which followed the crisis of 1873 intensified the demand for more money and higher prices. That demand led to the inflation bill passed by both Houses of Congress in 1874, and killed by the veto of President Grant. The same feeling led to the silver act. The great fall in the price of silver, beginning in 1873, and showing itself markedly in 1876, made silver, at the old ratio, a cheaper currency than gold, and so caused the opponents of the return to specie payments to prefer silver to gold, as they preferred paper to either. No doubt some additional force was given to the move¬ ment in favor of the use of silver from the desire of the silver-mining States and their representatives, that the price of the metal should be kept up through a larger use of it for coinage. But this element, while sometimes prominent in the agitation, was not then, as it has not been in more recent years, of any great importance by itself. The real strength of the agitation for the wider use of silver as money comes from the conviction of large masses of the people that the community has not enough money :

THE ECONOMIC SITUATION.

a conviction which may be fostered by the selfish interests of mine owners, and doubtless has often been based on arguments ludicrously fallacious, but which rests, nevertheless, on a foundation not entirely selfish, and has some support from economic reason¬ ing that deserves candid and attentive discussion.

Although the specific measure passed in 1878 thus rested on a long train of historical causes, it con¬ tained details that were essentially new, not only in our own experience, but in that of the world at large. It provided for the injection into the cur¬ rency of a large annual increment of overvalued coin. It did not establish bimetallism proper ; for the coinage of silver was not free, but was under¬ taken by the government on its own account, the Treasury reaping the profit which would accrue so long as the coins were kept at a higher value than that of the bullion put into them. It did not estab¬ lish anything like a subsidiary coinage ; for the new coins were legal tender to an unlimited amount, and no attempt was made to adjust their quantity to the needs of the community for the convenience of small change. It simply provided for a regular mechanical addition of large amount to the general circulating medium. No precise experiment of this kind had ever before been tried. It is true that Germany and the countries of the Latin Union possess, in their circulating medium, large quantities of overvalued thalers and five-franc pieces which are exactly like our silver dollars. They also are legal tender with¬ out limit ; their total quantity is limited ; and it is only by this limitation of the quantity that their value is kept above that of the bullion contained in them. But the thalers and francs in these countries are not new additions to the currency. They are remnants from an earlier period, when Germany had a silver standard, and the Latin Union a complete bimetallic standard. No addition whatever to the thalers is made in Germany ; and if some coinage of five-franc pieces takes place in France and in other countries of the Latin Union, the additions are meant merely to fill the place of abraded coins, to provide for the ordinary losses from daily use, and to make any additions to the supply which may be needed for convenience in making small change. No other country has ever entered on an addition of overvalued coin to its circulating medium having the object and extent of that made by our silver act of 1878. This characteristic of the measure, it need hardly be said, was the result not of any deliberate intention to try a new experiment, but of the spirit of compromise which explains so many anomalies in the legislation of democratic communities. The silver act, as passed by the House of Representatives, provided for complete bimetallism, — for the free and unlimited coinage of the silver dollar at the old ratio of 16 to 1. In the Senate, it was amended by the substitution of the provisions for a limited coinage, which were finally enacted. The compromise was meant to satisfy both those who objected to the cheaper standard and those who wanted more money ; and it afforded a welcome escape to the legislators who were trying to satisfy all parties. At the time, no one probably expected that the meas-

THE ECONOMIC SITUATION.

ure would remain in force for any great length of time. The conservative element hoped that it would be repealed after a short trial ; the inflationists (for by that name they might, then at least, fairly be called) believed that it would soon be superseded by the free and unlimited coinage of silver. As it hap¬ pened, the act remained in force, unamended, and indeed without very serious attempt at amendment, for over twelve years ; and the measure which suc¬ ceeded it in 1890, though different in many details, followed the same method of forcing a large regular injection of money into the circulating medium, based on silver purchases by the government.

On the general principles which are expounded in standard books on political economy, the effects of this novel experiment were not difficult to predict. Each new dose of silver money would push out, — after the resumption of specie payments had taken place, — an equivalent amount of gold. This process would continue until all the gold in circulation had disappeared. So long as any gold money was left in the country, gold and silver would circulate side by side, and the silver dollars would be equal in value to the gold dollars. After the gold had disappeared, silver alone would be the basis of the monetary sys¬ tem. Prices would accommodate themselves to the new measure of value, and would become somewhat higher than they had been under the gold standard. If thereafter the government still continued to coin and issue the annual increment of silver, the effect would be simply a corresponding outflow of silver from the country.

Something of this sort was probably expected at the time by most persons familiar with economic reasoning ; and such doubtless would have been the working of the measure if no complicating forces had intervened, and if the effects of an increased issue of money had proved to work themselves out with that mechanical simplicity which is assumed in the usual statements of the theory of money and of prices. But neither of these conditions has been fulfilled. Complicating forces have, in fact, inter¬ vened. There have been changes in other parts of the circulating medium, and great changes in the general economic conditions of the community, which must necessarily have modified to a great extent the expected effects, even if the second assumption, of mechanical simplicity in operation, had held good. But this second assumption also has proved to need important correction. Our experience under the act of 1878 has shown that, in this class of economic phenomena as in others, the working of the economic forces is far from simple. The clearcut fundamental doctrines, while they remain true at bottom, and while they are confirmed by experience in the long run, need correction and qualification such as experience alone can supply. For this reason, the actual working of the act of 1878, and, it may be added at once, that of the act of 1890, are of interest not only as a matter of present political importance, but as a lesson of permanent instruc¬ tion for the economist. The sort of corrections of accepted doctrines which are supplied by our expe¬ rience will be explained in detail in due time ; but it

THE ECONOMIC SITUATION.

may not be amiss to state at the outset that the modifications by no means destroy the validity of the accepted conclusions. They rather supplement them, and show with what variations they apply under new conditions. The general theory of money, as worked out by Ricardo, and expounded on his lines by every writer of note since his time, remains intact ; but something is added to it, and, more par¬ ticularly, the need of care and discretion in making predictions based on it is illustrated to perfection.

II. The Silver Circulation

So much byway of preface. Turning now to the actual working of the act of 1878, the first fact to be noted is the attitude of the banks to the silver cur¬ rency, which was and is a factor of prime impor¬ tance. From the outset, the banks, especially in the large cities of the East, fought shy of the silver money. They were unwilling to use large quantities of it, and still more unwilling to allow large quanti¬ ties to accumulate on their hands. This disposi¬ tion no doubt may be ascribed in part to their close connection with the creditor class, to whom a lower¬ ing of the standard of value must be objectionable. But in good part it is due to causes of a different sort. The desire for a steady and unvarying basis for credit transactions results naturally from the conditions of the banker’s business ; and all trans¬ actions connected with foreign trade must of neces¬ sity rest on a gold basis. Not least important is the simple public-spirited preference for gold as the better standard of value in the interests of the community at large — a preference, to be sure, which rests on tradition quite as much as on a clear weighing of the merits of the case. At all events, in November, 1878, shortly after the passage of the

1 1

THE ECONOMIC SITUATION.

silver act, and immediately before the resumption of specie payments, the banks of the New York clear¬ ing-house adopted a rule prohibiting “ the payment of balances [i. e., between banks at the clearing¬ house] in silver certificates or silver dollars, except as subsidiary coin in small sums (say under ten dol¬ lars).” 1 In 1882, Congress tried to break up the practice so established by inserting in an act of that year, for extending the corporate existence of national banks, a proviso that no national bank should be a member of a clearing-house at which silver certificates were not receivable in payment of balances. The rule of November, 1878, was there¬ fore dropped by the New York banks. But their practice remained unaltered. Congress can compel a national bank to receive silver certificates, but cannot compel it to offer them. The banks by tacit consent refused to make the tender. In fact, the silver currency was not allowed to enter into trans¬ actions between banks.

The banks did not “ boycott ” the silver currency, as it has sometimes been put. They received it on deposit, and accepted it in tender of debts when

1 These rules are printed in the Comptroller’s report, in Report on the Finances for 1878, p. 169. It is there stated that the Boston banks adopted the same rules ; but the practice of the Boston banks did not become settled until after the events of 1885, to which refer¬ ence is made below at p. 29.

The usage of the banks in the West varies from that of the Eastern banks. Philadelphia follows the example of New York and Boston in the refusal to use silver currency. But in Chicago, St Louis, Kansas City, and Denver, silver certificates, and bank notes as well, pass between banks as freely as any form of currency, though in fact no large amounts are used.

THE SILVER CIRCULATION.

offered. But they endeavored to hold as little of it as possible. They paid it out first from the cash flowing through their hands, and still so pay it out. If the silver dollars or certificates which accumulated on their hands were not carried off by the calls for cash from persons presenting checks, the excess was got rid of in another way. Both silver dollars and certificates are receivable for all public dues, customs included ; and when they began to accumulate in the banks, they were turned over to the Treasury, chiefly through the hands of importers and custom-house brokers who had payments to make for customs dues. The signal importance of this attitude of the banks will soon appear.

The history of the working of the silver currency is most easily followed on the chart appended to this paper, which is continued as nearly as may be to the present time, and therefore bears on the act of 1890 as well as on that of 1878. The part of the chart to which the reader’s attention is chiefly called is the dotted line, which begins at the bottom on the left hand, and ascends irregularly but steadily upward athwart the page. It indicates the amount of silver currency (dollars and certificates added together) actually in circulation from month to month. Above it runs an unbroken line, almost straight, which soars up the page without a break, and indicates the total coinage under the act of 1878. After July, 1890, this straight line stands for the issues under the act of 1890, which will be described in their place in the pages to follow. It will be noticed that the rate of increase is markedly greater in 1890, in conse-

THE ECONOMIC SITUATION.

quence of the legislation of that year. Still another important line is the broken one which runs across these two, and represents the net amount of gold held by the United States Treasury. The fluctua¬ tions which it indicates are marked, and some of them — especially for 1884-85 and 1890-91 — are of much significance. Of least importance, though of interest as a matter of curiosity, is the lowest line, of asterisks, which represents the amount of actual silver dollars in the hands of the public.

Certain preliminary points suggested by this chart may be disposed of, before proceeding to the more important general features which it indicates. Look¬ ing at the line which represents the amount of silver currency in actual circulation, we observe a very distinct increase in the outgo or circulation of silver in the latter half of each year. That increase shows itself regularly, even in years like 1885, when the general movement was strongly toward a reduction in the volume outstanding. In the first half of each year, on the other hand, there is either a decline or a distinct retardation of the rate of increase. These regular fluctuations are clearly due to what is called “ moving the crops,” — the flow of currency to the West and South, to effect of exchanges which accu¬ mulate at the time when the staple agricultural products pass from the hands of the farmers and planters. The steadiness of this particular phenom¬ enon, maintaining itself throughout the irregularities of the general movement, points to a conclusion of which ample confirmation will be found in other directions : that the outgo of silver money into circu-

THE SILVER CIRCULATION.

lation has by no means proceeded with that regular¬ ity which the legislature expected and intended, but has been very greatly affected by circumstances beyond legislative control.

Another point, of some interest though of no great importance, is the circulation of the actual coined dollars, which is represented by the lowest line of the chart. In one respect, their circulation follows those fluctuations which have just been noted in the silver currency as a whole. The volume almost invariably increases at the close of each year, and as regularly decreases at the beginning of the year. Apart from these periodic changes, there is a general slow increase until 1886, and thereafter the amount outstanding remains practically stationary. There seems to be room for about sixty millions of the dollars, and for no more.

The government has made every effort to get the dollar coins out of its hands. Congress has annually appropriated a sum to enable the Treasury Depart¬ ment to ship them, free of expense, to all applicants in any part of the United States. The premium so offered to persons who have occasion to use money in small denominations, and especially to employers having large pay-rolls, has sometimes led to consid¬ erable call for them. But the great bulk of the coins thus got out of the Treasury return to it almost at once. The employees, to whom they are paid, get rid of them as fast as they make purchases ; the shopkeepers, in whose tills they accumulate, finding their customers averse to taking them in change, turn them into the banks on deposit ; and the banks

J finally turn them into the nearest sub-treasury in payment of public dues. The round-trip from Treasury back to Treasury is easily made, in some districts, in the course of a single week. The degree of favor which they meet of course affects this movement, and varies in different parts of the coun¬ try, apparently reflecting in a curious way the popular feeling as to the desirability of having silver currency at all. They circulate very little east of the Alleghanies, but are used more freely and perma¬ nently in the Mississippi valley. Among the negroes of the South the big pieces are said to be favorites, and find a permanent lodgment. Their greatest circulation, as we have seen, was reached in 1886; after that time the change in the denominations of silver certificates, to be discussed later, caused a decline in the amount used.1

We may now return to the movements of the silver currency as a whole, indicated by the irregular unbroken line of the chart. Between that line and the dotted regular line above it, indicating the maxi¬ mum issue authorized, there is a gap representing what we may call the dead silver. The gap stands for the dollars coined (or, after 1890, for the ounces of silver purchased), which lie in the Treasury, but are not injected in any form into the circulating medium. As a glance at the chart shows, it is very variable. It was greatest in 1885 and 1886, the