Battles for the Standard

Bimetallism and the Spread of the Gold Standard in the Nineteenth Century

Ted Wilson

• Publisher: Taylor & Francis
• Year: 2017
• Print ISBN: 9781138741959
• eBook ISBN: 9781351725675
• Edition: 1
• Topic: History
• Subtopic: World History
• Index: History

This title was first published in 2000. This is a history of the monetary developments in the international economy of the 19th century. It reviews the monetary developments in the core economies of the period: Britain, the United States, France, Germany, and also India. Particular attention is given to the expansion of the gold standard in the context of the intense national and international debates about the role of precious metals and the author also examines the conflict between supporters of gold, silver and bimetallism, both in terms of competing financial and economic theories and in terms of the varying social and cultural backgrounds that informed them. The main thrust of the work is that the sheer plurality of ideas and contexts helped to ensure the eventual victory of the gold standard, despite the inherent superiority of bimetallic systems.

CHAPTER ONE

Gold, silver and money

Bimetallism is the name given to a monetary system in which both gold and silver are on precisely the same footing as regards mintage and legal tender.

(Chambers Encyclopaedia, 1908; entry on bimetallism by
Professor J. S. Nicholson)

The functions of money

As economists have long recognized, money has three distinct functions. It acts as a medium of exchange, which allows the process of exchange itself to be separated into the two distinct acts of buying and selling, enabling producers to find the most suitable outlet for their goods, and encouraging specialization. It acts as a measure of value, providing a system of units in which the relative values of different objects can be expressed, massively simplifying the task of establishing, for example, how many light bulbs should be proffered for a ton of coal, or how many video games for a ten-speed bicycle. And it also serves as a store of wealth, facilitating saving, which would be almost impossible under a system of barter, and allowing wealth to be set aside for future contingencies. Only with money can capital formation take place, raising productivity and thus the general standard of living.

Money is defined largely in terms of its functions, so it follows that anything which acts as money, that is to say, which provides all of the three functions outlined above, is money, regardless of what it consists of in itself. ‘Money is as money does’, in other words. But to understand money further it is necessary to introduce the concept of liquidity. Liquidity is defined by the economist as the ability to turn wealth into any form without loss or delay. Using this concept, we can define money as anything, any substance at all, that confers liquidity on its holder. To act as money, a substance, or a commodity, must be generally acceptable in exchange for other goods and services of all kinds, and it must also be acceptable in the settlement of debts. Thus the basic requirement of money is that it must confer complete liquidity on whoever holds it (Nevin, 1964).

Historically, a wide variety of substances, or commodities, has been used as money. Certain kinds of polished stones, animal teeth, most kinds of metal and, famously, sea-shells and beads made from shells, such as the ‘wampum’ of the North American Indians, have all functioned as money from time to time. Even in recent times, cigarettes have performed some of the functions of money, in prisoner-of-war camps or even in civil society in postwar Germany, for example, when conventional forms of money have been unavailable. But in recent centuries, gold and silver, for reasons which will become apparent, have become the most widely acceptable commodities to be used as money. Until the last fifty years or so, it was only in times of war, or similar dire circumstances when the availability of the two precious metals was jeopardized for some reason, that the authorities in most countries were prepared to move their currencies away from ‘convertibility’ with gold or silver or gold and silver. It was only in the second half of the twentieth century that developed nations moved decisively away from what we may call ‘commodity convertibility’ of this kind. This is thanks to the virtual perfection of the techniques of finance and banking, which have at last allowed countries to use the cheaper option of ‘paper money’, whose value is not fixed by convertibility into a commodity of known value. Of course, gold is still used as a store of wealth by governments, institutions and individuals around the world, though in 2000 even this residual function seems to have been under threat.

The precious metals

Monetary systems based almost entirely on inconvertible paper, sometimes called ‘fiat moneys’, are, then, quite rare in economic history until the modern period and were nearly always temporary expedients resorted to only in times of war. An international monetary system based largely on fiat-paper money, such as we have today, is a truly recent phenomenon.

Gold and silver functioned as money because both commodities enjoyed great popularity and were in constant demand in all communities, from relatively primitive societies to the most advanced of civilizations. And as well as being used as money, they have always been popular for use in such items as ornaments, jewellery and ritual vessels, to the chagrin of certain economists, as we shall see. So it is not surprising that any money which consisted of gold and silver, or was convertible into gold and silver, should have enjoyed great confidence. Both precious metals fulfilled, in slightly different ways, the four basic requirements of ‘money commodities’: portability, homogeneity, divisibility and durability. Other likely substances simply do not fit the bill for various reasons. Lead is not sufficiently portable to be used efficiently as money (try picking up a piece of lead of only 2” cube); diamonds are not sufficiently homogeneous, valuable though they often are; cowry-shells are scarce enough in some (inland) territories but are not sufficiently divisible to act as money in some of its requirements, and cows (still used as money, especially for marriage dowries, in some parts of the world today) are scarcely to be considered durable and might even die (giving up some of their value) before a transaction has been completed.

Of the two great money metals, silver is perhaps closest to the ideal of a money commodity. It is not as portable as gold, that is, its value-to-weight ratio is not as high, but one might argue that gold is too portable, that a gold coin embodies too much value to be used in most transactions. Gold and silver enjoy both homogeneity and divisibility in equal degree. Silver is less durable than gold in the sense that it corrodes on exposure to air, whereas gold does not corrode at all (hence its use as a dental filler and as a coating on electrical contacts). But silver is more durable in the sense that it is a harder element not requiring so many additives as gold to improve its torsional stability and resistance to marking. Both metals have a high value in relation to their weight, and furthermore this value is not much threatened by the appearance of massive new supplies of either commodity. The annual output of the world’s gold and silver mines, even during the great gold rushes of the nineteenth century, has always been small relative to the total stock of the metals in existence.

It is for these reasons that these two particular precious metals have performed as money through most of the modern period. Gold was always the more valuable metal for the simple reason that far less of it was mined and far less of it existed in usable form above ground. At times this gave way to the auri sacra fames, the ‘accursed hunger for gold’ remarked upon down the ages, which caused European princes such as Frederick the Great of Prussia and Augustus of Poland to seek artificial ways of producing the yellow metal. Alchemists who were reckless enough to claim to possess the ‘philosopher’s stone’ might well find themselves imprisoned in remote castles until they gave up their secrets. Sometimes the prince would provide them with a well-equipped laboratory to assist their efforts, and in at least one instance this kind of investment proved fruitful. Johann Böttger in Saxony discovered the ‘arcanum’ (the secret recipe) for porcelain manufacture in the early eighteenth century at Meissen near Dresden, and thus provided his monarch with the ‘white gold’ which hitherto only the Chinese had been able to produce (see, for example, Gleeson, 1999).

We now know that the only way to change one element into another is by harnessing vast amounts of nuclear energy and showering it with neutrons in a nuclear reactor, but had Johann Böttger or any of his rivals succeeded in performing the transmutation (surely the most unlikely of all counterfactual hypotheses), gold would have been destroyed both as a unit of measure and as a store of value. The mere knowledge that some German prince could produce limitless amounts of the substance without having to pay privateers to steal it from Spanish galleons (the English method) would have left silver as the only candidate for a monetary commodity, at least until a method of manufacturing it, too, was found.

Of course, the philosopher’s stone was never found, and thus monarchs and states always had the choice of using one or both of the two great precious metals to give validity to their currencies. The choice lay between a gold standard, a silver standard, or a bimetallic standard which, as Professor Nicholson, a noted nineteenth-century proponent of bimetallism, explained, ‘used both gold and silver on the same footing as regards mintage and legal tender’.¹

Commodity money and fiat money

In Britain, as in many other countries in the nineteenth century, both gold and silver coins were in circulation. This did not necessarily mean, however, that they were on bimetallic currency systems. The silver coins used in Britain were in fact only ‘token coins’, and were legal tender only up to the value of forty shillings. The value of the silver contained in such coins was below the nominal, or face, value of the coin. Thus, for example, the silver in twenty shillings was not worth as much as the gold in a sovereign. A gold sovereign was what we call a ‘full-bodied’ coin, where the face value of the coin was more or less equal to its intrinsic value. In practice the face value would tend to be slightly higher than the intrinsic value because a small fee, called a seigniorage, was charged by the mint for converting bullion into coin.

This distinction between ‘full-bodied’ and ‘token’ coins is not merely of passing interest. There was, as Professor Nicholson went on to explain, a fundamental conceptual difference between standard gold coin and token silver coin. A significant increase in the world’s supply of gold, by new discoveries for example, would result in an increase in the amount of gold brought to the mints of the world. To countries which used gold as a standard of value as well as a currency metal, this would result in an increase in the volume of currency in circulation and, ceteris paribus, a rise in the general price level. The only point in converting gold into coins would be to use the coins to spend, and the increase in spending power would tend to force up prices. Similarly, an increase in the supply of silver would tend to raise prices in those countries which used silver as a standard of value. But for a country such as Britain, which was on a monometallic gold standard, even a large increase in the supply of silver available for minting would have no immediate effect on the price level. Silver token coins were minted by the state according to the perceived needs of the economy and not according to the state of the metals markets; the Royal Mint would not accept silver for coining except on the terms stipulated by the Treasury. This is what is meant by saying that Britain was on a gold standard in the nineteenth century. It meant that the course of the British economy was determined in part by factors beyond the control of the British people, such as the world’s supply of gold. This was an inevitable result of having what we call a commodity standard. The simplest way of operating a commodity standard is to use the commodity directly as money (in full-bodied coins) and this is what happened with the precious metals, from the earliest times until well into the twentieth century. The advantages of commodity standards will readily be appreciated. There is no possibility of the currency inflating unless the total supply of the commodity is suddenly and massively increased, and in any case people have great faith in a currency which is known to possess precisely the same scarcity value as a commodity such as the precious metals. It is not surprising, then, that serious academic economists have argued in favour of returning to commodity standards in recent years. In the 1980s the Reagan administration in the United States went as far as setting up a gold commission to look into the prospects of a return to gold. The arguments advanced are not dissimilar to those supporting the concept of an independent central bank. Governments, it is argued, simply cannot be trusted not to intervene in the supply of money; since the breakdown of Bretton Woods system (of fixed exchange rates set up by the victorious Western Allies after the Second World War), most governments in western countries have typically failed to restrict the money supply, and hence money creation should be taken out of their hands. An independent central bank, such as existed in West Germany, might be better trusted to look after the money supply, but in most countries there were misgivings about taking the control from politicians and giving it to bankers. Creating a commodity-money standard would achieve independence for the currency without bringing in another group about whom there might be as much concern as there was with politicians. This does not mean that operating a commodity standard such as a gold or silver standard is a cheap option. A well-managed fiat-money system can do just as well as a commodity standard in terms of stability of prices and exchange rates (the price of the commodity money in terms of foreign currencies) and it can do so at a lower social cost. The reason is that paper money avoids the inefficiency inherent in tying up large stocks of a valuable commodity for purely monetary use. In fact a paper money can be issued at near-zero social cost because the cost of the intrinsic substance – paper – is negligible. The problem is that of ensuring that the paper money is well managed. Arguably it was only in the late twentieth century that we finally achieved this. In Britain it has come very late in the day for, as Friedman pointed out, the successful operation of a fiat-money standard requires the exercise of considerable restraint on the part of the issuing authority. And, as Artis and Lewis (1991, p. 23) have written about commodity standards:

The whole point of a commodity-based system is to impose such restrictions upon the monetary authority, in particular to prevent inflationary policies. A commodity-based system can be thought of as a paper money standard in which there is inbuilt monetary regulation and control. So long as the monetary structure is tied to a commodity the volume of money is limited by the supply of the commodity. [But] … the linking of money to an external object – one or more commodities, another currency, or some index of items – should not be looked upon as giving value to money. The principal part of the linkage is instead to ensure confidence and sustain the convention [that money is worth what it says it is worth] by protecting against the over-issue of money and otherwise restricting the set of feasible policies which can be pursued by the authorities.

In the nineteenth century there was usually (with notable exceptions) little debate about the wisdom of trusting governments or other authorities with fiat moneys, since few people had yet had cause to doubt the essential wisdom of using a commodity money. In wartime it was not possible to retain commodity convertibility, that is, to keep the currency on a standard, because of the exigencies of war itself: the inevitable shortage of specie which was used to pay for essential matériel, the need to expand the money supply to pay for the war effort in general, and so on. So commodity standards broke down in wartime. But the intention – apart perhaps from the French creators of the assignats and mandats of the revolutionary period – was always to return to convertibility of some kind as soon after the end of the war as possible.

Commodity moneys, then, were the general rule and almost all monetary authorities based their currencies on either gold or silver, or both. Where both precious metals were used we often use the term ‘bimetallism’ or ‘dual standard’ to describe them. But therein lies a problem. The term bimetallism is to a large extent governed by the context in which it is used. It has been taken to mean, variously: an ancient system of currency long outdated and discredited; a monetary regime tirelessly promoted by the French in the nineteenth century against the good sense of England and the gold standard; a pitiful nostrum advocated by economic cranks to reverse the worst effects of the ‘Great Depression’ of 1873–96; or a synonym of, if not euphemism for, the American populists who advocated the restoration of silver as an easy means of raising primary-product prices in the Midwest during the late nineteenth century. We shall see also that in a formal sense there are several different kinds of bimetallism according to the geographical extent to which advocates believed the dual standard should be extended and according to what kind of metal ratio (between gold and silver) should be pursued. These varieties of bimetallism are clearly identifiable in economic history but, unfortunately, have never been adequately delineated or labelled either by contemporaries or by historians. The labels, or categories, are however required to make full sense of what was being argued and the implications of such arguments during what we might call the ‘great currency debate’ of the 1890s.

So bimetallism may have meant many things to many people, but it is now clearly understood that bimetallism in its broadest sense was the prevailing type of monetary regime in the history of the world economy from the late Renaissance, when Spanish gold and silver became available in large quantities, until well into the nineteenth century. The late success, or rather the late preponderance, of the international gold standard by the time of the First World War, meant that in the interwar period establishments in the western countries invariably saw a ‘return to normalcy’ as meaning a general commitment to the restoration of the gold standard. It was more widely believed in the 1920s than it is today that the pre-1914 international gold standard had been an unmitigated success. Its return, it was confidently thought, would secure the essential needs of both the nation state and the international economy in the postwar years – price and exchange-rate stability and a return to confidence in money. The late flowering of the gold standard, arguably, had served to confuse people into thinking that the yellow metal was the only one which should ever be considered as a monetary commodity or as a standard of value. This view has prevailed down to the present day.

If this has been true for western thinking generally, it was even more true of thinking in Britain, where the only serious competitor as monetary metal, silver, had long since been abandoned and only the gold standard was reckoned within living memory. Britain was unique in having given up silver long before it became clearly advantageous to do so, though it should be noted that even Britain had operated a de jure bimetallic regime until 1844.

Thus in recent times those economists who have given serious thought to monetary regimes have tended to think of gold as the only conceivable commodity standard metal. Common ancestry of modern economic thought in David Ricardo might also have served to emphasize gold monomania – though even Ricardo had been converted from silver – but whatever the reason, there has been a less than perfect understanding of the true place of bimetallism and bimetallic theory in modern economic history, especially in Britain.

Bimetallism and monometallism

Of all prominent economists and economic historians it has been the American, Milton Friedman, who has campaigned longest and hardest for a restitution of bimetallism to its proper place in economic history. In so doing, Friedman has consistently challenged the conventional wisdom about the merits and demerits of a dual standard as opposed to monometallism. The conventional view is, or was, that a dual standard was always unstable and unsatisfactory, and that it necessarily involved frequent shifts between the monetary metals. Friedman has challenged the view that monometallism was always preferable, and that gold was preferable to silver. As an influential monetary economist (and monetarist), Friedman clearly has certain axes to grind which are not of concern to this chapter, but in focusing our minds on actual historical experiences with monetary regimes – Friedman is the most empirical of economists – he has helped us t...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Acknowledgements
• Preface
• 1 Gold, silver and money
• 2 Britain’s golden heritage
• 3 France, bimetallism and standardization
• 4 India and the silver rupee
• 5 The United States: gold and silver in the Gilded Age
• 6 The spread of the gold standard and the defeat of bimetallism
• 7 The great monetary debate and the decline of bimetallism
• References
• Index