The cheaper money drives out the good money.—In any system of coinage, employing both silver and gold as standards, it is found by actual experience, repeated hundreds of times, that a change in the ratio between the two metals in open market always leads to hoarding for speculative purposes of the most costly metal of the two.
Thus, in our country previous to 1873, when silver was worth more than one-sixteenth of its weight in gold, uncoined silver was necessarily worth more than coined silver for some purposes, and the coins already struck were worth more in the manufacture of spoons and plate than to circulate as coins. Prior to 1853, when the half dollars, quarter dollars and dimes were coined at the ratio of sixteen to one, such coins could not be kept in circulation, for the reason that they were worth more than their face value. The law of 1853 reduced the weight of these coins so that their market value as silver was sure to remain a trifle less than their face value. The result was no further melting up of these small coins for use in the arts or for bullion. This fact is only one illustration of what is called Gresham's law, formulated in the time of England's base coinage during the sixteenth century, but noticed centuries [pg 126] earlier, that cheap money always drives out a more costly money. The principle is as constant as human nature, that nobody will give a greater value when a less value will serve the same purpose. For this reason, no country in recent times has been able to keep both gold and silver as the actual standards of value at the same time. Either the ratio must be changed with every fluctuation of either metal, or one of the metals must be undervalued in the system of coinage, as has been done in England for the greater part of this century; or else the total coins of the cheaper metal must be limited in amount, as has been done by the Latin Union in Europe during the last twenty-five years. In either case the tendency is toward a single standard. The commercial world prefers a stable, well understood unit to a changeable one. And while the fluctuations of gold alone affect somewhat the stability of prices, these are thought of less importance than the necessary legal adjustments for new systems of coinage.
Monometalism and bimetalism.—The discussion has led to two opposing views, distinguished as monometalism and bimetalism. The monometalist holds that since one metal only can, under ordinary circumstances, set the standard of price, it is wise to choose the one subject to the least fluctuation for the universal standard. The bimetalist holds that a nation, or at any rate a group of nations, can fix by agreement the price of gold and silver in terms of each other, when used as money. Since the use of these metals as money makes the chief demand for them, it is thought possible to make this legal ratio hold upon the total product of [pg 127] both gold and silver. If, then, in any country the supply of gold should be out of due proportion with silver, its overvaluation will at once attract gold from other countries until it becomes no more profitable there than elsewhere. The result is assumed to be a somewhat ready equalization of values for the territory establishing the standard, so that the actual fluctuations of the standard unit will follow the line of lowest prices for either of the metals. The monometalist feels certain that the actual withdrawal from circulation, and so from use as money, of the higher priced metal causes greater hardship and probably greater fluctuations in values of other commodities than any fluctuation of a single standard can produce.
It is very certain that the commercial world recognizes the tendency toward a single standard, and that the coinage systems of all civilized countries are practically, if not in definite form, based upon a single standard. The countries of wide commerce and extensive credit are using the gold standard. The less developed countries adhere to the silver standard. Many which nominally sustain both have, by some legal restriction in the coinage of silver, become practical supporters of the gold standard. Few, if any, thorough students of the subject believe it possible by statute in the present conditions of mining and commerce to bring the commercial world anywhere back to the ratio of sixteen to one, established in the United States in 1834. Statute law might declare a sheep to be equal to a horse, but no power on earth could make it pull as much. So even agreement among nations, by [pg 128] legal enactments, cannot enforce an unnatural relation between two products.
NATIONAL STANDARDS OF VALUE, 1899
| Gold | Gold, with silver limited | Gold or silver | Silver |
| Great Britain, Germany, Sweden, Norway, Denmark, Austro-Hungary, Roumania, Turkey, Portugal, Brazil, Canada, Newfoundland, Egypt, Russia, Chile. | United States, France, Belgium, Italy, Switzerland, Greece, India. | Haiti, Uruguay, Argentine Republic, Venezuela, Spain, Servia, Bulgaria, Netherlands, Algeria, Tunis, Japan, Java, etc., Philippine Islands, Hawaii. | Mexico, Central America, Columbia, Bolivia, Peru, Equador, China, Hong Kong and Straits, Cochin China. |
Actual bimetalism.—It is necessary to caution against supposing that the use of both gold and silver as currency in any country implies true bimetalism, nor is it at all certain that the making of either gold or silver legal tender at option touches the question of bimetalism. Only the issue by free coinage at the will of the owner of both metals shows a distinct attempt to maintain bimetalism. The actual maintenance of both standards has always been, and always will be, by alternation, when the ratio of the two metals as to value is established at very nearly the market value of the two metals in bullion.
Popular demand for a return to the old ratio in the United States is founded in part upon misconception of commercial principles and largely upon a misunderstanding of current events during a financial crisis. The supposed dangers from a single standard of value are largely exaggerated from confusion of standards with currency in exchange. It is quite conceivable that gold may still serve as a standard unit of value, while 90 per cent of exchanges have no other use for gold beyond its furnishing terms of comparison. We must measure value by value, and the unit of value must be true to its name, just as we measure length by something long. But the number of yardsticks in actual use in a store may have no constant ratio to the number of yards of cloth sold by that measure. The folding of calico in yard folds relieves the yardstick, but does not change the nature of the yard. So gold, or silver, is relieved of many functions in exchange through banking systems without materially affecting its use as a standard unit.
The multiple standard.—It is proper to mention in connection with units of value a theoretical device for overcoming the necessary fluctuation in all articles of value. This is sometimes called the multiple standard. The plan, in brief, is to appoint a committee of experts, whose record of current prices, in some general market, for a hundred or more staple articles of commerce, shall be compared from week to week, or day to day, in such a way as to indicate how far above or below the average the price of any article may be. If, then, gold is made a legal tender, a comparison of its price with the average [pg 130] of all prices will show how much weight of gold must be given on any day to actually return a value exactly equivalent to what was borrowed sixty days or a year previous, when the ratio of gold to average prices was different. In this way it is supposed that natural fluctuations in gold, silver or any other commodity made legal tender for debt can be fully provided for without loss to either debtor or creditor.
The objections to this ideal standard are the practical difficulty of settling, first, the wide range of commodities to serve as the basis; second, the importance to be given each in adjusting the standard; and third, the nature of the commission under which the work should be done. In the history of the world, custom has preceded law in devising for welfare; in this, law without experience will have to precede custom. The difficulty which most men would experience in understanding and trusting such a system puts off indefinitely the possibility of a general adoption.