The Forgotten Man, and Other Essays

by William Graham Sumner

The cases in which legislation acts on value are all cases of monopoly. Such is the case with token money; such is the case with irredeemable paper. As with every other monopoly, the successful manipulation of these monopolies consists in controlling supply, to fit the supply to the demand at the price which the monopolist wants to get. The history of every monopoly shows the great difficulty, I might say, in the long run, the impossibility, of doing this. The bimetallists propose not to act on the supply, and so create a monopoly, but to act upon the demand. This is a new exercise of legislation, different from any yet tried, and not guaranteed by any experience. Now to act upon the demand is, in the phrase of the stock brokers, to make a corner, that is to buy all that is offered at a price. Stock gamblers do this so as to sell out again at an advance to those who are forced to buy. If there are none who are forced to buy, then those who bought above the market have lost their capital. The propositions of the advocates of the alternate standard and of bimetallism are alike in proposing that all civilized nations shall combine to make a corner on the falling metal. Whether that is a worthy undertaking or not I will not stop to inquire. It is evident that the nations of the coinage union would have no one on whom to unload after they had bought, and that there would be an inevitable loss and waste of capital in the transaction. This, however, is not all. A corner is effective or not according to its scope. It must embrace the whole object to be raised in price, and above all it must act upon a limited amount which is not fed from any new source of supply. A corner on the precious metals is not to be made effective even by a combination of all civilized nations. In my opinion there is a grand fallacy in the notion that a coinage union would do what France did, only on a larger scale. Wolowski saw France, lying between Germany, a silver nation, and England, a gold nation, carry out the compensatory operation, and he inferred that all nations could agree to do the same, more widely, more easily, and with wider distribution of the loss. It seems to me that there was an action and reaction here between members of the group of nations which one can easily understand, but that if all nations joined in the system, the alternation would not work at all for want of a point of reaction. If all nations agreed to join the corner on the falling metal, they could not all bring their new demand to bear on the new supply at the same time. As the mines are limited and local, a new supply would touch the market only at one point. Hence the coinage union implies no aggregation of force at all. Make the union embrace the whole world, and the effect is just the same as if there were none at all, the matter standing simply on the natural laws for the distribution of the precious metals. Control of demand by a corner or of supply by a monopoly acts more efficiently the smaller and closer the market is, and, conversely, the larger and wider the transaction, the less the efficiency. Furthermore, a corner to succeed must make sure that there is no source of supply, and that it has to deal only with an amount which can be computed. The gold corner on Black Friday, 1869, was ruined when the Secretary of the Treasury ordered sales of gold. A monopoly in like manner, must be able to count on steady and uniform demand. The coal combination failed when the hard times suddenly contracted the demand for coal. Hence the movement towards a wider market, embracing a larger quantity, is always a movement towards less, and not towards greater control by artificial expedients.

Applying these observations to the matter before us, I have to say (1) that I consider the inference that a coinage union would do what France did under the double standard, only more surely and efficiently, quite mistaken; (2) as to the alternate standard, I do not believe that the alternation would work on a worldwide scale at all. I regard its operation in France as fully accounted for by the relations of the three countries, England, France, and Germany; (3) as to bimetallism, the coinage union, instead of gaining more stringent control to counteract and nullify the effect of changes in supply of either metal, would have less effect in that direction the larger it was.

Having thus examined the nature of artificial interferences with value, and their limitations, I return to my proposition that to establish a concurrent circulation is just as impossible as to square the circle or to invent perpetual motion. No doubt it is difficult, perhaps impossible, to make a demonstration of a negative proposition like this. The burden of proof lies upon those who bring forward attempts to solve the problem, and I can justly be held only to examine and refute such attempts. No proof has ever been offered by any of the persons in question. No one of them has attempted as much of an analysis of the effect of artificial expedients on value as the one I have just offered. No one of them has attempted to analyze the operation of the proposed coinage union, to show how or why they expect it to act as they say. They pass over this assumption as lightly as our popular advocates of silver assume that re-monetization would put an end to the hard times. They content themselves with analogies, or with loose and general guesses that such and such things would result from a coinage union. We all know what dangers lurk in the argument from analogy. The further you follow it the further you are from the point. An analogy has no proper use save to set in clearer light an opinion or a proposition which must rest for its merits on an appropriate demonstration. Thus the attempt has been made to illustrate the power of governments to control the fluctuations of the metals by the analogy of a man driving two horses. It is said that this is “controlling natural forces for definite results,” and it is asked, “if one man in his sphere can do this, why may not the collective might of the nation do this in its sphere?” My answer is that it is in the sphere of man to tame horses, but it is not in the sphere of nations to control value, and therefore the analogy is radically false. I cannot be held to argue both sides of the question. I am not bound to put all the cases of the adversaries into proper shape for discussion and then to refute them. I plant myself squarely upon the fundamental principles of the science of which I am a student and deny that any concurrent circulation is possible except under temporary and accidental circumstances, because it involves the proposition that legislation can control value to bring about desired results. A concurrent circulation must mean one which is concurrent, and if it is to offer debtors the whole mass of both metals to pay their debts with, it must be permanent. If both metals should be used for a time until prices and contracts were adjusted to them, and then one should rise so much as to go out of use, the consequences would be disastrous to debtors beyond anything now apprehended.

I proceed then to criticize the notions of a concurrent circulation, as to their common features. The error with them all is that they try to corner commodities the supply of which is beyond their control or knowledge. That is a fatal error in any corner, as I have already shown. If it were proposed that each nation should have a certain amount of circulation, composed of the two metals in equal parts, and then that the circulation should be closed, then the corner might work and there would be some sense in it. Suppose that a nation had two hundred millions of fixed circulation, half gold and half silver, and that this sum was not in excess of its requirement for money. Then I do not see how either half of the coinage should fall relatively to the other; but if silver did fall, every dollar of silver which was sought would involve the relinquishment of a dollar in gold and this exchange would act on equal and limited amounts of each metal. It would then depress one metal and raise the other to an exactly equal degree. The balance might, in that case, be retained. The hypothesis of a closed circulation is, however, preposterous. No one thinks of it.

The plan of a concurrent circulation with a free mint strikes, upon close examination, at every step, against difficulties of that sort which warn a scientific man that he is dealing with an empirical and impossible delusion. How is it to be brought about? The movement towards a bimetallic circulation would never begin unless the ratio of the coinage was the market ratio. It would not go on unless the mint ratio followed every fluctuation of the market. It would not be accomplished unless the mint ratio at last was that of the market. It would not remain unless the market ratio remained fixed. But the mint ratio cannot be changed from time to time. If it were, the result would be inextricable confusion in the coins, driving us back to the use of scales and weights with which to treat the coins as bullion.

If we pass over this difficulty, and suppose, for the sake of argument, that the system had been brought into activity, the reasons why it could not stand present themselves in numbers. They all come back to this, that the supply is beyond our knowledge and control. If the supply of either metal increased, it would overthrow the legal rating at the point at which it was put into the market, and would destroy the equality there. Its effects would spread according to the amount of the new supply and the length of time it continued. The bimetallists seem to forget that an increased demand counteracts an increased supply only by absorbing it under a price fluctuation. The same error is familiar in the plans for perpetual motion. Speculations to that end often overlook the fact that we cannot employ a force in mechanics without providing an escapement which is always exhausting the force at our disposal. So the bimetallists seem to think of their enhanced demand as acting on value without an actual action and reaction which consist in absorbing supply under a price fluctuation. The new metal would therefore pass into the circulation and would destroy the equilibrium of the metals in the coinage. If this new addition were only a mathematical increment it would suffice to establish the principle for which I contend and to overthrow the bimetallic theory, for if I see that any force has a certain effect I must infer that the same force increased or continued would go on to greater effects; and if the final effect is not reached it is because the force is not sufficient, not because there is an act of the legislature in the way. If then, silver entered the circulation, gold would leave it and be exported, if the exchanges allowed of any export, or would be hoarded and melted. The silver-producing countries would therefore gravitate towards a silver circulation only, and other countries towards a gold circulation.

Here another assumption of the bimetallists is involved. They assume that the metal to be exported would be the one which falls. Thus, if all nations had a bimetallic circulation, and if the supply of silver in the United States increased, it would be necessary that this silver should be proportionately distributed among all the nations in order to keep up the bimetallic system. No bimetallist has ever faced this question. They assume that Americans would pay their foreign debts with silver in that case, and they rely on the international legal tender law to secure this. This is one of the fallacies of legal tender referred to at the outset. Rates of exchange and prices would at once vary to counteract any such operation, just as they always counteract the injustice of a forced circulation and throw it back on those who try to perpetrate it. It may suffice to put the case this way. If we had both metals circulating together so that a merchant obtained both in substantially equal proportions, and if silver should fall ever so little in our markets, owing to increased production, and if a foreigner were selling his products here, intending to carry home his returns in metal, which metal would he retain to carry away? Obviously that one which at the time and prospectively had the higher value. Rates of exchange and prices would adjust themselves so as to bring about the same result through the mechanism of finance. This is one of the most subtle questions involved in the general issue, but it is vital to the bimetallic theory.

Some writers have satisfied themselves with general opinions—guesses, I am obliged to call them—that if the fluctuations were kept within certain limits the concurrent circulation would stand. They probably rely on an element analogous to friction which unquestionably acts in economy and finance. This element consists of habit, prejudice, passion, dislike of trouble. It acts with great force in retail trade, and in individual cases, and in small transactions. Its force diminishes as we go upwards towards the largest transactions, where the smallest percentages give very appreciable sums. It seems to me that the bimetallic system reduces this friction to a minimum. If a man has to spend a dollar he does not go to a broker to buy a trade dollar with a greenback dollar, and save a cent or two, but if he has both a gold dollar and a silver dollar in his pocket (and, under the bimetallic system, the chances are that when he has two dollars he will have one of each), it needs only the lightest shade of difference in value to determine him which to give and which to hold. A bank of issue, holding equal amounts of the two metals with which to redeem its notes, would find an appreciable profit in giving one and holding the other, and it would require nothing but a word of command to the proper officer, involving no risk at all. Hence I say this friction would be reduced to its minimum under the bimetallic system. It is astonishing what light margins of profit suffice to produce financial movements nowadays; and the tendency is to make the movements turn on smaller and smaller margins. Five in the thousand above par carries gold out of this country. Four in the thousand carries it from England to France. When the French suspended specie payments a depreciation of two in the thousand on the paper sufficed to throw gold out of circulation. A variation in the ratio of metals from 15.5:1 to 15.6:1 is a variation of six and one-half in the thousand. I do not see how small a variation must be in order to justify any one in saying that a bimetallic circulation could exist in spite of it. Therefore it seems to me that the more accurately the bimetallic system was established the more delicate and more easily overthrown it would be, while if it was not accurately established it would not come about at all. I submit that such a result is one of the notes of an absurdity in any science.

An analogy has been suggested in illustration and support of the bimetallic theory that two vessels of water connected by a tube tend to preserve a level. I have already indicated my suspicion of all analogies, but I will alter this one to make it fit my idea of bimetallism. Suppose two vessels capable of expansion and contraction to a considerable degree, under the operation of forces which act entirely independently of each other, so that the variations in shape and capacity of each may have all conceivable relations to the corresponding variations of the other. Suppose further that each is fed by a stream of water, each stream being variable in its flow and the variations of each having all possible relations to the variations of the other. The fluctuations in capacity may represent fluctuations of demand, and the fluctuations of inflow, fluctuations of supply. Would the water in the two vessels stand at the same level except temporarily and accidentally, even though the two vessels were connected by a tube? The analogy of the connecting tube could not be admitted even then, because it brings into play the natural law of the equilibrium of fluids, to which the legal tie between the metals is not analogous. If we desire to make the analogy approximately just, in this respect, we may suppose that each vessel has an outlet and that a man is stationed to open the outlet of the vessel in which the water is at the higher point so as to try to keep them both at a level. It is evident that his utmost vigilance would be unavailing to secure the object proposed. I do not borrow the analogy or adopt it. I only show how inadequate it is, in the form proposed.

There is another group of propositions which have many advocates amongst us, of which something ought to be said—propositions of those who want to use silver as a legal tender at its value, under some scheme or other. Some want a public declaration, by appointed persons, from time to time, of the market value. Any such plan would throw on the officers in question a responsibility which would be onerous in the extreme, so much so that no one could or would discharge it; and it would introduce a mischievous element of speculation into the payment of all debts. It is, besides, open to the objections which may be adduced against the other plan, which is to have either coins or bars of silver, assayed and stamped, legal tender for debts at the market quotation. Here we need to remember the definition of legal tender given at the outset. If these silver coins and bars are convenient for the purpose they will come into use by custom and consent at their value. If they really pass at their market value, there will be no advantage to the debtor. One who has silver and wants to pay a debt can do so at its value by selling the silver. In this sense every man who produces wheat, cotton, iron, or personal services, pays his debts with them at their value. One who produced something else than silver would have no object in selling it for silver, to pay his debt with at the value of silver. He would have the trouble of another transaction, he would have to buy silver at its selling price, and the creditor to whom he paid it would have to sell it for money at the broker’s buying price, with no advantage to either, but only to the broker. If silver passes at its value, legal tender has no force for it; if it is to have forced circulation in some way, it will help the debtor, as all forced circulation does, by enabling him to keep part of what he borrowed. If then these schemes really mean that silver shall pass at its value, they are of no use. It does so now. If they mean that silver shall be enabled to pay debts in some other way than iron, wheat, cotton, etc., then we know what we are dealing with. There is just as much reason why the government should pay for elevators and issue certificates of the amount and quality of grain, which should be legal tender, as there is why it should assay and stamp silver for that purpose, and issue notes for it. These cases only serve to bring out the distinction between money and merchandise, and to show that the perfection of money does not lie in the direction of a multiple legal tender, but of a single standard, as sharp and definite as possible. Such a standard has the same advantages in exchange as the most accurate measures of length and weight have in surveying or in chemistry, and it is turning backward the progress of monetary science to introduce fluctuations and doubt into the standard of value, just as it would be to cultivate inaccuracy in weights and measures.