would respond much more nearly than at present to the natural influence of changes in the value of silver bullion. It is argued that the Philippine Islands would not be subject under such a system to the same drain upon their money supply and the dearth of currency which was felt last year during the movements of the forces of the civilized powers in China. These comparative advantages of the proposed plan over present conditions would undoubtedly be felt in some degree, because of the means afforded, when an increase of currency was required, for the direct importation of silver bullion from the United States and from other silver-producing countries and its speedy conversion into money.

Notwithstanding these advantages, it is difficult to see how a drain upon the existing currency supply would be entirely averted if the new coins were of the same weight and fineness as the Mexican dollars. They would serve practically the same purpose in exchange in China and in other countries unless mere custom should cause a fictitious preference for the Mexican coins. The ebb and flow of such money, when the demand for it increased or diminished in the islands in relation to the demand in China or other countries, would be in itself a normal movement and in harmony with the natural laws of trade. Such a movement is not to be deprecated, except where it is influenced by artificial causes. But such a project would still leave the Philippine Islands subject to all the fluctuations in the bullion value of silver and would more or less hamper their trade with gold-standard countries.

FUNDAMENTAL OBJECTIONS TO A SILVER STANDARD.

All projects which contemplate the continuance of a silver basis in the Philippines without any fixed relationship between the money of the islands and the gold standard are, in my opinion, hostile to the best interests of the islands and to the development of American trade. The great majority of trading nations have now adopted the gold standard. Gold, by a process of natural selection, has become the money of international trade and the standard by which value is measured throughout almost the entire commercial world.

A nation whose monetary system is based upon silver is at a serious disadvantage in its trade relations with other commercial nations. All trade between silver countries and gold-standard countries is carried on under conditions which are more or less speculative. This arises from the fact that the value of silver as expressed in gold is subject to constant fluctuations. These fluctuations, it is true, are smaller than was the case during the ten years from 1885 to 1895, but are not the less disturbing to merchants engaged in foreign trade and to those who manufacture for that trade, in view of the narrow margins of profit upon which their transactions are carried on under modern conditions of competition. The fluctuations are not sufficient to insure a low cost of production in silver countries, but they are sufficient to disturb

materially the calculations of profit and the prices which must be made by merchants in gold-standard countries in dealing with those of silver-standard countries. Either the merchant in the gold-standard country must do business at great risk of loss or must make the price of his goods high enough to cover all possible margins of fluctuation. In any case the tendency of such conditions, from the fact that they are speculative, is to impose a higher cost for goods upon purchasers in silver-standard countries, and to impose a greater risk of loss and a greater uncertainty in business upon the exporter and importer of gold-standard countries. In so far as this danger of fluctuation can be obviated by establishing a fixed relation between gold and silver the speculative element in business will be diminished. This I believe to have been one of the declared purposes of the advocates of bimetallism and of the free coinage of silver, as well as those who believe in the extension of the gold standard.

HOW THE GOLD STANDARD ATTRACTS CAPITAL.

An important reason for the adoption of the gold standard by any undeveloped country is the inducement held out for the investment of capital there. The investor in negotiable securities, paying usually a moderate interest of from 3 to 6 per cent, can not afford to see his profits swallowed up by fluctuations in the gold value of silver. English establishments in the Orient, like the Hongkong and Shanghai Banking Corporation, have been compelled to make a large deduction from their nominal dividends in order to transfer those dividends in gold to their English stockholders. In the case of this bank, and in some other cases, the profits have been so large that an ample margin for gold dividends has remained after charging up what is classified as "the loss on exchange." This would not be the case with securities paying a fixed and low return if the dividends on such securities were payable in silver. A declared dividend of 3 per cent in silver would shrink to less than 1 per cent when converted into gold. For this reason the accumulated capital of the great civilized countries has in recent years refused to seek investment in silver countries. Since it is in the gold-standard countries that the great surplus of capital has been accumulated, which is now being offered in the world's money markets for the development of the tropical countries, it is absolutely essential that monetary legislation, as well as that regarding the sanctity of contracts and the security of property, should be such as to attract the investors of these countries.

Experience has demonstrated that capital seeking investment can be attracted in no other way than by the adoption and maintenance of the gold standard. The Empire of Russia adopted the gold standard in 1896 under the advice of the finance minister, M. de Witte, with the avowed object of attracting foreign capital into Russia. The result was a remarkable verification of the foresight of the minister of

finance. The issues of shares in joint stock companies in Russia, which had been 1,296,214,000 rubles during the entire period from 1799 up to 1895, when the measures for adopting the gold standard were set in operation, or an average of about 13,500,000 rubles per year, increased to 232,040,000 rubles in 1896; 239,324,000 rubles in 1897; 256,237,000 rubles in 1898; 423,585,000 rubles in 1899; and about 300,000,000 rubles in 1900; making in this short period total issues of more than 1,450,000,000 rubles ($730,000,000).

The same policy influenced the Government of Japan in the adoption of the gold standard in 1897, and the results were equally striking. The capital invested in stock companies in Japan rose from 268,635,810 yen (about $134,000,000) at the close of 1895 to 878,154,396 yen (about $438,000,000) at the close of 1899. The conditions in British India led to the attempt to give a fixed value to the silver rupee as early as 1893. There also one of the chief motives was the introduction of capital from Great Britain and abroad, and the same motive influenced the more resolute steps recently taken by the Indian government to create a gold reserve and make the value of the rupee unchangeable in its relation to gold.

The policy adopted in these countries has been subject to some criticism upon the ground of monetary disturbances which occurred not long after the adoption of the gold standard. Consideration of the facts will show, however, that these disturbances were due to the too rapid realization of the purposes of the new system, and to the too extensive discounting of its effects, rather than to any faults inherent in the system. Into both Russia and Japan the influx of foreign capital was great and rapid. In both cases active speculation was invited by the very fact that confidence had been so much strengthened by the adoption of the gold standard. Capital was invested in projects which did not prove immediately productive, imports of merchandise increased under the stimulus of visible prosperity, and a check inevitably came to the rapidity of this process of development. The United States went through a similar experience in 1857, and again in 1873, as the result of undue investments in railways and other important works. These checks to industrial development are almost inevitable in a new country, but never set the country back to the state of development existing before the period of undue speculation, and the works which are premature in the sense that they draw in undue proportion upon the existing resources of the country often prove of high value in its ultimate development.

THE MONETARY EXPERIENCE OF JAPAN.

In the case of Japan, the tendency to undue speculation and embarkation upon extensive public works was intensified by the transfer to the Japanese treasury of the large war indemnity exacted from China by the treaty of 1895. Such a violent transfer of capital, contrary to

the normal movements of commerce, had a similar effect in stimulating speculation after the war between Germany and France in 1870, and exposed Germany much more severely than France to the depressing influences of the crisis of 1873. The crisis in Japan, so far as it was a reality, was limited in its influence chiefly to the banking world and the market for capital. It was not accompanied by the extensive closing of factories, the fall of wages, and the enforced idleness of labor which distinguish a period of serious commercial depression. This is the weighty testimony of Japanese officials and financiers, with whom I conferred at Tokyo.

That the crisis in Japan was due to the tendency to overspeculation is plainly shown by the statistics of foreign trade, which appear below. These figures indicate that the importation of machinery and raw material for new enterprises, as well as of luxuries, created a heavy excess of imports of merchandise, which had to be settled by the export of gold. Japan, in spite of her great progress during the present generation, is not a rich country, and a comparatively limited drain upon her monetary supply created a more serious impression than if she were possessed of greater resources. Her entire stock of gold at the close of 1899, according to the official estimates made by the Financial Annual of Japan, recently issued by the department of finance at Tokio, was only 93,360,986 yen, or about $1.05 per capita. This sum, equivalent to gold resources of only about $80,000,000 for the larger population of the United States, was perhaps an inadequate basis upon which to inaugurate the gold standard. The gold stock, however, including that held in reserve, was equal to more than one-third of the money in actual circulation, and is still equal to about one-sixth of the circulation. The official estimates of the monetary stock of Japan for recent years are as follows:

Foreign trade balances create a more immediate and powerful impression upon monetary conditions in Japan than in more advanced countries because of her small reserve resources in accumulated capital and the resulting absence of the steadying and mitigating influence of a flexible stock market. An "adverse" foreign balance has to be settled in gold, because it can not be settled by the transfer of credits. and securities. These conditions have brought their own remedy by

arresting imports of foreign merchandise and stimulating exports from Japan. How effectively and promptly this corrective has worked may be judged by comparing the trade balances for the previous years with those of the nine months ending with September last in the following table, which is compiled from the Financial Annual of Japan and from the monthly Return of the Foreign Trade of the Empire of Japan for September, 1901:

These figures show that an excess of imports of merchandise which amounted to 82,831,852 yen (c. $41,000,000) in 1900, has been reduced to 27,783,452 yen for the first nine months of the present year, or to the rate of about $18,000,000 per year. The healthful effect of this movement in merchandise is reflected in the movement of specie and bullion, chiefly gold, which showed an excess of exports of 45,189,228 yen for 1900, but showed a balance of imports amounting to 1,371,129 ven for the first nine months of 1901. For the three months ending with September last the aggregate exports of specie were less than 500,000 yen and the imports were more than 6,100,000 yen.

Analysis of the real conditions in Japan, Russia, and British India, therefore, will not justify the conclusion that they would have been better off under the silver standard than they are to-day; that they have not already greatly profited by the adoption of the gold standard, or that they will not profit by it to a still greater degree in time to come. It was freely admitted by the managers of the foreign banks in Manila, whose statements are appended to this report, and by the managers of those banks in Hongkong, that the Government of the Philippine Islands would be able, if they took the proper measures, to maintain the gold standard unimpaired.

The development of the Philippines may follow in some respects that of other undeveloped countries. There is likely to be speculation and some losses of capital in enterprises which prove to be premature. There is reason to believe, however, that overspeculation and premature development will be much less than in countries like Russia or Japan, because the development of the Philippine Islands will be

WAR 1901-VOL 1, PT I—13