65. REASONS FOR VARIATION IN RELATIVE VALUE OF GOLD AND SILVER' BY FRANCIS A. WALKER It is easy to find reasons for variation in the gold-value of silver and the silver-value of gold. 1. The precious metals have in a great degree their separate sources and conditions of supply. Silver is generally drawn from deep mines. A very large part of all the gold produced in the history of the world has been drawn from "placers," surface deposits, where the metal lies in fine grains mingled with the sand in the beds of old rivers, or has been derived by the process of hydraulic mining, where the force of water is directed by engineering skill to accomplish the same work in a few hours which in the case of the "placer," or "gulchgold," has been done by centuries of frost and flood. Hence the production of silver is generally pursued through systematic mining operations. The production of gold is more largely influenced by accidental discoveries. Moreover, owing to its very low affinity for other metals, gold is largely found native, while silver, from the high degree of affinity it exhibits, is generally found in ores; so that the problem of its production involves both mechanical and chemical elements. It will appear from what has been said that the comparative production of gold and of silver is likely to be influenced greatly by accidental discoveries of deposits, which are likely especially to favor gold production, and to be influenced greatly, also, by the progress of the arts, which is likely especially to favor silver production. Europe and South America have been the great historical silver continents; Asia, Africa, and Australia have chiefly, almost exclusively, produced gold. North America is the only continent that has produced the two metals in anything like equal value. First through the Mexican mines it made important contributions to the stock of silver; then the California discoveries constituted it the greatest gold field of the world; and more recently the extensive silver deposits of Nevada have turned the scale of production to the side of the other metal. 2. The precious metals have, in a certain degree, their separate sources of demand. The uses of gold and silver in the industrial I Adapted from Money, Trade and Industry, pp. 139-44. (Henry Holt & Co., 1889.) arts are widely different. In the ornamental arts the tastes of an age may assign a preference now to one and now to the other. Even in their function as money, gold and silver have not been wholly of common or indifferent use. The habits and traditions of a people and the scale of their exchange transactions may make an ounce of gold, for instance, more desirable for use as money than a certain number of ounces of silver, while among other people that quantity of silver may have a decided preference for the uses of exchange. Practically it is of great consequence that the metal or metals to be employed as money, while possessing high value for a given bulk and weight, should yet be found in quantity sufficient to afford pieces of such purity as to remain bright and clean in circulation, of such size as to be handled and carried about conveniently, in number sufficient for the needs of the community. It is evident that the number of money pieces will depend upon the spending habits of the people, and that these habits will vary with their social condition, the equality or inequality with which wealth is distributed among the classes of the community, the rapidity of circulation, etc. Copper once formed a considerable part of the monetary circulation of Europe, with the highest advantage to the commercial community. But copper has now dropped out of use as money in all advancing nations except as the smallest of small change. Within the last three hundred years silver has become the ordinary money of the civilized world, and it has already become quite a fashionable doctrine that even silver has in large measure survived its usefulness, and has grown too heavy to serve as the money of communities like those of Europe and North America. However this may be, it is manifest that in the United States, England, and perhaps France, the prevailing rates of wages and prices are such as naturally to create a preference, from considerations of convenience only, for gold, in place of silver, as the money of general circulation. We have seen that the so-called precious metals have each their own sources and conditions of supply which are widely different from those of the other, and that they have also, in a certain degree, separate sources of demand. Evidently here is the occasion for large and frequent variations of value in the gold-value of silver and in the silver-value of gold. But while this occasion for a divergence in value between the precious metals exists, there are causes which serve more or less effectively to restrain that divergence. These are: 1. The durability of the metals already noted. We have seen how this property tends to keep the value of gold and silver comparalively steady, since the great mass at any time in existence allows an excess or deficiency of production for one year, or for a term of years, to exercise but small influence. The same cause operates to reduce the extent of the variations in the gold-value of silver and the silver-value of gold. If the crop of corn falls off in the same year in which the output of coal is exceptionally large, we look to see the power of a given quantity of corn to purchase coal largely increased; but a very great increase in the yield of silver coincidently with a considerable reduction in the yield of gold could not seriously affect the relative value of the two metals unless persisted in for a term of years. 2. The interchangeable use of the two metals in the arts of decoration and for the purposes of ornament has a tendency to reduce variations in their relative value. While some of the uses of each metal are characteristic, there is also a wide field occupied by them in common or indifferently. Articles of silver and articles of gold are kept for sale in the same shops; they are sold to customers in the same rank of life. A person entering such a shop often has no explicit intention as to the article he is to purchase. He is more likely to know how much he is prepared to pay for something that will answer his purpose. He may buy a small article of gold, or a large one of silver. A fall in the price of either metal, then, promotes its consumption, and thus the fall is in a degree checked. 3. The interchangeable use of the two metals as the medium of exchange has a strong tendency to check variations in their relative value. Although, as we say, each has uses in exchange which give it a preference within that field over the other, there is also ground which they occupy in common or indifferently. For payments of a certain class people can use more silver or less silver, more gold or less gold, with no appreciable diminution of convenience. 66. GRESHAM'S LAW AND BIMETALLISM The operation of Gresham's law, as in the case of debased currency, has been the great barrier to a successful bimetallic system. Given two metals with full legal-tender power and unrestricted coinage at the mints at a given ratio, one metal will drive the other from circulation, wholly or in part, whenever the market ratio varies from the mint ratio. The opportunity for profit in taking the cheaper metal to the mint will result in the expulsion of the dearer metal just as long as that opportunity continues. It should be carefully noted in this connection that unlimited coinage of both metals is essential to the operation of the law. Another essential condition for the operation of Gresham's law under bimetallism is that both metals should have equal legal-tender power in the settlement of obligations. The opportunity to secure the profit obtained by exchanging coins depends upon their being equally acceptable by law. If the less valuable metal can be refused, it is obvious that it has no power to drive out the more valuable money. It is evident from this that an almost instantaneous remedy for the disappearance of the dearer money is the withdrawal of the legal-tender power from the cheaper. 67. GRESHAM'S LAW QUALIFIED1 BY ROBERT GIFFEN There is a good deal of misunderstanding of the real law as to bad money "driving out" good, and an overrated metal in a bimetallic system "driving out" the underrated metal, which is commonly spoken of as the Gresham law. It is assumed that the money driven out must be physically driven out of the country, i.e., exported, and this export is regarded as a fundamental part of the Gresham law. The "law," however, was only an observation that it is difficult, if not impossible, for good and bad coins of the same metal to circulate together, and the good coins are selected for exportation when a demand for exportation arises. The export is not a necessary part of the "law." In point of fact, also, good and bad coins will circulate together in a given country as if they were all good when the circulation itself is not in excess of the demand for it. In the case where bad coins drive out good coins of the same metal, the good and bad coins are both doing the same work; so the good are driven out of circulation when there is a surplus because they are more useful for other purposes than the bad, containing more of the metal. When it is a question, however, between two different metals, the coins of the different metals may be performing quite different work. 'Adapted from Economic Inquiries and Studies (G. Bell & Sons, London, 1904), II, 162-65. |