Section IX. The Effect of Employing Two Metals Both as Standard Money, and of Using Subsidiary Coins, at Less Than the M

Some nations have made use of two metals, gold and silver, both, as standard money, or legal tender to any amount.

For this purpose it was necessary to fix a certain relative value between them. A certain weight of the one was taken to be equal in value to a certain weight of the other.

If the proportion thus fixed for the coins were accurately the proportion which obtained in the market, and continued so invariably, there would be no inconvenience in the two standards. The value of any sum would always be the same in either set of coins.

The relative value, however, of the two metals the market is fluctuating.

Suppose that the value fixed for the coins is that of 15 to 1; in other words, that one piece of gold is equal to 15 pieces of silver of the same weight. A change takes place in the market, and this value becomes as 16 to 1. What follows?

A man who had a debt to pay, equal, let us say, to 100 of the gold pieces, or 1500 of the silver, finds it his interest to pay his debt not with gold. With his 100 pieces of gold he can go into the market and purchase as much silver as may be coined into 1600 pieces, with 1500 of which he may pay his debt, and retain 100 to himself. In this manner silver coins would be multiplied; and the quantity of the currency would be increased; its value would, therefore, be diminished; the gold in coins would thus become of less value than in bullion; hence the gold coins would be melted and would disappear.

After a fluctuation in one direction, it may take place in another. Silver may rise, instead of falling, as compared with gold. The relative value may become as 14 to 1. In this case it would be the interest of every man to pay in gold, rather than silver; and in this case it would be the silver coins which would disappear.

Two inconveniences are therefore incurred by the double standard. First, the value of the currency, instead of being rendered as steady in value as possible, is subjected to a particular cause of variation. And, secondly, the country is put to the expence of a new coinage, as often as a change takes place in the relative value of the metals.

The case would be exactly the same, if a seignorage existed. Suppose that 10 per cent. were imposed as seignorage; it would be equally true, that the 100 pieces of gold; were the proportion changed, from 15 to 1, to 16 to 1; would purchase as much silver as would be exchanged at the mint for 1600 pieces of silver. While the market value or the two metals was the same as the mint value, one piece of gold purchased not only as much silver as was contained in 15 pieces or silver, but one-tenth more; after the change which we have just supposed, it purchases in the proportion of 16 to 15, that is, as much as will be contained in 16 pieces, and a tenth more.

The use of silver coins, for the purpose of small payments, or change, as it is called, of the more valuable coins, if they are legal tender only to a small amount, is not liable to the objections which apply to a double standard.

It has, indeed, been affirmed, that if they are issued, at a higher value than that of the metal contained in them, they will occasion the exportation of the gold coins. But it is easy to see that this is a mistake.

Suppose that our silver coins in this country are 10 per cent. above the value of the metal, but legal tender only to the extent of 40 shillings; every man, it is affirmed, has hence an interest in sending gold to Paris to buy silver.

The relative value of gold to silver in Paris and England is naturally pretty nearly the same; let us say as 15 to 1. An ounce of gold, therefore, will in Paris purchase 15 oz. of silver. But so it will in England. Where then is the advantage in going to France to purchase it?

You propose to coin it because it is 10 per cent more valuable as coin.

But 10 per cent. of it is taken from you, and hence to you the advantage of the high value is lost.

Your silver coins with 10 per cent. added to them would make the coins of full weight.

Suppose the price of silver to have sunk below the mint proportion, it would then be your interest to pay in silver if you could; but you can only pay to the extent of 40 shillings; it is therefore worth nobody's while to surcharge the market.

Besides, government reserves to itself the right of refusing to coin silver, when it pleases; it can therefore retain it of a high value.

Subsidiary coins cannot send the standard coins out of the country, unless the increased amount of them sink the value of the currency. The standard coins will not go in preference to bullion, unless they can be purchased cheaper than bullion.