Irving Fisher

“ Even if only Switzerland had a system of bimetallism in successful operation, it would, until its breakdown, keep together and equalize the currencies of the whole world, wherever either gold or silver was standard. In fact, the world would have all the benefits of bimetallism enjoyed by Switzerland without its evils and dangers. ”

“ Whether the half billion dollars of new currency, which came into circulation with the Bland and Sherman Acts, are of silver, overvalued to the extent of 50 per cent, or of paper, overvalued to the extent of 100 per cent, does not really affect the principle of the limping standard which keeps silver dollars at par with gold. The idle silver in the treasury vaults represents mere waste, a subsidy given by the government to encourage silver mining. ”

“ VII.32 But though such a result—a condition of irredeemable paper money as the sole currency—is possible, it has seldom if ever proved desirable. Unless safeguarded, irredeemability is a constant temptation to abuse, and this fact alone causes business distrust and discourages long-time contracts and enterprises. Irredeemable paper money has almost invariably proved a curse to the country employing it. While, therefore, redeemability is not absolutely essential to produce parity of value with the primary money, practically it is a wise precaution. ”

“ The gold currency of the world is, roughly speaking, perhaps $5,000,000,000; the annual production of silver, reckoning at its present market price, is roughly about $100,000,000. Supposing a system of international bimetallism at, say, 36 to 1 to be initially in normal equilibrium, consider the effect of an enormous increase in the silver production, say a half, or $50,000,000. Then a hundred years would be required to push out gold without taking into account the fact that, as the pushing proceeds, the excess of production over consumption steadily declines. ”

“ When bimetallism has broken down at one ratio, it can always be set in operation again at another, but the transition requires a depreciation of the currency. The only way of reintroducing the metal which has passed out of the currency reservoir is by lowering the amount of it in the monetary unit,—unless the still more drastic measure is adopted of raising the coinage weight of money already in circulation. ”

“ VII.30 So long as the quantity of silver or other token money, e.g. paper money, is too small to displace gold completely, gold will continue in circulation. The value of the other money in this case cannot fall below that of gold. For if it should, it would, by Gresham's Law, displace gold, which we have supposed it is not of sufficient quantity to do. The parity between silver coin and gold under the "limping" standard is, therefore, not necessarily dependent on any redeemability in gold, but may result merely from limitation in the amount of silver coin. ”

“ The limping standard without the gold-exchange attachment may at any time break down, if the silver (or whatever else the overvalued money may be) should become so redundant, relatively to trade, as completely to displace gold. As soon as all gold is driven abroad, parity with gold ceases. But with the gold-exchange system this catastrophe is avoided. In fact, with this system it is not necessary to have gold in circulation at any time. ”

“ If it is at the right, silver will be cheaper than gold and will move it leftward; if it is at the left, gold will be cheaper than silver and will move it rightward. Under these circumstances, evidently, equilibrium must lie between these extremes, as in Figure 7 b. The conditions of production and consumption under which bimetallism can succeed are therefore (1) that under silver monometallism a gold dollar would in equilibrium be cheaper than a silver dollar, and (2) that under gold monometallism silver would be cheaper than gold. ”

“ The consumption in the arts would be the same; but the waste and absorption of silver money constitute an additional drain. Therefore, consumption (equal to production before) will now exceed production, and the high original level cannot be maintained. The conclusion follows that, whatever the new level of permanent equilibrium, it lies below the old. The same argument, mutatis mutandis, proves that for gold the new level of permanent equilibrium lies above the old. ”

“ The paper would keep its parity with gold just as well if there were no silver. A silver dollar as silver is worth less than a gold dollar just as truly as a paper dollar, as paper, is worth less than a gold dollar. The fact that the silver is worth more than the paper will not avail in the least to make the paper worth a whole dollar so long as the silver is not itself worth a whole dollar. A pillar which reaches only halfway to the ceiling cannot hold the ceiling up any more than a pillar an inch high. ”

“ Bimetallism spreads the effect of any single fluctuation over the combined gold and silver markets.*78 The steadying power of bimetallism depends on the breadths of the reservoirs, and not on the position of the film f. It remains in full force, no matter what may be the proportions of gold and silver money, and is as great when only one nation is bimetallic as when the whole world adopts the system. ”

“ The silver dollars (and therefore the silver certificates) maintain their value on a parity with gold primarily because they are limited in amount. If any question were raised as to their parity with gold, the treasury would probably offer to specifically redeem them in gold. No law directly provides for the redemption of silver in gold, but it is made the duty of the Secretary of the Treasury to take such measures as will maintain its parity with gold. ”

“ Gold is the standard and is freely coined. A limited number of silver dollars, worth, moneywise, more than double their value bullion-wise, are a heritage of former bimetallic laws long since rendered inoperative by the paper money of the Civil War and expressly repealed in 1873. The two attempts of 1878 and 1890 to return halfway to bimetallism by the purchase of silver—attempts discontinued in 1893—have greatly swollen the volume of coined silver. ”

“ A bimetallic level, therefore, when bimetallism is feasible, must always lie between the levels which the two metals would have assumed under gold monometallism, gold being currency and silver not, and for the same reasons it must lie between the levels which the two metals would have under silver monometallism, silver being currency and gold not.*75 In all our reasoning we have supposed a given legal ratio between the two metals. But bimetallism, impossible at one ratio, is always possible at another. ”

“ If its quantity increases indefinitely, it will gradually push out all the gold and entirely fill the money reservoir, just as silver would do under bimetallism if produced in sufficiently large amounts. Likewise, credit money and credit in the form of bank deposits would have this effect. To the extent that they are used, they lessen the demand for gold, decrease its value as money, and cause more of it to go into the arts or to other countries. ”

“ If, just previous to the introduction of bimetallism, the silver level in Sb is below the gold level in Gb the statute introducing bimetallism will be inoperative, i.e. the silver bullion will not flow uphill, as it were, into the money reservoir; but if, as in Figure 6 a or in 7 a, the silver level is higher, then as soon as the mints are open to silver, it will flow into circulation. Being at first cheaper than gold, it will push out the gold money through the left tube (i.e. by melting) into the bullion market. ”

“ Such limitation is usually sufficient to maintain parity despite irredeemability. This is not always true, however; for if the people should lose confidence in some form of irredeemable paper or token money, even though it were not overissued, it would depreciate and be nearly as cheap in money form as it is in the raw state. A man is willing to accept money at its face value so long as he has confidence that every one else is ready to do the same. ”

“ The manner in which most modern civilized states have solved the problem of concurrent circulation has been to use gold as a standard, and to use silver, nickel, and copper chiefly as subsidiary money, limited in quantity, with, in most cases, limited amounts of paper money, the latter being usually redeemable. ”

“ Its only real effect to-day is to mislead the public into the belief that in some way it keeps or helps to keep silver certificates at par with gold;*92 whereas they are kept at par by the limitation on its amount. The silver and its paper representatives cannot fall below par without displacing gold, and they cannot displace gold because there are not enough of them. ”

“ He will take only the best, because our legal-tender laws do not bind him.
VII.5 The better money might conceivably be used in exchange at a premium, i.e. at its bullion value; but the difficulties of arranging payments in it, which would be satisfactory to both parties, are such that in practice it is never so used in large quantities. In fact, the force of Gresham's Law is so great that it will even sacrifice the convenience of a whole nation. For instance, in Italy fifteen years ago the overissue of paper money drove not only gold across the Alps, but also silver and copper. ”

“ Under the law of 1875, the greenbacks were by 1879 retired in sufficient numbers to restore parity with gold; but by a counterlaw of 1878, 347,000,000 of them were kept in circulation and are in circulation now. As soon as redeemed, they must be reissued; they cannot be retired. They are a fixed ingredient in our money pot pourri, neither expansive nor shrinkable. They have been kept at par with gold because: (1) they are limited in amount; (2) they are redeemable in gold on demand ”

“ Since, however, almost all the money can be used as bank reserves, even national bank notes being so used by state banks and trust companies, the proportionate relations between money in circulation, money in reserves, and bank deposits will hold true approximately as the normal condition of affairs. ”

“ The temporary and normal equilibriums which have been considered separately are in fact quite distinctly separated in time. The time of redistributing existing stocks of metal, according to a newly enacted law, depends on the rapidity of transportation, melting, and minting, and would be measured in months or weeks. ”

“ In the second case, x is supposed to be smaller than the contents of the money reservoir below the line mm; that is, there is not enough silver to push all the gold out of circulation. Under these circumstances, disregarding for the moment any change in production or consumption, the opening of the pipe—the opening of the mints to silver—will bring the whole system of liquids to the common level mm. ”

“ The breadths of the reservoir, which here play the important rôle, are the rate of increase of commodity relative to decrease of marginal utility. The law of inverse breadth applies with exactness only to static, or short-time readjustments. ”

“ Whereas silver money had been over-valued by the previous laws, by these new laws gold was overvalued. That is, the commercial ratio continued to be near 151⁄2 to 1, while the monetary ratio was slightly greater. This remained the case up to 1850; consequently, in accordance with Gresham's Law, gold money, now the cheaper, drove out silver money, and the United States became a gold-standard country. In 1853, to prevent the exportation of our subsidiary silver coins, their weight was reduced. ”

“ One possibility is obvious, namely, that gold may be completely driven out, the result being the same as already represented in the lower part of Figure 6. In the second possibility, gold will not be pushed out. ”

“ These could circulate in Southern France at a par with corresponding coins there because France and Italy belonged to the Latin Union. Consequently, for a time there was very little small change left, below the denomination of 5 lire notes. Customers at retail stores often found it impossible to make their purchases because they lacked the small denominations necessary, and because the storekeeper lacked the same small denominations, and could not make change. To meet the difficulty, 30,000,000 of 1 lire notes were issued, and these were so much in demand that dealers paid a premium for them. ”