Vol. 6 · pages 421–425

406 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES

407 THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY The facts thus presented led to two conclusions. The first is that the supposed enormous increase in the relative production of silver was an assumption which had no foundation in reality. On the contrary, a glance at the figures for relative production discloses the curious fact that since the beginning of the eighteenth century silver, instead of rising, has been falling in proportion. With the exception of the first quarter of the nineteenth century, silver had formed, throughout the two centuries covered by the table, a diminishing proportion as compared with gold.* Indeed, never was the proportion of silver so low as it was in the latter half of the nineteenth century, and even when after 1873 it began to grow it did not reach half the magnitude it had reached in the beginning of the eighteenth century. The second conclusion which these facts were claimed to sustain was that the value of silver in terms of gold did not move in sympathy with its supply relative to that of gold. According to theory, the value of silver should have been rising because the relative volume of its production had been diminishing. On the other hand, a closer examination of the figures of relative values and relative productions, as given in the foregoing table, instead of showing any close correlation (see Chart III) between them, pointed to the contrary. Instead of supply and value being inverse in proportion, it showed that as its supply was falling there was also a fall in its value. Such being the facts of history, it was contended that they gave no support to those who rested their case on over-supply rather than on demonetization as a sufficient explanation for the depreciation of silver. Apart from such minor points, the issue was considerably narrowed by the peculiarity of the events of the twenty years preceding and following the year 1873.† Compare, it was said, the period commencing with 1848 and ending with the year 1870 with the period following 1870, and there emerges the arresting fact that these two periods, though they have been the opposite * In view of this, it is a matter of some surprise that such an eminent economist as Prof. W. Lexis should have ceased to be bimetallist on the ground that the enormous increase of silver militated against the establishment of a permanently high ratio with gold. Cf. his essay on “ The Present Monetary Situation,” in the Economic Studies of the American Economic Association, 1896, Vol. I, No. 4, pp. 273-77. The habit of measuring the production of silver in terms of value is no doubt largely responsible for this quite unfounded notion. † Cf. H. S. Foxwell, “Bimetallism : Its Meaning and Aims,” in The (Oxford) Economic Review (1893), Vol. III, p. 302.

408 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES of each other with reference to the relative values of the two metals, were alike with reference to the changes in their relative supply. The period between 1870 and 1893 on the side of relative production was marked by the preponderance of silver. The period between 1848 and 1870 is an exact parallel to the above period with respect to changes in the relative supply of the two precious metals, only in this case it was gold that had increased in volume. Now, if it is oversupply that governed the value relations of the two metals in the second period (1870-93) the same should be true of their value relations in the first period (1848-70). Was there, then, a disturbance in the relative values of the two metals in the first period anything like what took place in the second period ? It was insisted that the disturbance in the ratios of production of the two metals in the first period was enormously greater than that which occurred in the second period. Indeed, comparatively speaking, the disturbance in the second period was nothing to speak of. And yet their relative value during the first period was well-nigh constant at the ratio of 1 to 15½, while in the second it fluctuated between 16.10 and 26.75. Those, who argued that the value of silver fell after 1873 because of its over-supply, were thus faced with the problem as to why the value of gold did not fall when its supply had become so abundant before 1873. The whole controversy was therefore centred into the question as to what could have made this difference in the two situations ? If the colossal increase in the production of gold in the first period did not raise the value of silver by more than 2 per cent., how was it that a comparatively insignificant rise in the relative production of silver in the second period led to such an enormous rise in the price of gold ? What was the controlling influence present in the one case which was absent in the other ? Those who held that it was demonetization of silver that was responsible for its depreciation argued that, though alike in every way, the two periods differed in one important particuar. What distinguished them was the fact that in the former it was a common practice to define the standard money of a country as a certain quantity of gold or a certain quantity of silver. Prior to 1803 the two metals were rated differently in different countries,*but since that date the rating of 1 to 15½ became more uniform, with the result that the monetary standard throughout that period was either 1 gr. of gold or 15½ grs. of * For these ratios, see Appendix, Table B, to A Colloquy on Currency, by H. H. Gibbs.

409 THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY silver. On the other hand, during the second period, the “ or” which characterized the first period was deleted by the silverdemonetizing and suspending decrees. In other words, the first period was characterized by the prevalence of bimetallism under which the two metals could be used inter-changeably at a fixed given ratio. In the second period they could not be so used owing to the fact that the fixed ratio necessary for interchange had been abrogated. Now, could the existence or non-existence of a fixed ratio be said to be such a powerful influence as to make the whole difference that set the two periods in such marked contrast ? That this was the factor which made the whole difference was the view of the bimetallists. It was said that, by virtue of the monetary system prevalent during the first period, gold and silver were rendered substitutes and were regarded as “one commodity of two different strengths.” So related, the conditions of supply had no effect upon their ratio of exchange, as would have been the case in respect of a commodity without a substitute. In the case of commodities which are substitutes, the relative scarcity of one can give it no greater value in terms of the other than that defined by their ratio of exchange, because by reason of the freedom of substitution the scarcity can be made good by the abundance of the other. On the other hand, the relative abundance of one cannot depreciate its value in terms of the other below the ratio of exchange, because its superfluity can be absorbed by the void created in consequence of a paucity of the other. So long as they remain substitutes with a fixed ratio of substitution, nothing originating in demand or supply could disturb their ratio. The two being one commodity, whatever changes take place in the demand or supply of either system beyond the needs of commerce express themselves in the price level exactly as though one of them alone was the money medium ; but their ratio of exchange will be preserved intact in any case In support of this was cited the authority of Jevons, who said*:— “ Whenever different commodities are thus applicable to the same purposes their conditions of demand and exchange are not independent. Their mutual ratio of exchange cannot vary much for it will be closely defined by the ratio of their utilities. Beef and mutton differ so slightly that people eat them almost indifferently. But the wholesale price of mutton, on * Theory of Political Economy, 4th ed./, 1911, pp. 134-36.

410 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES an average, exceeds that of beef in the ratio of 9 to 8, and we must therefore conclude that people generally esteem mutton more than beef in this proportion, otherwise they would not buy the dear meat...... So long as the equation of utility holds true, the ratio of exchange between mutton and beef will not diverge from that of 8 to 9. If the supply of beef falls off people will not pay a higher price for it, but will eat more mutton ; and if the supply of mutton falls off, they will eat more beef...... We must, in fact, treat beef and mutton as one commodity of two different strengths—just as gold at 18 carats and gold at 20 carats are hardly considered as two but rather as one commodity, of which twenty parts of one are equivalent to eighteen of the other. “It is upon this principle that we must explain, in harmony with Cairnes’ views, the extraordinary permanence of the ratio of exchange of gold and silver, which from the commencement of the eighteenth century up to recent years never diverged much from 15 to 1. That this fixedness of ratio did not depend entirely upon the amount or cost of production is proved by the very slight effect of the Australian and Californian gold discoveries, which never raised the gold price of silver more than about 42/3 per cent., and failed to have more than a permanent effect of 1½ per cent. This permanence of relative values may have been partially due to the fact that gold and silver can be employed for exactly the same purposes, but that the superior brilliancy of gold occasions it to be preferred, unless it be about 15 or 15½ times as costly as silver. Much more probably, however, the explanation of the fact is to be found in the fixed ratio of 15½ to 1, according to which these metals are exchanged in the currency of France and some other continental countries. The French Currency Law of the year XI established an artificial* equation— Utility of gold = 15 ½ X utility of silver * It is this artificiality of the bimetallic system which unfortunately befogs the minds of some people and prejudices those of others. Some do not understand why the price determination of two commodities used as money should be so different from the price determination of any other two commodities as to be governed by a ratio fixed by law. Others are puzzled as to why, if gold and silver are a pair of substitutes, should they require a legal ratio while other pairs of substitutes circulate without a legal ratio, merely on the basis of the ratio of their utility. These difficulties are well explained away by Prof. Fisher thus :