Vol. 6 · pages 426–430

411 THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY and it is probably not without some reason that Wolowski and other recent French economists attributed to this law of replacement an important effect in preventing disturbance in the relations of gold and silver.” But granting that before 1873 the ratio was preserved owing to the compensatory action of the bimetallic law, can it be said that it would have been maintained after 1873 if the law had not been suspended ? To give an uncompromising affirmative as the bimetallists did is to suppose that bimetallism can work under all conditions. As a matter of fact, though it is workable under certain conditions it is not workable under other conditions. These conditions are well described by Prof. Fisher.* The question under bimetallism is whether the market ratio “......two forms of money differ from a random pair of commodities in being substitutes. Two substitutes proper are regarded by the consumer as a single commodity. Thus lumping together of the two commodities reduces the number of demand conditions, but does not introduce any indeterminateness into the problem because the missing conditions are at once supplied by a fixed ratio of substitution. Thus if ten pounds of cane sugar serve the same purpose as eleven pounds of beet-root sugar, their fixed ratio of substitution is ten to eleven......... In these cases the fixed ratio is based on the relative capacities of the two commodities to fill a common need, and is quite antecedent to their prices...... The substitution ratio is fixed by nature, and in turn fixes the price ratio. “In the single case of money, however, there is no fixed ratio of substitution...... We have here to deal not with relative sweetening power, nor relative nourishing power, nor with any other capacity to satisfy wants—no capacity inherent in the metals and independent of their prices. We have instead to deal only with relative purchasing power. We do not reckon a utility in the metal itself, but in the commodities it will buy. We assign their respective desirabilities or utilities to the sugars...... before we know their prices, but we must inquire the relative circulating value of gold and silver before we can know at what ratio we ourselves prize them. To us the ratio of substitution is incidentally the price ratio. The case of the two forms of money is unique. They are substitutes, but have no natural ratio of substitution, dependent on consumers’ preferences. “ The foregoing considerations...... are overlooked by those who imagine that a fixed legal ratio is merely superimposed upon a system of supply and demand already determinate, and who seek to prove thereby that such a ratio is foredoomed to failure...... the...... analogy...... is unsound ......Gold and silver ...... are not completely analogous even to two substitutes because for two forms of money there is no consumers’ natural ratio of substitution. There seems, therefore, room for an artificial ratio......”—Purchasing Power of Money, 1911, pp. 376-77 * Elementary principles of Economics, 1912, pp. 228-29. In the illustrations given by Prof. Fisher he appears, although he does not mean it, to make the success or failure of bimetallism hang upon the question whether or not the two metals are maintained in circulation. For in the illustration which he gives to show the failure of bimetallism—Fig. 14 (b)—his film f shows gold to be entirely thrown out of circulation ; while in the illustration he gives to show the success of bimetallism—Fig. 15 (b)—his film f shows gold to be only partially thrown out of circulation. But there seems to be no reason to suppose that there cannot be a third possibility, namely, that while the position of the film is f is as in Fig. 14 (b)—a possibility in which bimetallism succeeds although one of the two metals is entirely pushed out of circulation. For the success of bimetallism it is not necessary that both the metals should remain in circulation. Its success depends upon whether or not the compensatory action succeeds in restoring the relative values of the two bullions to that legally established between the two coins. If it succeeds in achieving that, the ratio would be preserved even if the compensatory action drives one metal entirely out of circulation.

412 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES between gold and silver bullion will always be the same as the legal ratio between gold and silver coins freely minted and possessing unlimited legal-tender power. Now supposing the supply of silver bullion has increased relatively to that of gold bullion, the result will obviously be a divergence in the mint and the market ratio. Will the compensatory action of the bimetallic law restore the equilibrium ? It may succeed in doing it or it may not. If the increase in the supply of silver bullion and the decrease in that of gold bullion are such that a decrease in that of silver caused by its inflow into the currency and an increase in that of gold caused by its outflow from currency can restore them to their old levels as bullion, bimetallism would succeed ; in other words, the market ratio of the two bullions would tend to return to the mint ratio. But if the increase in the supply of silver bullion and the decrease in that of gold is such that the outflow of silver bullion into currency reduces the level of the silver bullion to the old level, but the outflow of gold bullion from currency does not suffice to raise the level of the gold bullion to the old level, or if the outflow of gold from currency raises the level of the gold bullion to the old level, but the inflow of silver into currency does not result in the reduction of the level of silver bullion to its old level, bimetallism must fall; in other words, the market ratio of the two bullions will remain diverted from the mint ratio legally established between their coins. Under which of these two possibilities could the circumstances arising after 1873 have fallen ? That is a question about which no one can say anything definitely. Even Jevons, who admitted the success of the bimetallic law in the earlier period, was not very sanguine about its success in the latter period. It was he who observed* “ that the question of bimetallism is one which does not admit of any precise and simple answer. It is essentially an indeterminate problem. It involves several variable quantities and many constant quantities, the latter being either inaccurately known or, in many cases, altogether unknown......” * Investigations, etc. (ed. Foxwell), p. 317.

413 THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY Nonetheless, it is certain that the divergence between the mint ratio and the market ratio under a bimetallic system must be smaller than may be the case where there is no bimetallic systgem. Whenever the market ratio diverges from the mint ratio the compensatory action under the bimetallic law tends to restore the equilibrium, and even where it fails in restoring it, it does succeed in abridging the gulf between the two ratios. That being the case, it is safe to argue that had there been no demonetization of silver after 1873 the ratio between gold and silver would have probably been preserved as it was during the monetary disturbances of the earlier period. At any rate, this much is certain, that the market ratio between the two metals could not have diverged from the mint ratio to the extent it actually did.* It is therefore a sad commentary on the monetary legislation of the seventies that if it did not actually help to create, for no purpose, a problem unknown before, it certainly helped to make worse a bad situation. Prior to 1870, not all countries had a common currency. There were India and countries of Western Europe which were exclusively on a silver basis, and others, like England and Portugal, which were exclusively on a gold basis, and yet none of them felt the want of a common standard of value in their mutual dealings. So long as there existed the fixed-ratio system in France and the Latin Union the problem was really provided for, for under it the two metals behaved as one and thereby furnished a common standard, although all countries did not use the same metal as their standard money. It was therefore a matter of comparative indifference to most countries which metal they used so long as there was some one country which used either at a certain defined ratio. With the destruction of this fixed ratio what was thus a matter of comparative indifference became a matter of supreme concern. Every country which had before enjoyed the benefits of a common international standard without having a common currency was faced with a crisis in which the choice lay between * Fisher, Purchasing Power of Money, 1911, pp. 134-35.

414 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES sacrificing its currency to securing a common standard or hugging its currency and foregoing the benefits of a common standard. That exigencies of a common standard ultimately led to its accomplishment was as it should have been, but it was not a fact before a great deal of harm and some heavy burdens had brought home to people what the want of it really meant to them. zz

CHAPTER III THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY The economic consequences of this rupture of the par of exchange were of the most far-reaching character. It divided the commercial world into two sharply defined groups, one using gold and the other using silver as their standard money. When so much gold was always equal to so much silver, as was the case previous to 1873, it mattered very little, for the purposes of international transactions, whether a country was on a gold or on a silver standard ; nor did it make any difference in which of the two currencies its obligations were stipulated and realized. But when, owing to the dislocation of the fixed par, it was not possible to define how much silver was equal to how much gold from year to year or even from month to month, this precision of value, the very soul of pecuniary exchange, gave place to the uncertainties of gambling. Of course, all countries were not drawn into this vortex of perplexities in the same degree and to the same extent, yet it was impossible for any country which participated in international commerce to escape from being dragged into it. This was true of India as it was of no other country. She was a silver-standard country intimately bound to a gold-standard country, so that her economic and financial life was at the mercy of blind forces operating upon the relative values of gold and silver which governed the rupee-sterling exchange. The fall increased the burden of those who were under an obligation to make gold payments. Amongst such, the most heavily charged was the Government of India. Owing to the exigencies of its political constitution, that Government has been under the necessity of making certain payments in England to meet: (1) interest on debt and on the stock of the guaranteed railway companies ; (2) expenses on account of the European troops maintained in India; (3) pensions and noneffective allowances payable in England; (4) cost of the home