Book I, Chapter XI, 11

Before the discovery of the American mines, the value of fine gold relative to fine silver in the various European mints was fixed at ratios between one to ten and one to twelve: an ounce of fine gold was reckoned worth ten to twelve ounces of fine silver. Around the middle of the last century, the ratio came to be fixed between one to fourteen and one to fifteen: an ounce of fine gold was now reckoned worth fourteen to fifteen ounces of fine silver. Gold rose in nominal value, that is, in the amount of silver paid for it. Both metals fell in real value, or in the amount of labor they could purchase; but silver fell further than gold. Though the American gold and silver mines were more productive than any previously known, the silver mines appear to have been proportionately more productive still than the gold mines.

The great quantities of silver carried every year from Europe to India have gradually lowered that metal’s value relative to gold in some English settlements. In the Calcutta mint, an ounce of fine gold is reckoned worth fifteen ounces of fine silver, as in Europe. This mint valuation may be too high for its value in the Bengal market. In China, the ratio of gold to silver remains one to ten or one to twelve. In Japan it is said to be one to eight.

According to Mr Meggens’ account, the quantities of gold and silver imported into Europe each year stand at nearly one to twenty-two: for every ounce of gold, a little more than twenty-two ounces of silver are imported. The large amount of silver shipped annually to the East Indies reduces, he supposes, the quantities of the two metals left in Europe to a ratio of one to fourteen or fifteen, the ratio of their values. He seems to think that the ratio of their values must necessarily equal that of their quantities, and would therefore be one to twenty-two if so much silver were not exported.

Yet the usual ratio between the values of two commodities need not equal the ratio between the quantities of them commonly available in the market. An ox priced at ten guineas costs about three score times as much as a lamb priced at 3s. 6d. It would nevertheless be absurd to conclude that there are commonly three score lambs in the market for every ox. It would be just as absurd to conclude, because an ounce of gold commonly buys fourteen or fifteen ounces of silver, that only fourteen or fifteen ounces of silver are commonly available for every ounce of gold.

There is probably much more silver in the market relative to gold than the value of a given amount of gold bears to that of an equal amount of silver. The entire quantity of a cheap commodity brought to market is generally not merely greater in volume than that of a dear commodity, but greater in value. All the bread brought to market each year exceeds all the butcher’s meat both in quantity and in value; all the butcher’s meat likewise exceeds the poultry, and all the poultry the wildfowl. There are so many more buyers for a cheap commodity than for a dear one that a greater quantity and a greater total value can generally be sold. The total quantity of the cheap commodity must therefore commonly exceed the total quantity of the dear one by a greater ratio than the value of a given quantity of the dear commodity exceeds that of an equal quantity of the cheap one. Compared with each other, the precious metals make silver the cheap commodity and gold the dear one. We should accordingly expect the market always to contain not only more silver than gold, but a greater value of silver. Anyone who owns a little of both may compare his silver plate with his gold plate and will probably find that the former greatly exceeds the latter in value as well as quantity. Besides, many people possess a good deal of silver but no gold plate; and even among those who possess it, gold plate is generally limited to watch cases, snuffboxes, and similar trinkets, whose total value is seldom large. The value of gold does, to be sure, greatly predominate in British coin, but not in the coin of every country. In some countries the values of the two metals in coin are nearly equal. In Scottish coin before the union with England, gold predominated only slightly, though it did predominate somewhat [See Ruddiman’s Preface to Anderson’s Diplomata, etc. Scotiae.], as the mint accounts show. In many countries silver predominates in the coin. In France, the largest payments are commonly made in silver, and it is hard there to obtain more gold than one needs to carry in a pocket. Yet the greater value of silver plate than gold plate in every country will far more than offset the predominance of gold over silver coin in the few countries where it occurs.

Although silver has always been, and probably always will be, far cheaper than gold in one sense of the word, gold may in another sense be called somewhat cheaper than silver in the present Spanish market. A commodity can be called dear or cheap not only by the absolute size of its ordinary price but also by how far that price exceeds the lowest at which it can be brought to market for any substantial length of time. This minimum price barely replaces, with a moderate profit, the stock employed to bring the commodity there. It leaves nothing for the landlord, contains no rent, and consists entirely of wages and profit. In the present Spanish market, however, gold is certainly somewhat closer to this minimum price than silver. The king of Spain’s tax on gold is only one-twentieth of the standard metal, or five per cent.; his tax on silver is one-tenth, or ten per cent. As already noted, these taxes constitute the whole rent of most gold and silver mines in Spanish America, and the gold tax is paid even less reliably than the silver tax. The profits of those who operate gold mines must generally be more modest than those of silver-mine operators, since fortunes are made less often in gold. Since it yields less rent and less profit, Spanish gold must therefore sell in the Spanish market somewhat closer to its minimum feasible price than Spanish silver. Taking every expense into account, it would appear that the entire quantity of gold cannot be sold in the Spanish market on such advantageous terms as the entire quantity of silver. The king of Portugal’s tax on Brazilian gold, however, is the same as the old tax of the king of Spain on the silver of Mexico and Peru: one-fifth of the standard metal. It may therefore be uncertain whether, in the general European market, the entire stock of American gold arrives at a price closer to the minimum feasible price than the entire stock of American silver.

The price of diamonds and other precious stones may lie even closer than gold’s to the minimum at which they can be brought to market.

It is highly unlikely that any portion of the silver tax will be relinquished while payment remains possible: it falls on one of the most suitable objects of taxation, a mere luxury and superfluity, and produces a very important revenue. Yet the same inability to pay that made it necessary in 1736. to reduce the tax from one-fifth to one-tenth may eventually require a further reduction, just as it required reducing the tax on gold to one-twentieth. Everyone who has investigated the Spanish American silver mines acknowledges that, like all mines, they gradually become more expensive to work as operations must descend further, making it costlier both to draw out the water and to supply fresh air at those depths.

These causes amount to a growing scarcity of silver—for a commodity can be said to grow scarcer when gathering a given quantity becomes harder and costlier—and must eventually bring about one of three outcomes. First, the increased cost must be wholly offset by a corresponding rise in the metal’s price; second, it must be wholly offset by a corresponding reduction in the silver tax; or third, it must be offset partly by each of these two means. The third outcome is quite possible. Just as gold rose in price relative to silver despite a large reduction of the tax on gold, silver might rise in price relative to labor and commodities despite an equal reduction of the tax on silver.

Successive reductions of the tax, however, would certainly delay to some degree a rise in silver’s value in the European market, even if they could not entirely prevent it. They would allow many mines to be worked that could not previously bear the old tax. The amount of silver brought to market each year would thus always be somewhat greater, and the value of any given quantity somewhat lower, than otherwise. Because of the reduction in 1736, silver’s value in the European market, even if it is no lower today than before that reduction, is probably at least ten per cent. lower than it would have been had the Spanish court continued to exact the old tax. Despite this reduction, the facts and arguments set out above incline me to believe that the value of silver has begun to rise somewhat in the European market during the present century—or, more accurately, to suspect and conjecture it, for the best judgment I can form on the matter scarcely deserves the name of belief. Indeed, any rise so far has been so small that many people, after all that has been said, may still doubt not only whether it has occurred, but whether the reverse has occurred instead, and silver’s value continues to fall in the European market.

It should be observed, however, that whatever annual imports of gold and silver one assumes, a time must come when the annual consumption of those metals equals those imports. Consumption must grow as their accumulated quantity grows, indeed at a much faster rate. As their quantity grows, their value falls. They are used more freely and handled with less care; consequently their consumption rises faster than their accumulated quantity. Eventually, therefore, annual consumption must come to equal annual imports in this way, provided imports do not keep rising—a condition they are not supposed to meet at present.

If annual imports then gradually decline once annual consumption has come to equal them, consumption may exceed imports for a time. The accumulated quantity of the metals may slowly and imperceptibly diminish, and their value slowly and imperceptibly rise, until imports stabilize again and consumption gradually and imperceptibly adjusts to the amount those imports can sustain.

Grounds for Suspecting That the Value of Silver Is Still Declining

Europe’s growing wealth, together with the popular belief that the quantity of precious metals naturally increases with wealth and their value falls as their quantity rises, may lead many to believe that their value continues to fall in the European market. The steadily rising price of many kinds of raw produce from the land may further strengthen that belief.

I have already tried to show that an increase in the quantity of precious metals arising from a country’s increased wealth does not tend to lower their value. Gold and silver flow naturally to a rich country for the same reason as luxuries and curiosities of every kind: not because they are cheaper there than in poorer countries, but because they are dearer, and fetch a better price. That higher price attracts them, and the moment it disappears, they necessarily stop flowing there.

Excepting corn and other vegetables raised entirely by human industry, I have also tried to show that every other kind of raw produce—cattle, poultry, every kind of game, useful fossils and minerals, etc.—naturally grows dearer as society advances in wealth and improvement. Even if such commodities therefore exchange for more silver than before, it does not follow that silver has truly grown cheaper and buys less labor. Rather, these commodities have truly grown dearer and buy more labor. It is their real price, not just their nominal price, that rises with improvement. The rise in their nominal price results not from any decline in silver’s value, but from the rise in their real price.

Different Effects of the Progress of Improvement on Three Kinds of Raw Produce

These different kinds of raw produce may be divided into three classes. The first includes things that human industry can scarcely multiply at all. The second includes things it can multiply in proportion to demand. The third includes things for which the effectiveness of industry is either limited or uncertain. With growing wealth and improvement, the real price of the first class may rise extravagantly, apparently without any definite limit. The real price of the second, though it may rise greatly, has a definite limit beyond which it cannot long remain. The real price of the third naturally tends to rise with improvement; yet at a given stage of improvement it may fall, stay the same, or rise by varying degrees, depending on how various circumstances affect the success of human industry in multiplying this kind of raw produce.

Before the American mines were discovered, European mines set the value of fine gold relative to fine silver at ratios between one to ten and one to twelve. In other words, an ounce of fine gold was considered worth ten to twelve ounces of fine silver. Around the middle of the last century, the ratio became between one to fourteen and one to fifteen. An ounce of fine gold was then considered worth fourteen to fifteen ounces of fine silver. Gold rose in its nominal value, meaning the amount of silver paid for it. Both metals fell in their real value, meaning the amount of labor they could buy. But silver fell more than gold. The American gold and silver mines were richer than any previously known mines. It seems, however, that the silver mines were even richer relative to the gold mines.

The large amounts of silver sent each year from Europe to India have gradually lowered its value relative to gold in some English settlements. At the Calcutta mint, an ounce of fine gold is valued at fifteen ounces of fine silver, as it is in Europe. The mint may value it too highly compared with its market value in Bengal. In China, the gold-to-silver ratio remains one to ten or one to twelve. In Japan, it is said to be one to eight.

According to Mr Meggens’ account, the amounts of gold and silver imported into Europe each year stand at nearly one to twenty-two. That means a little more than twenty-two ounces of silver arrive for every ounce of gold. He thinks the large amount of silver shipped each year to the East Indies brings the amounts remaining in Europe to a ratio of one to fourteen or fifteen, matching their values. He seems to think that the ratio of their values must equal the ratio of their quantities. Without this larger export of silver, he believes, the value ratio would be one to twenty-two.

But the usual ratio of the values of two goods does not have to match the ratio of their available quantities. If an ox costs ten guineas and a lamb 3s. 6d., the ox costs about sixty times as much. Yet it would be absurd to conclude that markets usually have sixty lambs for every ox. It is just as absurd to conclude that markets usually have only fourteen or fifteen ounces of silver per ounce of gold because one ounce of gold usually buys fourteen or fifteen ounces of silver.

The amount of silver on the market is probably far larger relative to the amount of gold than the value of a given amount of gold is relative to the same amount of silver. The total supply of a cheap good brought to market is usually greater in both quantity and total value than the supply of an expensive good. The bread brought to market each year exceeds butcher’s meat in both quantity and value. Butcher’s meat similarly exceeds poultry, and poultry exceeds wild fowl. Cheap goods have so many more buyers than expensive ones that sellers can usually sell more of them in both quantity and total value. So the ratio of the total amount of the cheap good to that of the expensive good is usually greater than the ratio of the value of a given amount of the expensive good to an equal amount of the cheap one. Among precious metals, silver is cheap and gold expensive. We should therefore expect the silver on the market to exceed the gold in both quantity and total value. Anyone who owns a little of each can compare his silver and gold tableware. He will probably find that his silver exceeds his gold in both quantity and value. Many people also have plenty of silver but no gold tableware. Even among those who own gold, it is generally limited to watch cases, snuffboxes, and similar small objects, whose total value is rarely large. Gold does greatly exceed silver in value among British coins, but not in every country’s coins. In some countries the values of the two metals in coin are nearly equal. Before the union with England, gold in Scottish coin exceeded silver only slightly, though it did exceed it [See Ruddiman’s Preface to Anderson’s Diplomata, etc. Scotiae.], as mint accounts show. In many countries silver exceeds gold in coin. In France, people usually pay large sums in silver, and it is hard to obtain more gold than one needs to carry in a pocket. Yet in every country, the greater value of silver tableware over gold tableware more than makes up for the greater value of gold coin over silver coin found in only some countries.

In one sense silver always has been, and probably always will be, much cheaper than gold. But in another sense gold may now be somewhat cheaper than silver in the Spanish market. A good can be expensive or cheap not only according to how high its usual price is, but also according to how far that price exceeds the lowest price at which it can be brought to market for any substantial length of time. That lowest price just replaces the stock used to bring it there, with a moderate profit. It pays nothing to the landlord: rent is no part of it, and the entire price consists of wages and profit. In today’s Spanish market gold is certainly somewhat closer to this lowest price than silver is. The king of Spain taxes gold at only one-twentieth of the standard metal, or five per cent.; his silver tax is one-tenth, or ten per cent. As already noted, those taxes make up the entire rent from most of Spanish America’s gold and silver mines. The gold tax is also paid even less reliably than the silver tax. Gold-mine operators less often make fortunes, so their profits must generally be smaller than those of silver-mine operators. Since Spanish gold pays both less rent and less profit, its price in the Spanish market must be somewhat nearer the lowest price at which it can be brought there than the price of Spanish silver. Taking all expenses into account, it seems the entire supply of gold cannot be sold as profitably in the Spanish market as the entire supply of silver. The king of Portugal, however, taxes gold from the Brazils at the old rate the king of Spain charged on silver from Mexico and Peru: one-fifth of the standard metal. It may therefore be uncertain whether the entire supply of American gold reaches the general European market at a price closer to its minimum than the entire supply of American silver does.

The price of diamonds and other precious stones may be even closer than gold’s price to the lowest price at which they can be brought to market.

The silver tax falls on a luxury and an unnecessary good, one of the most suitable things to tax. It also provides very important revenue. It is therefore very unlikely that any of it will be given up while people can still pay it. But an inability to pay forced a reduction in 1736. from one-fifth to one-tenth, and might eventually force another reduction, just as it forced the gold tax down to one-twentieth. Everyone who has investigated Spanish America’s silver mines acknowledges that, like other mines, they gradually become more expensive to work. Operations must move deeper underground, where removing water and supplying fresh air cost more.

These causes amount to a growing scarcity of silver: a good grows scarcer when gathering a given amount of it becomes harder and more expensive. Eventually one of three things must happen. First, a corresponding rise in the metal’s price might cover all the increased costs. Second, a corresponding cut in the silver tax might cover them all. Third, both measures might cover part of the increase. The third outcome is quite possible. Gold rose in price relative to silver despite a large cut in the gold tax. In the same way, silver could rise in price relative to labor and other goods despite an equal cut in the silver tax.

Successive tax cuts, though, would certainly slow any rise in silver’s value on the European market, even if they did not stop it entirely. A lower tax allows mines to operate that could not afford the old tax. The annual supply of silver would therefore be somewhat larger, and the value of any given amount somewhat smaller, than otherwise. Because of the reduction in 1736, silver’s value in the European market is probably at least ten per cent. lower today than it would have been if the Spanish court had kept the old tax. This may be true even if its value is not now below its value before the reduction. The facts and arguments given above lead me to believe—or, more accurately, to suspect and guess—that silver’s European value has begun to rise somewhat in the present century despite the tax cut. My best opinion on this subject perhaps hardly deserves to be called a belief. If there has been any rise, it has been so small that, despite everything I have said, many people may still question whether it happened at all. They may even wonder whether the opposite happened and silver’s value continues to fall in Europe.

We should observe, however, that whatever the estimated annual imports of gold and silver, a time must come when annual consumption equals those imports. Consumption must grow as the stock of the metals grows, and indeed must grow even faster. As the stock grows, its value falls. People use the metals more freely and take less care of them. Consumption therefore rises faster than the stock. After some time, annual consumption must thus equal annual imports, provided imports do not keep rising. They are not thought to be doing so today.

If annual imports then gradually decline after annual consumption has caught up with them, consumption may exceed imports for a while. The stock of the metals may slowly and almost imperceptibly shrink, and their value may slowly and almost imperceptibly rise. Once annual imports stabilize again, annual consumption will slowly adjust to what those imports can sustain.

Reasons to Suspect That Silver’s Value Is Still Falling.

Europe is growing wealthier. People commonly believe that as wealth grows, the supply of precious metals naturally grows too, and that a larger supply lowers their value. This may persuade many that the metals are still losing value on the European market. The gradually rising prices of many kinds of raw products from the land may strengthen that belief.

I have already tried to show that the increase in precious metals which accompanies a country’s growing wealth does not tend to lower their value. Gold and silver flow naturally to a rich country for the same reason as all kinds of luxuries and unusual goods. They go there not because they are cheaper than in poor countries, but because they are more expensive and fetch a better price. That higher price draws them in. As soon as the price advantage ends, they stop coming.

I have also tried to show that, apart from corn and other plants grown entirely through human effort, all other kinds of raw products naturally become more expensive as society grows richer and improves. These include cattle, poultry, all kinds of game, and useful fossils and minerals from the ground. Even if these goods exchange for more silver than before, it does not follow that silver has really become cheaper or buys less labor. Instead, these goods have really become more expensive and buy more labor. As a country improves, their real prices rise along with their nominal prices. Their nominal prices rise because their real prices rise, not because silver loses value.

Different Effects of Improvement on Three Kinds of Raw Products.

These raw products can be divided into three groups. The first contains goods that human effort can hardly increase at all. The second contains goods that it can increase to meet demand. The third contains goods whose supply human effort can increase only within limits, or with uncertain results. As wealth and improvement advance, the real price of the first group can rise to any extravagant level, with no clear limit. The real price of the second can rise considerably but has a limit it cannot remain above for long. The real price of the third naturally tends to rise as improvement advances. Yet even at the same stage of improvement, it might fall, stay unchanged, or rise by different amounts, depending on whether various events make efforts to increase its supply more or less successful.