Book I, Chapter V, 3

In fact, so long as a fixed ratio governs the respective values of the metals in the coinage, the most precious metal determines the value of all the coin. Twelve copper pence contain half a pound avoirdupois of copper of less than the best quality, which before minting is seldom worth seven-pence in silver. Yet because the regulation requires twelve such pence to exchange for a shilling, the market treats them as worth a shilling, and a shilling can always be obtained for them. Even before the recent reform of Great Britain's gold coin, the gold coin circulating in London and its neighborhood was generally less worn below its standard weight than most of the silver coin. Nevertheless, one-and-twenty worn and defaced shillings were reckoned equal to a guinea, itself perhaps worn and defaced, but seldom to the same extent. The recent regulations have brought gold coin perhaps as close to its standard weight as any nation's circulating coin can be brought; the order that public offices accept gold only by weight should keep it so for as long as it is enforced. Silver coin remains as worn and degraded as it was before the reform of the gold coin. In the market, however, one-and-twenty shillings of this degraded silver coin are still held to be worth a guinea of this excellent gold coin.

The reform of the gold coin has plainly raised the value of the silver coin for which it can be exchanged.

At the English mint, a pound weight of gold is coined into forty-four guineas and a half; at one-and-twenty shillings per guinea, this equals forty-six pounds fourteen shillings and sixpence. An ounce of such gold coin is therefore worth £ 3:17:10½ in silver. In England no duty or seignorage is charged for coinage: someone who takes a pound weight or an ounce weight of standard gold bullion to the mint receives the same weight of gold coin, without deduction. Three pounds seventeen shillings and tenpence halfpenny per ounce is thus called the English mint price of gold: the quantity of gold coin the mint gives for standard gold bullion.

Before the reform of the gold coin, standard gold bullion had for many years sold in the market for upwards of £3:18s. an ounce, sometimes £ 3:19s, and very often £4; in worn and degraded gold coin, that sum probably seldom contained more than an ounce of standard gold. Since the reform, the market price of standard gold bullion seldom exceeds £ 3:17:7 an ounce. Before the reform its market price was always somewhat above its mint price; since then it has consistently been below it. Yet the market price is the same whether paid in gold coin or silver coin. Thus the recent reform has raised not only the value of gold coin but that of silver coin relative to gold bullion, and probably relative to every other commodity as well. Because so many other causes affect the prices of most commodities, however, the rise in the value of gold or silver coin relative to them may be less clear and perceptible.

At the English mint, a pound weight of standard silver bullion is coined into sixty-two shillings, which likewise contain a pound weight of standard silver. Five shillings and twopence an ounce is therefore called the mint price of silver in England: the quantity of silver coin the mint gives for standard silver bullion. Before the reform of the gold coin, standard silver bullion sold in the market at various times for five shillings and fourpence, five shillings and fivepence, five shillings and sixpence, five shillings and sevenpence, and very often five shillings and eightpence an ounce. Five shillings and sevenpence, however, seems to have been the commonest price. Since the reform, its market price has sometimes fallen to five shillings and threepence, five shillings and fourpence, or five shillings and fivepence an ounce; it has scarcely ever exceeded the last of these prices. Though the market price of silver bullion has fallen considerably since the reform of the gold coin, it has not fallen as low as the mint price.

Among the metals in English coin, copper is valued far above its real value, while silver is valued somewhat below its own. In European markets, and in French and Dutch coinage, an ounce of fine gold exchanges for about fourteen ounces of fine silver. In English coinage it exchanges for about fifteen ounces—more silver than it is worth by the usual European reckoning. Yet just as the high valuation of English copper coin does not raise the price of copper in bars, even in England, the low valuation of English silver coin does not depress the price of silver bullion. Bullion silver preserves its proper ratio to gold for the same reason that bar copper preserves its proper ratio to silver.

After the reform of the silver coin under William III., the price of silver bullion still remained somewhat above the mint price. Mr Locke attributed this high price to the permission to export silver bullion and the prohibition on exporting silver coin. Permission to export, he said, made the demand for silver bullion greater than the demand for silver coin. Surely, however, far more people need silver coin for ordinary domestic buying and selling than need silver bullion for export or any other purpose. Today gold bullion may likewise be exported while gold coin may not, and yet the price of gold bullion has fallen below the mint price. At that time, as now, silver was undervalued relative to gold in English coinage; and gold coin, which even then was not thought to need reform, determined the real value of all the coin, as it does today. Since reforming the silver coin did not then bring the price of silver bullion down to the mint price, a similar reform is unlikely to do so now.

If silver coin were restored as nearly to standard weight as gold coin, a guinea would probably, at the present ratio, exchange for more silver in coin than it could buy in bullion. With silver coin at its full standard weight, a profit could be made by melting it down, selling the bullion for gold coin, and then exchanging that gold coin for more silver coin to be melted in turn. Some change in the present ratio seems the only way to prevent this inconvenience.

The inconvenience might be smaller if silver were valued in coin as far above its proper ratio to gold as it is now valued below it, provided the law at the same time limited silver as legal tender to no more than the change of a guinea, just as copper is legal tender for no more than the change of a shilling. In that case no creditor could be cheated by the high valuation of silver coin, just as no creditor can now be cheated by the high valuation of copper. Only bankers would suffer from the regulation. When a run on a bank occurs, bankers sometimes try to gain time by paying in sixpences; this rule would deny them that discreditable means of evading immediate payment. They would consequently have to keep more cash in their coffers at all times. Although this would undoubtedly be a considerable inconvenience to them, it would also give their creditors considerable security.

Three pounds seventeen shillings and tenpence halfpenny, the mint price of gold, certainly contains no more than an ounce of standard gold even in our excellent present gold coin; it may therefore seem that it ought not to buy more than an ounce of standard bullion. But coined gold is more convenient than bullion. Although coinage is free in England, gold taken to the mint as bullion seldom comes back to its owner in coin before several weeks have passed. With the mint presently so busy, the delay would be several months. Such delay amounts to a small duty and makes coined gold somewhat more valuable than an equal quantity of bullion. If English silver coin were valued at its proper ratio to gold, the price of silver bullion would probably fall below the mint price without any reform of the silver coin: even today's worn and defaced silver coin derives its value from the excellent gold coin for which it can be exchanged.

A small seignorage or coinage duty on both gold and silver would probably increase still further the advantage that the coined metals have over equal amounts of bullion. Minting would raise the value of the metal coined in proportion to the size of this small duty, just as workmanship raises the value of plate by the price of that workmanship. The higher value of coin would prevent its being melted down and discourage its export. If a public emergency made export necessary, most of the coin would soon return home of its own accord. Abroad it would sell only for its weight as bullion; at home it would buy more than that weight. Bringing it home again would therefore be profitable. France imposes a seignorage of about eight per cent. on coinage, and exported French coin is said to return home of its own accord.

Occasional fluctuations in the market prices of gold and silver bullion have the same causes as fluctuations in the prices of other commodities. Accidents on land and sea frequently destroy some of these metals; gilding, plating, lace, embroidery, and wear to coin and plate consume them continually. Countries without mines must therefore import them continually to replace these losses. We may suppose that importing merchants, like other merchants, try to match their occasional imports to what they judge the immediate demand will be. Yet for all their care, they sometimes bring in too much and sometimes too little. When they bring in more bullion than is wanted, they may prefer selling some of it below its usual or average price to risking and troubling themselves with exporting it again. When they bring in less, they obtain somewhat more than that price. But if, despite these occasional fluctuations, the market price of gold or silver bullion remains steadily above or below the mint price for years together, we can be sure that the persistent difference is caused by some condition of the coin. That condition makes a given quantity of coin worth either more or less than the exact quantity of bullion it ought to contain. An enduring and steady effect presupposes an equally enduring and steady cause.

A country's money at any given place and time measures value more or less accurately according to how closely its circulating coin meets its standard—how exactly it contains the prescribed quantity of pure gold or silver. If, for example, forty-four guineas and a half in England contained exactly a pound weight of standard gold, or eleven ounces of fine gold and one ounce of alloy, English gold coin would measure the actual value of goods at that place and time as accurately as its nature permits. But if wear and abrasion generally reduce forty-four guineas and a half to less than a pound weight of standard gold, and reduce some coins more than others, that measure of value becomes subject to the uncertainty common to all weights and measures. Since these rarely correspond exactly to their standards, merchants set the prices of their goods as best they can by what experience shows those weights and measures to be on average, rather than by what they ought to be. When coinage is similarly disordered, prices likewise come to reflect the amount of pure gold or silver the coins contain on average in practice, not the amount they ought to contain.

By the money price of goods, I should note, I always mean the quantity of pure gold or silver for which they sell, whatever the denomination of the coin. Thus I regard six shillings and eight pence in the time of Edward I. as the same money price as a pound sterling today, because, so far as we can judge, each contained the same quantity of pure silver.

In practice, as long as a fixed ratio holds between the values of different metals in coins, the most precious metal sets the value of all the coins. Twelve copper pence contain half a pound avoirdupois of copper, and not the best kind. Before being made into coins, that copper is seldom worth seven pence in silver. But the rules say that twelve of these pence can be exchanged for a shilling. So the market treats them as worth a shilling, and anyone can get a shilling for them at any time. Even before the recent reform of Great Britain's gold coin, the gold circulating in London and nearby was generally closer to its standard weight than most of the silver was. Still, people treated twenty-one worn, defaced shillings as equal to a guinea. The guinea might also have been worn and defaced, but rarely as much. The recent rules have probably brought gold coin as close to its standard weight as circulating coin in any country can get. The order that public offices accept gold only by weight should keep it that way as long as it is enforced. Silver coin remains as worn and underweight as it was before the reform of gold coin. Yet the market still treats twenty-one of these underweight silver shillings as worth a guinea of this excellent gold coin.

Reforming gold coin has clearly raised the value of the silver coin that can be exchanged for it.

The English mint turns a pound weight of gold into forty-four guineas and a half. At twenty-one shillings per guinea, this equals forty-six pounds fourteen shillings and sixpence. An ounce of gold coin is therefore worth £ 3:17:10½ in silver. England charges no duty or seignorage for making coins. A person who brings a pound weight or an ounce weight of standard gold bullion to the mint gets that same weight back in gold coin, without any deduction. Three pounds seventeen shillings and tenpence halfpenny an ounce is therefore called the mint price of gold in England. It is the amount of gold coin the mint gives for standard gold bullion.

Before the reform of gold coin, the market price of standard gold bullion had been above £3:18s. an ounce for many years. It was sometimes £ 3:19s and very often £4. The worn, underweight gold coins making up that sum probably seldom contained more than an ounce of standard gold. Since the reform, the market price of standard gold bullion seldom exceeds £ 3:17:7 an ounce. Before the reform, the market price was always somewhat above the mint price. Since then, it has consistently been below the mint price. This market price is the same whether payment is made in gold or silver coin. So the recent reform raised the value not only of gold coin but also of silver coin compared with gold bullion. It probably raised their values compared with all other goods too. But the prices of most other goods depend on so many other causes that the rise in the value of either kind of coin relative to those goods may be less clear or noticeable.

The English mint turns a pound weight of standard silver bullion into sixty-two shillings containing a pound weight of standard silver. Five shillings and twopence an ounce is therefore called England's mint price of silver: the amount of silver coin the mint gives for standard silver bullion. Before the gold coin reform, the market price of standard silver bullion had at different times been five shillings and fourpence, five shillings and fivepence, five shillings and sixpence, five shillings and sevenpence, and very often five shillings and eightpence an ounce. Five shillings and sevenpence seems to have been the most common price. Since the reform, the market price has sometimes fallen to five shillings and threepence, five shillings and fourpence, or five shillings and fivepence an ounce. It has hardly ever gone above that last price. Though the market price has fallen considerably since the reform, it has not fallen as low as the mint price.

Under the ratios set between metals in English coin, copper is valued far above its actual value, while silver is valued somewhat below its actual value. In European markets, and in French and Dutch coins, an ounce of fine gold exchanges for about fourteen ounces of fine silver. In English coins, it exchanges for about fifteen ounces. That is more silver than the gold is worth by the usual European valuation. But even in England, the high valuation of copper coins does not raise the price of copper bars. In the same way, the low valuation of silver coins does not lower the price of silver bullion. Silver bullion keeps its proper ratio to gold for the same reason copper bars keep their proper ratio to silver.

When silver coin was reformed in the reign of William III., the price of silver bullion remained somewhat above the mint price. Mr Locke attributed this high price to the permission to export silver bullion and the ban on exporting silver coin. He said the permission made demand for silver bullion greater than demand for silver coin. But surely far more people need silver coin for ordinary buying and selling at home than need silver bullion for export or any other purpose. Today there is likewise permission to export gold bullion and a ban on exporting gold coin, yet gold bullion's price has fallen below the mint price. The English coin system valued silver too low compared with gold then, just as it does now. Gold coin, which people did not think needed reform at the time, determined the real value of all coin then, just as it does now. Reforming silver coin did not bring the price of silver bullion down to the mint price then. A similar reform is therefore unlikely to do it now.

Suppose silver coin were brought as close to its standard weight as gold coin now is. At the present ratio, a guinea would probably exchange for more silver in coins than it could buy as bullion. If silver coins contained their full standard weight, a person could profit by melting them down, selling the bullion for gold coin, then exchanging that gold coin for silver coin and melting it down in turn. Changing the present ratio seems the only way to prevent this problem.

The problem might be smaller if coins valued silver as much above its proper ratio to gold as they now value it below that ratio. But at the same time, the law would have to limit silver as legal tender to the change of a guinea, just as copper is legal tender only for the change of a shilling. Then no creditor could be cheated by the high valuation of silver coins, any more than creditors can now be cheated by the high valuation of copper coins. Only bankers would suffer under this rule. When people rush to withdraw their money, bankers sometimes try to gain time by paying in sixpences. The rule would stop them from using this discreditable way of putting off immediate payment. They would have to keep more cash in their strongboxes at all times. This would certainly be a considerable inconvenience for them, but it would also give their creditors considerable security.

Three pounds seventeen shillings and tenpence halfpenny, the mint price of gold, certainly contains no more than an ounce of standard gold, even in our excellent gold coin today. It might therefore seem that this sum should not buy more than an ounce of standard bullion. But gold coin is handier than gold bullion. And although England makes coins without a charge, an owner who takes gold bullion to the mint seldom gets it back in coins before several weeks have passed. With the mint as busy as it is now, the delay would be several months. This delay works like a small duty and makes gold coin somewhat more valuable than the same amount of gold bullion. If English coins valued silver at its proper ratio to gold, the price of silver bullion would probably fall below the mint price even without reforming silver coin. Even the value of today's worn and defaced silver coin is determined by the value of the excellent gold coin for which it can be exchanged.

A small seignorage or duty on minting both gold and silver would probably make the coins worth even more, compared with equal amounts of bullion. Minting would add value to the metal in proportion to the size of the duty. In the same way, workmanship adds value to silverware in proportion to its cost. Coins being worth more than bullion would prevent people from melting them down and discourage exports of them. If some public emergency made it necessary to export coins, most would soon come home on their own. Abroad, they could be sold only for the value of their weight in bullion. At home, they would buy more than that. Bringing them home would therefore be profitable. France charges a seignorage of about eight per cent. for minting coins, and people say French coins that are exported come home again on their own.

The market prices of gold and silver bullion fluctuate from time to time for the same reasons as the prices of other goods. Accidents on land and at sea often cause losses of these metals. Gilding, plating, lace, and embroidery steadily use them up, as does wear and tear on coins and silverware. Countries without mines of their own must keep importing the metals to make up for these losses and uses. Like other merchants, importers presumably try to match each shipment to what they think immediate demand will be. Despite their care, sometimes they import too much and sometimes too little. If they bring in more bullion than is needed, they may prefer to sell some of it for less than the usual or average price rather than face the risk and trouble of exporting it again. If they bring in less than is needed, they get more than that price. But suppose the market price of gold or silver bullion stays steadily above or below the mint price for several years despite these short-term fluctuations. We can then be sure the persistent difference comes from the condition of the coin. Something about the coins at that time makes a given amount of coin worth more or less than the exact amount of bullion it is supposed to contain. A persistent, steady effect points to an equally persistent, steady cause.

At any time and place, a country's money measures value more or less accurately depending on how closely its circulating coins match their standard. That is, accuracy depends on how nearly they contain the exact amount of pure gold or pure silver they are supposed to contain. Suppose, for example, that in England forty-four guineas and a half contained exactly a pound weight of standard gold: eleven ounces of fine gold and one ounce of alloy. English gold coin would then be as accurate a measure of the actual value of goods at a particular time and place as such a measure can be. But suppose wear and rubbing make forty-four guineas and a half generally contain less than a pound weight of standard gold, and some coins lose more than others. The measure of value then becomes uncertain, much like other weights and measures. Those rarely match their standards exactly. A merchant therefore sets prices as best he can, not according to what the weights and measures should be, but according to what experience shows them to be on average. When coins have a similar defect, goods are priced not according to how much pure gold or silver the coins should contain, but according to how much they contain on average in actual experience.

When I speak of the money price of goods, I always mean the amount of pure gold or silver for which they are sold, whatever the coin is called. For example, I count six shillings and eight pence in the time of Edward I. as the same money price as a pound sterling today, because, as far as we can tell, it contained the same amount of pure silver.