Money Demand and the Ratio of Gold to Silver

¹⁶⁹ The continual consumption of the precious metals is very sensible:

• in coin by wearing
• in plate both by wearing and cleaning

Such metals require a very great annual supply.

The consumption of those metals in manufactures is much more rapid and sensible though it may be less than this gradual consumption in coin and plate.

In Birmingham manufactures alone, the gold and silver annually employed in gilding and plating is more than £50,000 sterling. We may from thence form a notion how great the annual global consumption must be:

• in manufactures of the same kind as Birmingham or
• in laces, embroideries, gold and silver stuffs, the gilding of books, furniture, etc.

A big amount too must be annually lost in transporting those metals by sea and land.

In most Asian governments, an added loss of precious metals is caused by the custom of concealing treasures underground.

It is then lost after the concealer dies.

¹⁷⁰ The quantity of gold and silver imported and smuggled at Cadiz and Lisbon is £6 million sterling a year.

¹⁷¹ According to Nicolas Magens, the annual importation of the precious metals into Spain from 1748 to 1753 and into Portugal from 1747 to 1753 was:

• 1,101,107 pounds weight in silver, and It amounts to £3,413,431, at 62 shillings the pound Troy. 49,940 pounds weight in gold

It amounts to £2,333,446, at 44 guineas and a half the pound Troy. Both together amount to £5,746,878 He assures us that the account is exact. He gives us the detail of the places where the gold and silver were brought how much was transported from each place. He also makes an allowance for the metals which may have been smuggled. The great experience of this judicious merchant gives weight to his opinion.

¹⁷² Guillaume Thomas Raynal was the eloquent author of the Philosophical and Political History of the Commerce and Settlements of the Europeans in the two Indies.

According to him:

• The annual importation of registered gold and silver into Spain from 1754 to 1764 was 13,984,185¾ piastres of 10 reals
• The smuggled ones may have been 17 million piastres, at 4s. 6d. the piastre, is £3,825,000

He also wrote of the places where the gold and silver were brought and the quantities of each metal which each place afforded.

The tax of the king of Portugal on gold imports was 20%.

The quantity of gold annually imported from Brazil into Lisbon measured from this tax might be valued at 18 million cruzadoes or 45 million French livres, equal to £2 million.

The amount of smuggled metals is 1/8 more, or £250,000.

The whole amount is £2,250,000.

The whole annual importation of the precious metals into both Spain and Portugal is about £6,075,000.

¹⁷³ Several other credible accounts agree with this amount.

¹⁷⁴ The annual importation of the precious metals into Cadiz and Lisbon, is not equal to the total annual produce of the American mines.

Some is sent annually by the Acapulco ships to Manila. Some is employed in the contraband trade of the Spanish colonies with other European nations. Some remain in the country. The American mines are not the only mines in the world.

The produce of all the other known mines is insignificant compared to them. Most of their produce is annually imported into Cadiz and Lisbon. But the consumption of Birmingham alone, at £50,000 a year, is equal to the 1/120 of this £6 million annual importation. The global annual consumption of gold and silver may perhaps be nearly equal to the total annual produce. The remainder may have fallen short due to the increasing demand of thriving countries, raising the price of those metals in Europe.

¹⁷⁵ There is much more brass and iron annually brought from the mine than gold and silver.

Those coarse metals, however, will not likely multiply beyond the demand nor become gradually cheaper. Why should we imagine that the precious metals are likely to do so? The coarse metals are put to much harder uses. They are less cared for as they have less value. The precious metals are not as immortal. They are also liable to be lost, wasted, and consumed in many ways.

¹⁷⁶ The price of all metals varies less from year to year than almost any rude produce of land.

The price of the precious metals is less liable to sudden variations than the coarse ones. The durability of metals is the foundation of this extraordinary steadiness of price. All the wheat brought to market last year will be consumed long before the end of this year. But some of the iron brought from the mine 200-300 years ago, may be still used. Gold from 2,000-3,000 years ago could also still be in use. The global supply of wheat will always be nearly in proportion to the produce of those different years. But the proportion between the amount of iron used in two different years will be very little affected by any accidental difference in the produce of iron mines of those 2 years.

The proportion between the amount of gold will be still less affected by any difference in the produce of gold mines. Even though the produce of most metallic mines, varies from year to year more than the produce of wheat fields. Those variations in supply do not affect the price of commodities as wheat does.

¹⁷⁷ Before the discovery of the American mines, the ratio of the value of fine gold to fine silver was regulated by the European mints to 1= 10 to 1= 12.

An ounce of fine gold waas supposed to be worth from 10-12 ounces of fine silver. In the mid-17thth century, it came to 1= 14 to 1= 15. Gold rose in its nominal value or in the amount of silver given for it. Silver and gold sunk in their real value or in the amount of labour they could buy. Silver sunk more than gold. The silver mines were more fertile than the gold mines.

¹⁷⁸ In some English settlements, the great amounts of silver carried annually from Europe to India gradually reduced silver value relative to gold.

In the Calcutta mint, an ounce of fine gold is supposed to be worth 15 ounces of fine silver, as in Europe. It is there perhaps rated too high for its value in the Bengal market. In China, the ratio continues to be 1= 10 or 1:12. In Japan, it is 1:8.

¹⁷⁹ According to Nicolas Magens, the ratio of annual gold to silver imports into Europe is nearly 1:22.

He supposes that the great amount of silver sent annually to the East Indies reduces its remaining amount in Europe to the proportion of 1:14 or 1:15.

He thinks that the proportion between their values must be the same as the proportion between their amounts. It would therefore be as 1:22, were it not for this greater exportation of silver.

¹⁸⁰ But the ordinary proportion between the values of two commodities is not necessarily the same as the proportion between their quantities commonly in the market.

The price of an ox at 10 guineas [2,520 pence] is 60 times the price of a lamb at 42 pence. It would be absurd to infer that there are commonly 60 lambs for one ox in the market. It would be absurd to infer that there are 14-15 ounces of silver for every ounce of gold in the market, just because an ounce of gold will buy 14-15 ounces of silver.

¹⁸¹ There is a bigger difference between the amounts of silver and gold in the market than the value of silver against gold.

There are more cheap commodities in a market. When taken together, those cheap commodities have a greater value than the dear ones. There is much more bread in a market than meat. The total value of bread is greater than the total value of meat. There is more meat than poultry. There is more poultry than wild fowl. There are more buyers for the cheap than for the dear commodity.

A greater value and amount of the cheap can be disposed of than the dear commodity. Therefore, there must be more cheap commodities in total than dear ones. The whole value of the cheap commodity must be greater than the whole value of the dear one.

Silver is cheaper than gold.

We naturally should expect there should be a greater combined value and amount of silver than gold. Anyone who compares his own silver with his own gold plate will find that the combined value and amount of silver greatly exceeds that of gold. Many people have silver but have no gold. Even if they had gold, it is confined to watch-cases, snuff-boxes, and trinkets which do not have a great combined value. In the British coin, the value of the gold preponderates greatly, but not in all countries. In the coin of some countries, the value of gold and silver is nearly equal. In the Scotch coin before the union with England, the gold preponderated very little. In the coin of many countries, the silver preponderates. In France, the largest sums are commonly paid in silver. It is difficult there to get more gold than what can be carried in your pocket. The superior value of silver plate above gold in all countries will much more than compensate the preponderancy of the gold coin above the silver. This happens only in some countries.

¹⁸² Silver has always been and probably will always be much cheaper than gold.

Yet gold is cheaper than silver in the current Spanish market. A commodity may be dear or cheap depending on its price above the long term lowest possible price. This lowest price is that which barely replaces the stock employed with a moderate profit. It provides no rent.

But in the current Spanish market, gold is nearer to this lowest price than silver. The tax of the King of Spain on gold is only 5% Whereas his tax on silver is 10%. These taxes have the whole rent of most of the gold and silver mines of Spanish America. Gold tax is still worse paid than silver tax. Gold mine undertakers rarely make a fortune. Their profits must be more moderate than those of silver mines. In the Spanish market, the price of Spanish gold affords less rent and profit. It must be nearer to its lowest price than the price of Spanish silver.

In the Spanish market, with all expences computed, the total quantity of the one metal cannot be disposed of so advantageously as the other. The tax of the King of Portugal on Brazilian gold is 20%, the same with the ancient tax of the King of Spain on Mexican and Peruvian silver. It may therefore be uncertain whether all American gold is nearer to its lowest price than all American silver, to the European market.

¹⁸³ The price of precious stones may be nearer to their lowest price than the price of gold.

¹⁸⁴ A tax on luxury which creates a very important revenue, such as the tax on silver, will probably never be given up as long as it is possible to pay it.

Yet in time, it might be needed to be reduced if it is impossible to pay it. In 1736, the silver tax was reduced from 20% to 10%. The gold tax was reduced to 5%.

The operational costs of the Spanish American silver mines, like all other mines, gradually became more expensive because of the greater cost of:

• drawing out water
• supplying them with fresh air at greater depths.

¹⁸⁵ These causes are equivalent to a growing scarcity of silver.

Silver grows scarcer when it becomes more difficult and expensive to collect.

In time, the increase of the expence must either:

• be compensated by an increase in the price of silver
• be compensated by a reduction of the tax on silver
• be compensated partly by the one and partly by the other

Gold prices rose relative to silver, despite a big reduction of the gold tax. Silver prices might rise relative to labour and commodities, despite a big reduction of the silver tax.

¹⁸⁶ Such successive tax reductions must retard the rise of the value of silver in Europe.

Because of such reductions, many mines may be wrought which could not be wrought before, because they could not afford to pay the old high tax. More silver would be brought to market and reduce its value. Because of the reduction in 1736, the value of silver in Europe is at least 10% lower.

¹⁸⁷ Despite this reduction, I believe the value of silver began to rise in Europe during the 18th century.

If there were any rise, it would have been very small. People may still think the rise did not happen.

¹⁸⁸ Whatever is the annual importation of gold and silver, there must be a certain period when their annual consumption will be equal that annual importation.

Their consumption must increase as their amount increases. As their quantity increases, their value dereases. They are more used and less cared for. Their consumption increases more than their amount.

After a certain period, the consumption of those metals must become equal to their importation, provided that that importation is not continually increasing. This is currently not the case.

¹⁸⁹ The consumption may exceed the importation for some time if the importation gradually diminishes after it becomes equal to the consumption.

The amount of those metals may gradually and insensibly diminish. Their value may gradually rise until the consumption matches the importation. Why people believe silver prices continues to decrease

¹⁹⁰ People believe that the value of silver still continues to fall in Europe because of:

• the increase of European wealth, and
• the popular notion that the value of precious metals diminishes because their quantity rises with the rising wealth.

The increasing price of most rude produce may confirm them this opinion further.

¹⁹¹ I have shown that the increase in the amount of gold and silver from the increase of wealth does not reduce their value.

Gold and silver naturally resort to a rich country just as all luxuries resort to it. It is because they become dearer or because a better price is given for them, and not because they become cheaper. It is the superiority of price which attracts them. When that superiority ceases, they necessarily cease to go there.

¹⁹² I have shown that all non-plant rude produce= cattle, poultry, game, fossil fuels, minerals, etc. naturally grow dearer as the society advances in wealth and improvement.

Such commodities are worth more silver than before But it will not follow that silver has become cheaper It means such commodities have really become dearer. Both their nominal and real price rises in the progress of improvement. The rise of their nominal price is the effect of the rise in their real price.