Fifty years in Wall Street
“scaling” of their bonds. When the railroads begin to feel the effects
of competition with the low-rate companies, they will not be slow to
adjust their finances to the new situation; neither will they be nice
about their methods of effecting such adjustments; and the rights of
creditors will be ruthlessly dealt with under the compulsion of
foreclosure; and when this compulsory stage is reached, it will not be
very long before a large proportion of the high-rate bonds is transmuted
into long 4 per cent. obligations.
This very important transition, upon a such large mass of investments,
is to be anticipated as one of the most conspicuous financial events of
the comparatively near future. One of its first effects may be expected
to appear in a certain tone of depression among investors, who will feel
themselves impoverished through the fall in the market value of their
bonds, and by the impending reduction of one-third in their income from
this class of securities. The bondholders—and, indeed, investors
generally—will be likely to reason that the reduction in the fixed
charges of the roads will leave so much more available for the
stockholders; and there would be this extent of warrant for such a
conclusion, that, as the stock of a company usually about equals the
amount of its bonds issues, any reduction in the rate of interest on the
latter would be just so much per cent. saved towards the dividend on
share capital. Under such circumstances, there would naturally be a
marked increase in the demand for railroad stocks, and a large advance
in their market value would in all probability result. To those who
contemplate investing in railroad shares, this is a consideration which,
it appears to me, should claim their consideration.
It would seem probable that, in the process of conversion here
foreshadowed, there are the elements of an era of unusual speculative
activity at a period not very remote. That speculative movement may be
expected to consummate and finally adjust the change. Naturally, such an
excitement would tend to produce a great inflation in the price of
stocks (as distinguished from bonds); the final stroke of adjustment,
however, would come ultimately through the construction of new competing
roads, which would take out of the net earnings of the roads as much as
had been saved by the reduction of interest on their debts, thus leaving
the dividend resources where they stood before the change. The final
issue of this transition, therefore, would be to give the public at
large about the entire benefit of what the railroads saved by the
amelioration of their debt charges.
The tendency I have here aimed to foreshadow is one that must largely
tend to the public advantage. In other words, the railroads, having
reduced by 30 to 40 per cent. their interest charges, will be in a
position to perform their services for correspondingly lower charges.
This will be an invaluable advantage to all our industries, and
especially to such as have to deal with bulky products, a considerable
portion of the costs of which consists of charges for transportation,
and the working class, who constitute the bulk of our consumers, will be
especially benefited.
In another chapter I have shown how the overcapitalization of our
railroads has caused a false and unjust distribution of wealth, and
burdened our industries with transportation charges which are a serious
obstacle to our national progress. The tendency above delineated shows
how seriously the natural laws governing the distribution of wealth
provide an ultimate remedy for such violations of these laws. The
railroad capitalists who have made their millions by providing railroads
at such an inflated cost are now faced with the certain prospect of a
loss of one-third of their income from their investments; and that
deduction will have to be distributed among the community at large in
the form of cheaper carriage.
This is but a repetition of what we find so many times in the history of
nations, that when any important class exacts, by some artificial
process, a vast amount of wealth that does not naturally and justly
belong to it, it ultimately finds the earning capacity of its
accumulations declining. This is one among the many reasons why a low
rate of interest is apt to prevail in countries where privileged or
aristocratic classes have absorbed an undue proportion of the national
wealth.
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CHAPTER XLIV.
THE SILVER QUESTION.
ITS FUNDAMENTAL IMPORTANCE.—DANGERS OF NEGLECTING IT.—ATTEMPTS AT
EVASION.—HOW IT MUST BE FINALLY MET.—SILVER PAPER CURRENCY SCHEMES,
AND THEIR FUTILITY.
Of all current public questions, I know of none that so vitally affects
the future of our financial interests as this one—what shall be the
status of silver among the world’s currencies? At the present time,
about one-half of the world’s metallic money consists of silver, and the
other half of gold. It is clear that silver cannot maintain its
necessary function as money unless it is invested with stability of
exchangeable value. Such stability it cannot possess without the
intervention of a conventional arrangement which, with all the force of
a uniform law, makes a given weight of silver virtually exchangeable for
a given weight of gold. This principle once established, and silver
bullion being made convertible into silver coin at the mints of the
chief nations on demand, it follows that the bullion value of silver
must constantly conform closely to its value as coin, and the stability
of the value of silver coin would thus be insured.
The difficulty has been that, owing to petty jealousies and prejudices,
Governments have hesitated to act with the unanimity that is necessary
to an efficient conventional arrangement. Each one has preferred that
others should take the responsibility of free coinage; and the result
has been that unrestricted coinage has been adopted only by those
nations which happened to be most imperatively committed to the
necessity of protecting their silver circulation. Those nations were
comprised in the international combination known as “The Latin Union.”
That Union was found competent to take care of all the new supplies of
silver, so long as the principle of free coinage was maintained and the
value of the metal was kept uniform under its operation. In an evil
hour, however, certain German theorists persuaded Chancellor Bismarck to
commit Germany to the demonetization of silver. The large supply of the
metal thereby suddenly thrown into the mints of the Union nations
alarmed that combination, first, into a limitation of their coinage of
silver, and, finally, into a suspension of it. The coinage demand for
silver being thus cut off, the price of silver bullion was cut loose
from the relative legal valuation between silver coin and gold, and was
left to drift with the variations in the commercial demand, and to
decline in consequence of an excess of supply over demand. This is a
brief explanation of the causes of the present depreciation in the value
of silver.
I know of no way of repairing the value of that metal other than by
establishing an international union, similar in its objects and
conditions to the now virtually defunct Latin Union, but embracing a
wider range of Governments than that combination did; the co-operation
of the United States, England and Germany being especially important.
Here I may perhaps be permitted to republish a series of questions
propounded by the New York _Daily Commercial Bulletin_, in October last,
with my answers appended, as briefly expressing the conclusions I have
been led to form on this question:
QUESTIONS.
I. Would the stock of gold in the world afford a basis broad enough to
meet the banking and commercial operations of Europe and the United
States, without the co-ordinate use of a properly regulated silver legal
tender?
II. Would you favor an International Coinage Union, embracing the United
States and the leading European Governments, based upon a uniform
valuation of silver as compared with gold, and binding each member to
coin on demand all silver presented at its mints and to make such coin a
legal tender?
III. Supposing the ratio of valuation adopted by such a Union to be the
present most general one of 15½ to 1, do you see any reason why the
obligation of all nations in the Union to convert silver bullion into
legal tender coin at that rate should fail to restore silver to its
former value of about 60 pence per ounce?
IV. Would the suspension of the coinage of the Silver Dollar be
judicious, or necessary, or effectual, as a means of inducing European
Governments to join in an International Coinage compact?
V. Are there any important reasons connected with the finances of the
United States Government, with our currency system, or with the
prospective trade of this country, why the coinage of the Standard
Dollar should be suspended?
IV. Do you favor the immediate suspension of coinage of the Silver
Dollar?
REPLIES.
1. Possibly the existing stocks of gold in Europe and America might be
sufficient to serve the purposes of banking reserves and for
transmission in the international exchanges; but it is impracticable to
use such a valuable metal to the extent required for the purposes of
active circulation, and this creates a necessity for a silver legal
tender coin for the retail transactions of business. For this reason I
regard the use of silver, co-ordinately with gold, as an indispensable
element in the world’s currency.
2. I regard an international union as absolutely necessary for
maintaining the joint use of gold and silver, if the relative value
between those metals is to be steadily maintained. If a uniform value of
silver were adopted by members of such a union, and if the mint of each
nation were bound to coin all silver brought to it, and the coins were
made a legal tender, it appears to me that this would establish a
uniform value for silver bullion the world over, on a parity with the
legal valuation of silver coin; and this conventional value of bullion
would be preserved as long as the union should be continued. Even the
limited international arrangement known as the Latin Union sufficed to
keep silver at about 60 pence per ounce, until its members, taking
fright by the demonetization of silver by Germany, stopped the coinage
of silver; when, the conventional support being withdrawn and the
coinage demand suspended, bullion fell to its value as a mere commodity.
This shows how effective the union principle is, and what becomes of
silver without it.
3. If an international union were to fix the value of the two metals at
15½ weights of silver to 1 of gold, the rate now general in Europe, and
the members of the union were compelled to coin it on demand at that
rate, then the free convertibility of bullion into coin would
necessarily make the coin and the bullion of equal value, except the
slight difference that might arise from coinage charges; which is
tantamount to making silver worth about 60 pence an ounce, or its former
value.
4. In view of the differences of opinion in Europe on the standard
question and the strong prejudices in England in favor of the gold
standard, it appears to me more than doubtful whether any step will be
taken on this subject until those countries are made to carry the
burthen of the large surplus of silver that we are now coining. But with
25 to 30 millions of bullion of our silver going thither every year, the
effect would be so serious upon Asiatic trade and upon the immense