The Principles of Political Economy
by John Stuart Mill

Book 3: Distribution

Chapter 10

Of a Double Standard, and Subsidiary Coins

    1. Though the qualities necessary to fit any commodity for
being used as money are rarely united in any considerable
perfection, there are two commodities which possess them in an
eminent, and nearly an equal degree; the two precious metals, as
they are called; gold and silver. Some nations have accordingly
attempted to compose their circulating medium of these two metals
indiscriminately. There is an obvious convenience in making use
of the more costly metal for larger payments, and the cheaper one
for smaller; and the only question relates to the mode in which
this can best be done. The mode most frequently adopted has been
to establish between the two metals a fixed proportion; to
decide, for example, that a gold coin called a sovereign should
be equivalent to twenty of the silver coins called shillings:
both the one and the other being called, in the ordinary money of
account of the country, by the same denomination, a pound: and it
being left free to every one who has a pound to pay, either to
pay it in the one metal or in the other. 
    At the time when the valuation of the two metals relatively
to each other, say twenty shillings to the sovereign, or
twenty-one shillings to the guinea, was first made, the
proportion probably corresponded, as nearly as it could be made
to do, with the ordinary relative values of the two metals
grounded on their cost of production: and if those natural or
cost values always continued to bear the same ratio to one
another, the arrangement would be unobjectionable. This, however,
is far from being the fact. Gold and silver, though the least
variable in value of all commodities, are not invariable, and do
not always vary simultaneously. Silver, for example, was lowered
in permanent value more than gold, by the discovery of the
American mines; and those smal1 variations of value which take
place occasionally, do not affect both metals alike. Suppose such
a variation to take place: the value of the two metals relatively
to one another no longer agreeing with their rated proportion,
one or other of them will now be rated below its bullion value,
and there will be a profit to be made by melting it. 
    Suppose, for example, that gold rises in value relatively to
silver, so that the quantity of gold in a sovereign is now worth
more than the quantity of silver in twenty shillings. Two
consequences will ensue. No debtor will any longer find it his
interest to pay in gold. He will always pay in silver, because
twenty shillings are a legal tender for a debt of one pound, and
he can procure silver convertible into twenty shillings for less
gold than that contained in a sovereign. The other consequence
will be, that unless a sovereign can be sold for more than twenty
shillings, all the sovereigns will be melted, since as bullion
they will purchase a greater number of shillings than they
exchange for as coin. The converse of all this would happen if
silver, instead of gold, were the metal which had risen in
comparative value. A sovereign would not now be worth so much as
twenty shillings, and whoever had a pound to pay would prefer
paying it by a sovereign; while the silver coins would be
collected for the purpose of being melted, and sold as bullion
for gold at their real value, that is, above the legal valuation.
The money of the community, therefore, would never really consist
of both metals, but of the one only which, at the particular
time, best suited the interest of debtors; and the standard of
the currency would be constantly liable to change from the one
metal to the other, at a loss, on each change, of the expense of
coinage on the metal which fell out of use. 
    It appears, therefore, that the value of money is liable to
more frequent fluctuations when both metals are a legal tender at
a fixed valuation, than when the exclusive standard of the
currency is either gold or silver. Instead of being only affected
by variations in the cost of production of one metal, it is
subject to derangement from those of two. The particular kind of
variation to which a currency is rendered more liable by having
two legal standards, is a fall of value, or what is commonly
called a depreciation; since practically that one of the two
metals will always be the standard, of which the real has fallen
below the rated value. If the tendency of the metals be to rise
in value, all payments will be made in the one which has risen
least; and if to fall, then in that which has fallen most. 

    2. The plan of a double standard is still occasionally
brought forward by here and there a writer or orator as a great
improvement in currency. It is probable that, with most of its
adherents, its chief merit is its tendency to a sort of
depreciation, there being at all times abundance of supporters
for any mode, either open or covert, of lowering the standard.
Some, however, are influenced by an exaggerated estimate of an
advantage which to a certain extent is real, that of being able
to have recourse, for replenishing the circulation, to the united
stock of gold and silver in the commercial world, instead of
being confined to one of them, which, from accidental absorption,
may not be obtainable with sufficient rapidity. The advantage
without the disadvantages of a double standard, seems to be best
obtained by those nations with whom one only of the two metals is
a legal tender, but the other also is coined, and allowed to pass
for whatever value the market assigns to it. 
    When this plan is adopted, it is naturally the more costly
metal which is left to be bought and sold as an article of
commerce. But nations which, like England, adopt the more costly
of the two as their standard, resort to a different expedient for
retaining them both in circulation, namely, to make silver a
legal tender, but only for small payments. In England, no one can
be compelled to receive silver in payment for a larger amount
than forty shillings. With this regulation there is necessarily
combined another, namely, that silver coin should be rated, in
comparison with gold, somewhat above its intrinsic value; that
there should not be, in twenty shillings, as much silver as is
worth a sovereign: for if there were, a very slight turn of the
market in its favour would make it worth more than a sovereign,
and it would be profitable to melt the silver coin. The
over-valuation of the silver coin creates an inducement to buy
silver and send it to the Mint to be coined, since it is given
back at a higher value than properly belongs to it: this,
however, has been guarded against, by limiting the quantity of
the silver coinage, which is not left, like that of gold, to the
discretion of individuals, but is determined by the government,
and restricted to the amount supposed to be required for small
payments. The only precaution necessary is, not to put so high a
valuation upon the silver, as to hold out a strong temptation to
private coining.