The principal currency of England got on a gold basis, mainly because of the over-valuation of the guinea. Even as late as 1870 gold and silver were maintained at almost the same relative value in the market, and they were both freely usable as legal money at that value in countries which were important by reason of their wealth and production and which used a large quantity of coined money. There was, however, ocasionally a slight premium on one or the other, when in heavy demand.
The reason why silver was dropped altogether was mainly due to tradal development. Up to 1870 all the countries in the world had a silver standard or a bimetallic standard. Germany was the first country to follow England and at the close of 1871 she took steps toward the establishment of a gold standard and completed arrangements in July 1873. Denmark, Sweden, Norway and, later on, Holland followed in the wake of Germany. France, Belgium, Switzerland and Italy, or what was known as the Latin Union, suspended the free coinage of silver in 1874. For the first time gold and silver began to be used as standard money in the civilized world without any effective tie between them.
Even at this period there was no standard in the same sense as there is to-day. If anything, the currencies of the world were modelled on the bi-metallic principle. There was a striving, especially on the part of Great Britain, to bring in a single standard, and that in gold. With a view to bring about such a change successfully Great Britain proposed in 1867 - even before she adopted the gold standard herself - that France should co-operate with her to mint a coin that would be legal tender in both countries; also that France should give up the bi-metallic, and adopt the single gold, standard. Throughout the world it was felt that something should be done, as silver was depreciating and it was impossible to maintain gold and silver at a fixed ratio as heretofore. By about 1876 all the world's standard of value had changed, Asiatic countries alone remaining still wedded to the silver standard. At a later stage I will point out the reason which helped towards the speedy transformation of the standard of value in Europe.
From 1871 to 1876 the gold price of silver and the Indian Exchange on London fell steadily and largely. In March 1876 a Select Committee of the House of Commons was appointed to consider and "report upon the causes of the depreciation of "the price of silver, and the effects of such depreciation upon the exchange between India and England." It is noteworthy that people had already begun to think in gold when they spoke about the depreciation of the price of silver, suggesting of course that, while gold was unchanged, silver changed in value. While gold was the common denominator in Europe, in India and the Eastern countries silver held that position; and in 1876 the problem of the increase in the price of gold was discussed in India, instead of the decrease in the price of silver. The Committee which was presided over by Lord Goschen (then Mr. Goschen) must certainly have been aware of this when it made the following suggestion:
"Your committee on this point would simply remark that, if effect should be given to the policy of substituting gold for silver wherever it is possible, and giving gold for the sake of its advantages in international commerce the preference even among populations where habits and customs are in favour of silver, and thus displacing silver from the position (which it has always occupied) of doing the work of the currency over at least as large an area as gold, no possible limits could possibly be assigned to the further fall of its value which would inevitably take place: But your Committee are bound to refrain from giving any opinion on the expediency of such a policy, or the necessity for its adoption."
There was complete unanimity in the opinion that the change was in silver only, and it was also believed that the change in the relative value of gold and silver was due to increased production of, and reduced demand, for silver. At the same time the position was not so obscure, as may be seen from the following excerpt of the "Economist" of September 21, 1876:
"The cardinal present novelty is that silver and gold, in relation to one another, are simply commodities. Until now they have not been so. A very great part of the world adhered to the bi-metallic system which made both gold and silver legal tender and which established a fixed relation between them. In consequence, whenever the value of the two metals altered, these countries acted as equalizing machines. They took the metal which fell; they sold the metal which rose, and thus the relative value of the two was kept at its old point. There is no great country now really acting on this system. The Latin Union, it is true, adhered to the name, but they have abandoned the thing. As they do not allow silver to be coined except in limited quantities, they have no longer an equalizing action; they no longer receive the depreciated, or part with the appreciated metal, and, therefore, the two metals now exchange for one another just as commodities. The gold price of silver is now - like the gold price of tin - left practically for the first time without regulation and free from the manipulation of Governments."