. . . . ii hi ;;i: ii: iiiiiiiiiiiiiii liiiiiiii iiiiiiiiiiiiiiiiiiiiiiiiiKiiiiH.iiiiiiiiiuiiiiiiiiiiiiiiiiiiiKiiiiiiiM / BY J. LAURENCE LAUGH LIN BANKING PROGRESS MONET AND PRICES CREDIT OF THE NATIONS LATTER-DAT PROBLEMS INDUSTRIAL AMERICA THE PRINCIPLES OF MONET CHARLES SCRIBNER'S SONS MONEY AND PRICES MONEY AND PRICES BY J. LAURENCE LAUGHLIN, Ph.D. Emeritus Professor of Political Economy in the University of Chicago NEW YORK CHARLES SCRIBNER'S SONS 1920 Copyright, 1919, by CHARLES SCRIBNER'S SONS Published April, igiy • . • • . • • • • < • ■ . • . < < . \> SJ* PREFACE No practical economic problem has been brought more prominently to the front than that of prices and how they are regulated. It is said that the high rate of war wages cannot come down until prices of the articles consumed by the laborer fall. Indeed, cost of living to every one is involved in the price question. Why, then, have prices gone up? To what force must we look for their decline? Some writers have asserted that prices rise and fall because of the quantity of money in circulation, or the volume of credit devices. On the other hand, there was no such expansion of money or credit as would account for the rise of war prices in this country. Every business man, more- over, knows that higher wages for no greater labor effort have raised prices. It is a very timely subject, indeed, for all of us. Instead of making a complex and theoretical ex- position of prices and their causes, it occurred to the author that, after a simple statement of the principles involved, the forces regulating prices might be clearly interpreted for the general reader by the means of practical chapters from the history of prices since 1850, extending to the end of the European War. iO vi PREFACE Such a plan enables the relation of the production of gold to the price level, the great lack of uniformity in the prices of different groups of articles — especially in agricultural products as contrasted with other groups — and the mooted question of inflation as a cause of high war prices, to be treated in this volume. Thus it might not be uninteresting to present the workings of the fundamental principles of money — not in dry, theoretical essays, but in the form of studies upon actual happenings and emergencies in the experiences of recent decades down to the present day. A unity of treatment was thus obtained which, it is hoped, has not been impaired by the introduction of several topics which belonged as corollaries to the main course of the exposition. These also were episodes of our actual experience. J. Laurence Laughlin. Jaffrey, N. H., 1919. CONTENTS CHAPTER I. A THEORY OF PRICES PAGE § i. Exchange Value of Money i § 2. Meaning of "Money" 2 § 3. Supply of Money 5 § 4. Forces Affecting Price 6 § 5. Price-Making Precedes Exchange 9 § 6. Purchasing Power n § 7. Demand for Money 15 § 8. Introduction of Credit 20 § 9. International Movement of Specie .... 23 § 10. The Quantity Theory 26 CHAPTER II. GOLD AND PRICES AFTER 1873 § 1. Fall of Prices and Scarcity of Gold ... 31 § 2. Facts as to Prices, 1873-1885 32 § 3. Credit and Money 38 § 4. Events Leading to Panic of 1873 41 § 5. Effect of Improvements in Lowering Prices . 43 § 6. Price Movement Not Uniform 58 § 7. Theory of Appreciation of Gold 61 § 8. Economies in Use of Precious Metals ... 68 § 9. Fall of Profits and Wages 74 § 10. Conclusion 77 vii viii CONTENTS CHAPTER III. CHANGES IN PRICES SINCE 1896 PAGE § i. The Problem Analyzed 78 § 2. Resume of the Causes Affecting Prices ... 81 § 3. Facts as to Prices and Production of Gold, 1850- 1915 8 S § 4. Demand for Gold 89 § 5. Relation of Gold to Prices 94 § 6. Effect of Gold on Credit 97 § 7. No Uniformity in the Rise of Prices . . . . ioi § 8. Causes Other than Gold Affecting Prices: The Tariff, Materials 106 § 9. Unionism and Higher Wages 114 CHAPTER IV. THE INCREASED COST OF LIVING § 1 § 2 §3 §4 § S §6 Farm and Food Products . 119 Effect of Combinations on Prices 126 Speculation 129 Retail Prices 131 Extravagance 134 Conclusion 135 CHAPTER V. THE EUROPEAN WAR AND INFLATION § 1 § 2 §3 §4 § 5 Meaning of Inflation 137 Prices and the Increase of Circulation . . . 139 Causes Affecting Goods 141 Money and Prices in Europe 143 Credit and Inflation 144 CONTENTS ix PACE § 6. Relation of Reserves to Loans 146 § 7. The War Finance Corporation 149 § 8. Inflation Due to War Loans 151 § 1 § 2 §3 §4 § 5 §6 CHAPTER VI. AGRICULTURAL UNREST Psychology of the Greenback and Silver Craze 152 Agricultural Revolution Caused by Railways . 158 Price of Wheat Fixed by World-Wide Forces . 162 Agricultural Readjustment 164 A Boom and Its Reaction 167 Free Silver a Political Deception 171 CHAPTER VII. SOCIALISM IN THE PRICE QUESTION § 1. Some Common Fallacies About Prices .... 176 § 2. Prices Related to the Standard and Not to the Media of Exchange 180 § 3. Schemes to Change Prices Through the Quan- tity of the Circulation 182 § 4. Changing Prices by Laws Socialistic .... 185 § 5. Free Silver Allied to Socialism 188 § 6. Socialism in Other Issues 191 CHAPTER VIII. A MONETARY SYSTEM FOR SANTO DOMINGO § 1. Origin of the Proposal 197 § 2. General Economic Conditions 198 § 3. Evils of a Fluctuating Standard 203 § 4. Effects on Producers of Exports 210 x CONTENTS PAGE § 5. The Depreciating Standard Reduced Government Income 213 § 6. The Silver Standard and Prices 214 § 7. Sufferings of Laborers and Importers . . . 219 § 8. Features of the Remedial Legislation ... 222 § 1 § 2 §3 §4 § 5 CHAPTER IX. THE REFUNDING BILL OF 1881 The Sensitive Credit Mechanism 233 Ways of Reducing National Bank Circulation 234 Effect of Term and Rate of Interest on Bonds 242 Destructive Features of the Refunding Bill . 245 How the "Carlisle Section" Caused the Panic . 252 CHAPTER X. GOVERNMENT VS. BANK ISSUES § 1. Government Convertible Paper Expensive . . 258 § 2. Confusion Between Monetary and Fiscal Func- tions 263 § 3. The Menace of Government Issues .... 265 § 4. Objections to Bank-Notes 267 § 5. Only Bank-Notes Have Elasticity 273 § 6. Convertibility by Banks More Feasible . . . 274 CHAPTER XL THE MONETARY COMMISSION OF 1897 § 1. Why Our Democracy is Slow in Reforms . . 280 § 2. Raison d'Etre of the Monetary Commission . . 285 § 3. Vigorous Expression of Business Opinion . . 290 § 4. The Position of Merchants and Bankers . . 293 Appendix. Law of Santo Domingo, 1894 Index 299 309 CONTENTS xi CHARTS PAGE PLACE I. Movement of Prices in Germany, France, ? and Great Britain, 1850- 1885 34 Chap. II, § 2 II. Movement of Group Prices at Hamburg, 1850-1885 .... 35 Chap. II, § 2 III. Gold Prices and Gold Production, 1850-1915 86 Chap. Ill, § 3 IV. Changes of Prices in Certain Groups, 1890-1907 105 Chap. Ill, § 7 V. Wages and Prices, 1890-1907 . . 113 Chap. Ill, § 2 VI. Movement of Prices, 1914-1918 . 137 Chap. V, § 1 MONEY AND PRICES CHAPTER I A THEORY OF PRICES § i. Assuming that the problem of the theory of prices is the same problem as that of the value of money, we are at once required to explain that by value of money we mean the exchange value of money. With this understanding it is evident that the level of prices is only a statement of the exchange value of money in terms of goods in general. A fall, for example, in the value of money necessarily carries with it the fa^t of a rise in the prices of goods. In the relation of a par- ticular commodity to money, price is the quantity of the money for which it will exchange. If we are speak- ing of gold prices, the price of a single commodity is the quantity of gold for which it will exchange. One cannot think of price except as a ratio. 1 The theory of prices, therefore, is clearly a question of exchange value. Consequently, its attainment does 1 It is impossible for me to understand Professor Kinley's idea of value as "the quantity of marginal utility of an economic good"; and that the unit of value may be "the amount of value in a chosen quantity of any article" {Money, p. 62). The qualities of an article inhere in it; its utility arises from a relationship between these qualities and the needs of men; and these matters affect the exchange value of an article. How can we take a quantitative measure of the relation between the qualities of a commodity and men's regard for these qualities? This gives us no explanation of ex- change value. I 2 MONEY AND PRICES not appear to me to be involved in the solution of the fundamental theories of value, such as the case of marginal utility versus cost of production. Even if value be regarded as an unrelated magnitude of utility, or as subjective importance, we should still have the problem of exchange value. Whatever may be the various theories suggested as regulating the value of gold, or of a given commodity, we cannot escape the fact that exchange value between gold and goods is the problem of the value of money. And there seems to be a general concurrence in this simple proposition. 1 I am certainly in general agreement with most econ- omists at this point. § 2. When we mention the value of money, how- ever, it is also necessary to know what we mean by "money." At this point we must, as investigators, be willing frankly to admit that there is no agreement whatever as to the usage of the term "money." Even the same writer will use it in different senses. To some, as Nicholson, for instance, money — so far as it concerns prices — is gold and nothing else; to others, like Walker, it includes also government paper and bank-notes; to still others it includes all the forms of credit such as bills of exchange and checks. 1 J. S. Mill: Price is "the quantity of money for which it will exchange" (Book III, chap. I, § i). A. T. Hadley: "A price, in the commercial sense of the word, may be defined as the quantity of money for which the right to an article or service is exchanged" (Economics, p. 72). Cf. also Seager, Political Economy, p. 51; W. A. Scott, Money and Banking, p. 34, and many others. MEDIA OF EXCHANGE 3 It is evident enough that progress can be made only by some definite conceptions of the functions of money. In my opinion the distinction between the standard commodity in which prices are expressed, and the media of exchange by which goods are in fact conveniently transferred, is essential to any insight into the real problem of prices. This distinc- tion is' simple enough, but it is far-reaching in its in- fluence on the price question. For instance, we, in the United States, have the gold standard; and by our definition the price of any commodity is the quantity of gold for which it will exchange. If this be so, the means for the analysis of price changes are to be found, very evidently, in the relative values of goods and gold. Exchange value being not an ab- solute but a relative thing, we must, in a study of the price problem, deal with all the forces which can in- fluence the ratio between goods and gold. To deal only with those affecting gold, or the money side of the ratio, to discuss only the demand for gold and the supply of it, would be inadequate and unscientific. To assign the causes of changes of price chiefly to variations in the quantity of money is not only one- sided, it is also ambiguous; because "money" is only one side of the price ratio, and to those taking this point of view " money" may not mean only the stand- ard commodity. To this point, obviously, everything is simple; but here an honest inquirer rightly may suggest that there 4 MONEY AND PRICES may be forces working on the value of gold, and thus on prices, caused by the volume of other forms of money than gold, such as government paper, bank-notes, and forms of credit; and this is more or less true. In the evolution of monetary conveniences, society has con- stantly aimed at finding safe media of exchange to avoid loss from the use of the valuable standard, which fully accounts for the creation centuries ago of such institutions as the banks of Venice and Amsterdam; for the invention of the bill of exchange; for bank- notes; and more lately, for checks and deposits and clearing-houses. In the main, the effect on the value of gold of an increase or decrease in the volume of the media of exchange works on prices only in so far as it touches the demand for gold. As a rule the evolution of these various media of exchange has saved gold from being used as a medium, and, as transactions have increased, has relieved it pro tanto of demand. The influence upon prices of the quantity of the "cir- culation," when that word means media of exchange, therefore, is referable to the class of forces affecting the demand for the standard commodity. That is, devices which save the use of gold tend to keep prices up, because they protect it from a demand which other- wise would have worked to increase the value of gold and thus lowered prices. This is a very different thing from saying that an increase of various media of ex- change is an increase of purchasing power, and causes a rise of prices, on the ground that forms of money SUPPLY OF STANDARD COMMODITY 5 are necessarily a demand for goods. In my judgment this last is erroneous. Demand for gold, or the stand- ard, is but one of several sets of forces which influ- ence the level of prices, or the value of "money." Yet it must be remembered, while sharply distinguishing between the function as a standard and that as a medium of exchange, the same article chosen as the standard, like gold, may also be used as a medium of exchange. Although, as in the case of gold, this last use may not be extensive, still the principles of price in operation are acting upon that part of the money in question which serves as a standard differently from their action on that part which serves as a medium of exchange. § 3. Obviously the supply of the standard com- modity must be one force affecting its value, and thereby the level of prices. Yet the operation of sup- ply on the value of an imperishable commodity, like gold or silver, is not the same in different epochs. To change its value the new supply must be large rela- tively to the total stock; but as production goes on the total stock begins to assume an amount quite out of proportion to the new supplies from year to year. Thus, in the course of time, changes in the annual product — certainly if we have gold in mind — have less and less practical effect upon the value of the stand- ard and hence upon prices. The supply, of course, cannot be considered by it- 6 MONEY AND PRICES self; it must be taken in connection with demand. As we all know, an increased or diminished demand becomes effective on the value provided the stock is of such quantity that the force of demand is apprecia- ble on the total stock. If, then, the existing stock is very great, the effect of ordinary changes in demand, or even some considerable increase in demand, could produce little modification in the value of the world's total supply. Hence, variations in the level of prices due to the fluctuations in demand for a standard, like gold, would also be very gradual and it would be a long time before the results on general prices would be evident. § 4. A frequent error in past discussions of prices has arisen from a careless neglect of the pivotal and elementary nature of price. The price of any one article, as we have agreed, is the quantity of the stand- ard for which it will exchange. We are studying a case of exchange value; and the price obviously can be modified by anything which raises or lowers the exchange ratio of goods to the standard. If the stand- ard were supposed to be constant, any one knows that changes of price could be brought about by changes in the expenses of production of goods. Put a tax on goods and it is expected in general that their prices will rise; introduce wonderful new inventions which save labor, and without question the price of the goods thus affected will fall. In neither case is it possible HOW PRICES ARE MODIFIED 7 to refer the change in prices to changes in the demand and supply of " money" (however it may be defined). In reality, since price is the ratio of exchange between goods and a metallic standard, like gold, and since the enormous production of gold has created a very great total stock, any sudden or extreme fluctuations in prices, in any few years, could not be assigned to causes operating on the money standard, but to those oper- ating on goods themselves. Hence the active causes working on the level of prices in the real world of to-day are not to be sought by confining ourselves wholly to the one side of "money" in the exchange ratio. The general level of prices is the resultant of the two sets of forces acting both on the standard and on goods in general. The definite outcome can be known only after an examination of the relative strength of the various counteracting, or assisting, forces on both sides of the ratio. For instance, since 1880 there has been an unexampled progress of the arts, which has reduced the outlay in producing nearly every article of our daily consumption. In the same time there has been an unparalleled gain in the yield of gold. The total stock of gold has been nearly trebled since 1875. There has been some increased demand from countries adopting a gold standard, but in no proportion to the increased supply. At the be- ginning of this century only about one-half of the total stock of gold has been actually used in the currencies of the world. Therefore, gold ought to have fallen 8 MONEY AND PRICES in value and prices have risen. Relatively to a day's labor it has fallen; that is, a day's labor exchanges for more gold than ever before. On the other hand, the marvellous achievements of invention and dis- covery, have in general lowered the cost of obtaining a given unit of goods (i. e., sl yard, a ton, etc.) in such a phenomenal way that in the race for cheap- ness of production goods have outstripped gold. This outcome is the resultant of the several forces acting on the general price level since 1875. As com- pared with prices about 1879, the general level of prices in 1896 was about 20 per cent, lower. And I am confident this fall cannot be ascribed to any scarcity of gold, nor of "money" in any form. The facts may be seen at a glance in Charts I and III. This analysis of price, and the consequent theory of prices, goes with the insistence upon the fundamental nature of exchange value, and upon the definition of price. Clearly enough, it ignores some preconcep- tions which many of us have imbibed from all our earlier studies in economics. Sometimes I have been wrongly classed as a rigid Ricardian. Strangely enough for this classification, a correct statement of our mone- tary theory obliges me to depart from some of the ac- cepted propositions of Ricardo. He has led many followers to put too much emphasis upon the effect of the quantity of money on the level of prices. At this point let me insist that I do not remove "the quantity of money" from the forces which have THE PRICE-MAKING PROCESS 9 an influence on prices. Full and sufficient emphasis has been given the theoretical effect of an increase in the supply of the standard commodity upon its value, and thus upon prices. Likewise, the effect of changes in the volume of media of exchange upon the value of the standard has been considered. But I am quite aware that some may still believe that the quantity of the media of exchange has a direct effect on prices in other ways, for instance, by being offered for goods as purchasing power; that, with a stationary circulation and increasing transactions, the lack of media of ex- change may cause a fall of prices. It is exactly on this point that some explanation of the application of my theory of prices may be permitted. § 5. Please remember that in a brief outline of a vast subject like a theory of prices it is not possible to give to each proposition its full discussion and its proper limitations. Yet it is necessary to insist, first of all, upon the idea that the valuation of goods, or the determination of their price in some standard, is as a rule the outcome of conditions antecedent to the formal act of exchange in the market for any form of money. The offer of a certain amount of some media of exchange for goods merely records the antecedent price-making process. The media of ex- change come into play after the price-making process, and not as a part of that process. In the main, the media of exchange are a consequence, not a cause, io MONEY AND PRICES of the influences determining prices. All the elements touching the acquisition (materials, labor, transporta- tion, etc.) of an article; the intensity and nature of the demand for it from consumers; the influence of monopoly conditions — all these are in constant opera- tion in determining the quantity of gold for which the article will be bought and sold. But demand alone does not determine the price of any freely reproducible article. Anything affecting its expense of production must be taken into account. After these forces have done their work, and a price adjusted by these forces has been fixed in the markets, the goods thus valued, or expressed for convenience in terms of a standard, are actually exchanged (or paid for) by some medium of exchange, which, in these days, is seldom the stand- ard money commodity. The service rendered by the medium of exchange is purely one of convenience. The seller receives for the price, previously agreed upon, some means of payment (notes, checks, drafts, etc.) related to the standard indirectly by some test of solvency not material to the price-making process here under discussion. In most cases, such as selling wheat, or cattle, or wholesale goods, the media of exchange arise out of, and, as a consequence of, securing a discount at a bank based on the actual transaction in goods. In these matters, a medium of exchange is provided by the banks in exact proportion to the sum of the value of the goods bought and sold. As a mat- ter of course, the quantity of the media of exchange MONEY AND DEMAND n must be drawn for sums equal to the transactions, as expressed in dollars, or in terms of the standard. What should be kept in mind, however, is that in this whole process the " money," i. e., the media of exchange needed to perform the transactions, is not a factor in fixing the price per unit of goods. What buyer or seller of wheat or cattle is influenced in fixing the price of his goods by calculations as to the total supply of money in the country, as compared with the work to be done? That process goes on only in the minds of the theoretical writers on money. § 6. Yet to many minds the amount of a man's purchasing power, which he can offer for goods, and which consequently affects the prices of those goods, is the quantity of " money" which he can offer. In this way it is sometimes assumed that the quantity of "money" put into circulation is synonymous with the demand for goods in general; if the quantity of " money" is reduced the demand for goods is reduced, and vice versa. Therefore, it is argued, the quantity of money in circulation is a direct factor in fixing the level of prices. To my mind this is a superficial way of looking at the price-making process. If we hark back to simple, fundamental forces, we ought not to go astray on this matter. In the first place, because all goods and property are conveniently expressed in dollars, or in the gold standard, we are apt to think of money, in- 12 MONEY AND PRICES stead of goods, as the primary factor in trading opera- tions. In the essentials of production and consump- tion, goods are the primary thing, while money is only a secondary or incidental thing, introduced solely as a convenience and subsidiary to the main operations of satisfying economic wants. In the next place, a man's purchasing power, in any sense in which he can have a vital influence on the prices of things he desires, is measured not by the amount of money he has, but by a certain amount of his wealth; or, to put it more exactly, by that part of his wealth which consists of cash and of immediately salable goods. Since im- mediately salable goods are always a basis of legit- imate discounts, it amounts to saying that a man's purchasing power is limited by the amount of his cash, plus his credit. When we mention this conception of a theory of "purchasing power," which to some persons forms the demand for goods in general, we are at once intro- duced into the subject of demand for and supply of goods. In short, what is demand for goods? That ought to be a simple question; but it is not, if demand for goods is made synonymous with the volume of those instruments variously defined as "money." In case of particular demand and supply, a fluctuation in demand may cause a change in the market price of the one commodity in consideration. That is one of the ways by which readjustments of the values of com- WHAT CONSTITUTES DEMAND 13 modi ties relatively to each other may take place. 1 Or an increase in expenses of production, or the op- erations of monopoly, might change the price irrespec- tive of demand. On the other hand, in the case of a general demand and supply, we all know as an eco- nomic commonplace that they are only different ways of looking at the same total mass of goods : an increase in the general supply of goods is obviously an increase in the general demand for goods. Such operations do not act to change the level of prices, or the relation of units of these goods to a standard commodity, such as gold. Ranchman A may go on increasing the num- ber of cattle in his herd, and farmer B may go on in- creasing the yield of wheat on his lands, but the mere increase of cattle, or of wheat, does not necessarily lower the price of cattle or wheat. To explain a par- ticular price we must also deal with the actual demand for cattle, or wheat — arising from those who have immediately salable goods or cash — as compared with the increasing supply. The demand for cattle from owners of wheat may grow as fast as the supply; and vice versa. Our fine-spun theories are often held up by a sharp glance at well-known facts. Since 1880 we have witnessed a prodigious addition to the stock of salable goods in our markets; the total productivity 1 And a number of changes of this kind in several groups of goods, un- der a speculative influence, may theoretically lift the level of prices and so change the value of gold; but this would be temporary and due to ab- normal conditions. 14 MONEY AND PRICES of our capital and labor has been marvellously in- creased; and consequently each unit, in the large total output of units of goods has been sold at a lower price than before. These are gold prices, and yet no one can for a moment ascribe such a fall to a scar- city of gold. At this point, however, reference may be made to some great new production of gold, such as that after 1850, and it may be argued that as a matter of fact this increase in gold caused a rise of prices. 1 But it cannot be assumed without careful proof that this actual change of prices was due to the increased quan- tity of gold. To do so would require us first to grant the theory which is itself on trial, and to deny the effects of all other forces, some of which were obviously at work, to raise prices. For instance, the extraordinary rise in the price of labor at the time of the gold dis- coveries would almost alone explain the higher level of prices in the gold-producing districts; while the sudden demand for transportation raised freights and prices to an exceptional extent. To the claim, however, that an increased produc- 1 In 1850 and thereafter the new supply of gold was large relatively to the existing stock, and the value of the standard commodity must have fallen, with a consequent effect of a tendency to higher prices, which was doubtless exaggerated by speculation (cf. Chart III). But, since 1896, the unexampled increase in the production of gold has not proportionally influenced prices, owing to the already large accumula- tions in the total stock. The admitted rise of prices must be due more to conditions affecting the production of goods, such as monopolies, trusts, higher wages for the same or less effort, increase in costs of obtaining ma- terials, taxes, and the like. NEW GOLD AND HIGHER PRICES 15 tion of gold adds to general purchasing power and so raises the level of prices, let me suggest that the bring- ing into existence of new wealth of any kind — whether new gold, new wheat, or new cattle — adds likewise to man's purchasing power. Hence, according to this theory, a new supply of wheat, or cattle, ought to raise the general price level, because of increased "purchasing power," just as much as a similar sum of gold. Keeping in mind that we are here concerned only with the idea that "purchasing power" is the form by which prices in general are affected, we may see that increase of wealth in any form ought to in- crease purchasing power, and thus raise prices; but we all know it does not. Hence there must be some- thing wrong with this way of determining prices. In my judgment the error lies in not seeing that pur- chasing power is synonymous with goods and not with "money." § 7. Probably, when we were discussing the phe- nomenal increase in the production of goods, it may have occurred to some that the vital thing in lowering prices was passed over; that this vast addition of new goods has made a corresponding increase in the de- mand for "money" to carry on the new volume of transactions; and that prices must have consequently fallen because "money" has not been sufficiently en- larged in amount. Before discussing this point, let there be a word as 16 MONEY AND PRICES to the logic employed. If it be shown that transac- tions have increased — which all admit — and also that prices have fallen, it is not competent to assume that prices have fallen because "money" has not increased in proportion to the transactions. This method of arguing assumes the whole point at issue — the cause of the change in the price level. In order to prove that the amount- of money in circulation regulates prices, it is not permissible in the progress of the argu- ment to assume the thing to be proved. To pass now to the main question — even if we admit that the demand for goods is not synonymous with the volume of the circulation — there is a strong belief that the demand for money, in exchanging goods, is imperative, sui generis; and that an increase of trans- actions must necessarily increase the demand for "money," enhance the value of "money," and thus lower prices. It is exactly in this connection that, in my judgment, the inadequacy of the old reasoning about prices most clearly appears. In a word, this inadequacy is to be found in an untenable assumption about the conditions under which the issues of money are made. In these days it is impossible to start with the old assumption that the quantity of the circula- tion is capable of monopoly. And yet this is the Ri- cardian hypothesis. If there were limited sorts of media of exchange, and if these were wholly under control as regards the quantity outstanding, the con- clusion which follows might be hypothetically correct; AVAILABLE MEDIA OF EXCHANGE 17 but it would be quite aside from the facts of to-day. It is true that the demand for some media of ex- change, by which the inconveniences of barter may be obviated, is in a s.ense imperative. The great mass of modern transactions could not possibly be carried on without the use of some form of a medium of exchange. But in our day there is a wide choice between various media of exchange. Instead of there being only one kind, over which there is a monopoly control by the state, there are many available kinds. In the United States, for instance, should gold be required as a me- dium, there is free coinage, and a demand for its use would be a demand upon the large existing stock in the world, and not upon the sum actually in use within this country; in a real sense gold is an elastic currency which can be freely imported or exported. But, for the transfer of goods there are also govern- ment notes, national bank notes, Federal Reserve notes, bills of exchange, drafts, and the deposit currency of banks. If there is an imperative demand for a medium of exchange, and if it is found that one sort of medium is limited, instead of a persistent de- mand that will raise the value of that one kind, the need can be satisfied by some other. No exceptional pressure will be brought to bear on the value of one kind until the capabilities of all kinds have been ex- hausted. Indeed, the final outcome is that in the deposit currency we have a mechanism capable of 1 8 MONEY AND PRICES expanding its efficiency exactly in proportion to the work to be done. It is this medium of exchange which, in most communities having wholesale trans- actions, takes up all possible excess of demand which conceivably might fall on the other media. There- fore, instead of there being a demand for a medium of exchange which produces a need so imperative that it can give thereby a special value to a form of money, we must believe that with the growth of legitimate transactions, there is created ipso facto a medium by the banks in a proportion exactly corresponding to the new need. This is no new saying, but only an applica- tion of a truth long ago expressed by a former presi- dent of the American Economic Association, as follows : "If the United States Government were to pay off every legal tender note, and if every bank-note were to be withdrawn, these changes would produce no real contraction of the currency. With specie thus brought into common use for smaller and every-day transac- tions, we should, it is true, have a currency far less convenient for its minor uses, and we should no doubt see the use of the deposit and check system thus car- ried prematurely into classes of transactions and sec- tions of country where the note now meets a popular demand; but, as regards the mass of exchanges from which the business condition of the country at any given time takes its tone, we should find them carried on as now, by a creation of bank credits on whatever scale the needs of the time might require." x 1 C. F. Dunbar, "Deposits as Currency," Quar. Journ. Econ., I, July, 1887, pp. 409-413. Also Economic Essays (1904), p. 179. DEMAND AND SUPPLY 19 Nor does it touch the pivotal point of the price ques- tion to discuss the effect on prices of changes in the rate of interest. A rise in the rate of interest, as is known to all economists, is a rise in the charge for the use of capital, and does not necessarily involve a corresponding demand for standard money in which prices are expressed. But the essential fallacy in try- ing to connect the "value of money" with the rate of interest consists in supposing that price, or the ex- change value between goods and some standard, can be determined by studying only the forces on the money side of that exchange. It seems to me obsolete to talk of the offer of goods as the true demand for " money," in any sense that such a demand regulates its value. The need of a medium of exchange requires satisfaction; but the human race has long ago evolved a means of payment, through various devices, which meets this need with very little demand upon the valuable standard itself, and consequently without creating any effects to speak of on the value of gold, and thus on the level of prices. In applying the theory of demand and supply to the price problem, the demand for a medium of exchange is not at all synonymous with a demand for the stand- ard in which prices are expressed. Nor is the supply of "money," which has any direct influence on general prices, the supply of the media of exchange. We may have vast changes in the supply of media of exchange without causing any changes in the price level. If 20 MONEY AND PRICES changes take place in the quantity of such media, as deposit currency, for instance, they indicate only that operations in goods giving rise to these forms of credit, which served instead of gold, have been chang- ing. They are in the main referable to changes in the condition of business, to a rise or fall of the volume of ^transactions, due to causes quite inde- pendent of the quantity of "money" in circulation. The principle of demand and supply as applied to the price question still holds good. On the one side, there is an increase or decrease in the demand for the commodity used as the price standard, as well as an increase or decrease in its supply, to be taken into account. But this is only half the solution. On the other side of the price ratio, there is the in- crease or decrease in the expenses of production of goods in particular and in general which are to be compared with the standard of prices. These points are essential elements in any theory of prices. § 8. In regard to credit, it is to be said not only that it has been very much misunderstood, but that it has been given very little real study. There is to-day no commonly accepted definition of credit: the element of futurity in a credit transaction is gen- erally admitted, but "confidence" is by some re- garded as the essential element; and yet "confidence" can play its role only because futurity exists in the credit operation. MEANING OF CREDIT 21 Nor is there any received opinion as to the real nature and functions of credit. We seem, in the whole field of credit, to be on the frontier of knowledge. In any true sense, the economic end of society is the possession and use of goods which satisfy wants. Credit has been devised as one of many means to aid in accomplishing this end. In its fundamental rela- tions it has to do with goods and their increase. To some, however, it is related only to money. The truth of this concept, to my mind, depends upon our under- standing as to the nature of money. If money be only a means to an end, and if it does not alter the elemental principles of value, but aids and cheapens the exchange of goods, then it is easy to understand that a borrower in reality obtains the use of goods, as the purpose of a loan, and that money and credit are but the instruments devised by society for effec- tually carrying out that purpose. Hence the credit operation, as regards extension or contraction, is pri- marily based on transactions in goods; its relation to money is a secondary, and incidental, connection. Credit being a transfer of goods involving the return of an equivalent in the future, forms of credit appear only as a consequence of transactions in goods. More transactions, not more money, cause an increase of forms of credit; and, by an interesting process of evo- lution, forms of credit — especially the deposit currency of banks — act as a medium of exchange, obviating recourse to money. The belief, however, that credit - 22 MONEY AND PRICES depends on money, and not on goods, is wide-spread, and much discussion is probably before us on this point. The relation of credit to the theory of prices is not so clear: some think that all the money, plus all the credit (whatever that may be), are the primary ele- ments working to fix the level of prices; but any one will see at a glance that the forms of credit, such as bills, drafts, etc., arising, for instance, from the move- ment of the wheat crop, have no effect on the price of that crop — the price having been made antecedent to the creation of the forms of credit which came into existence only because of the actual sales of wheat. Does a farmer wait until he sees how many wheat bills are drawn before fixing the price of his wheat? Evidently not; and this mistaken belief needs thorough criticism. It is not possible here to introduce in detail the re- lation of credit to the price level. In speaking of the theory of purchasing power, it was stated that, in a true sense, a man's purchasing power consisted of all his cash, and of all his immediately salable goods; or, of all his cash plus all his credit. The general pur- chasing power of a community, therefore, directed against all goods, is composed of all the cash, plus all the immediately salable, or bankable goods. This, however, is only a statement of the machinery by which all goods — all supply and all demand — are exchanged against each other. In truth, normal credit, by coin- CREDIT AND PRICES 23 ing salable goods into present means of payment, merely sets more goods into circulatory exchange against each other than would be possible without the use of credit. In the end, since only a larger vol- ume of goods are offset against each other, we have a movement of a larger volume of goods at prices previously determined by a price-making process — a process usually finished before the moment when the goods are exchanged for some form of money. With abnormal credit, there may be a temporary and fic- titious rise of prices, followed inevitably by a serious decline. 1 When men speak of "our expansion of credit," they have a very vague and general idea in their minds. The definite and distinct forces at work are covered with darkness; and, when a revulsion of trade comes, the results are accepted as due to some undefined and mysterious force which can only be felt, but not ex- plained. It remains the duty of the economic thinker to outline with scientific exactness the forces uniting in the upward wave of overtrading, and to state with equal definiteness the causes of the receding move- ment. Principles must be sought for which will ex- plain the differing actualities of each special crisis. § 9. The settlement of the theory of prices, or the principles determining the value of money (suitably de- 1 For a more extended discussion of credit and its relation to prices, cf. my Principles of Money, chap. 4, and especially p. 112. 24 MONEY AND PRICES fined) has an importance reaching out into the field of the international movements of specie. We can- not properly formulate the methods by which the shifting of specie and goods act upon each other in international trade without having previously reached a definite conclusion upon the theory of prices. Thus the examination of and agreement upon the theory of prices will largely determine the statements made concerning the relation between the shipments of specie and the level of prices within a country. With the Ricardian formula, derived from the ex- perience of England in the early part of the last cen- tury, writers have attempted to solve this problem by using the quantity of money in a country as the force regulating its general level of prices: if gold is ex- ported, prices must fall; if gold is imported, prices must rise. In brief, the originating cause of a change in the general level of prices, so far as international trade is concerned, is the shipment of specie. The movement of goods is a consequence of the change of prices brought about by the addition or subtraction of specie. That is, the quantity theory has been re- lied upon to solve this highly important and practical problem of money. The original statement of Ricardo has, of course, been added to and emended; but, in the main, it was intended to show that any one country obtains a part of the world's circulation of specie in the proportion that its trade bears to that of other countries. This INTERNATIONAL MOVEMENT OF SPECIE 25 quota of gold, for instance, is retained in a country by influences working automatically on the price level through changes in the quantity of gold within that nation. If gold is withdrawn, prices fall, exports of goods are increased, and in due time the gold begins to return until the country's quota of gold reaches an equilibrium adjusted to the relative demands of other countries. The movement of goods forms the varia- ble in the process which aims at a correction of the quota of gold, whenever the equilibrium has been dis- turbed. The shipment of gold is the initial cause; the movement of goods is a consequence. In support of this view — the orthodox view — it is held that gold will flow wherever its exchange value is highest. The flow of gold will cause redundancy in the receiving nation, and thus, because it is cheap, will raise general gold prices there; or, vice versa, will lower prices in the countries from which gold is taken. The possession of the proper amount of gold seems to be of the main importance, while commerce is regarded as the means to the end. This manner of treating the problem, however, re- verses the true order of events. The movement of goods is the fundamental thing behind all other phe- nomena such as the methods of payment; the move- ment of money is a secondary operation, dependent on the direction and extent of the shipment of goods. Moreover, to say that gold, like other goods, flows where its exchange value is highest, is a truism; the 26 MONEY AND PRICES real question to be settled is, how does the flow of gold take its effect on prices? To say that because it is abundant it raises prices is to assume the whole problem at issue. How does a cheapened mass of gold adjust itself to other goods? What is the price- making process ? Are goods priced only by an actual exchange of those goods against the increasing flow of gold? On this point the adherents of the orthodox teaching of Ricardo have offered no light. In truth, the old-fashioned theory on international price changes needs restatement in vital parts. It will be found that forces affecting the prices of goods, such as demand and supply of those goods, are of primary influence in affecting prices, quite independent of the action of a medium of exchange — which, in fact, chiefly comes into existence as a consequence of the exchange of goods. The movement of specie is not the end of commerce, but specie moves as a con- sequence of commerce. The monetary changes fol- low and do not precede the operations in merchandise and securities. § 10. Only after the honest student has come to a satisfactory conclusion in regard to the nature of money and credit is he in a position to discuss with profit the pivotal problem of this field — the theory of prices. Perhaps I may be criticised for treating here the present monetary problems from too theoretical a point of view; but in subsequent chapters it is the UNSETTLED ISSUES 27 purpose to present the question of prices by actual experience of concrete operations. Every practical re- former in the field of money is in fact using some theory of prices, true or false, in all the premises laid down in his propositions. One might as well go into practical engineering without a knowledge of thermo- dynamics as to discuss practical monetary schemes without first settling basic monetary principles. But, unfortunately, the thinking, even among so-called economists, is to-day unsettled on so pivotal a ques- tion as the theory of prices. Practical monetary legis- lation, in more than one country, would be radi- cally modified, accordingly as the so-called "quantity theory" of money is accepted or not. In my humble opinion, that theory is indefensible and erroneous; and yet our great politicians in the United States, in their fencing on the monetary problem, have decided that the question of the gold standard has been defini- tively disposed of, because of the large recent produc- tion of gold. The partisans of gold have thus ac- cepted the principle on which the demands for an extension of the circulation of silver and greenbacks have been based in the past; and the position is abso- lutely untenable. The issues thus arising are unmistakable; and they must be thrashed out to a conclusion before any prac- tical applications can be attempted. These issues may be briefly stated in the following heads: 1. Is the price of goods the quantity of some stand- 28 MONEY AND PRICES ard commodity for which they will exchange, or is it the relation between goods and a variety of several media of exchange? 2. If true money is a commodity, like gold, then what determines the exchange value between goods and that commodity? Is the problem in any way different from that of obtaining the exchange value of any two commodities? 3. What is the actual process of evaluation between goods and gold ? 4. If demand and supply regulate the value of money (cost of production apart), what is the exact meaning of demand for money, and of supply of money ? 5. Is the demand for a money metal only the mon- etary demand? Is the demand for a commodity as money something sui generis? 6. In the theory of prices, what is meant by "money"? Is it only gold, or gold together with everything, such as deposit currency, which acts as a medium of exchange? In short, what constitutes the supply of money? 7. If prices are influenced by " purchasing power," is that synonymous with the sum of the existing media of exchange, multiplied by their rapidity of circula- tion? Or, is purchasing power in its ultimate anal- ysis synonymous with the offer of salable goods ? 8. Have the expenses of production, or progress in the arts, no influence on the general level of prices? Does supply as well as demand affect prices? UNSETTLED ISSUES 29 9. What is the effect of credit on general prices? 10. How do fluctuations in bank reserves actually affect general prices ? Does the rate of interest, being paid for capital and not for money, have an effect on prices through its effect on loans? n. By what economic process would a great new supply of gold influence general prices ? Only by being directly offered for goods as a medium of exchange ? 12. Does the Ricardian reasoning in favor of the quantity theory of prices hold in monetary systems where free coinage of the standard money exists, and where other devices are used as media of exchange? If mints are open, how can the coin differ in value from the bullion of which it is made? It is safe to say that the thorough discussion of these points, and a satisfactory disposal of them, is neces- sary to the solution of the central monetary problem, not only of the past, but of the present time. It is one which cannot be blinked. It arises at every step in popular monetary discussions, and the econo- mists have not given it due attention. On the set- tlement of the theory of prices, of the value of money, a host of minor questions, which have caused endless and fruitless differences of opinion, will disappear. The solution of this matter of theory is of the greatest practical import; it is as important to practical mon- etary action as is a theory of heat to mechanics. Therefore let us not be deterred from a struggle with a fundamental matter of theory by any slighting and 30 MONEY AND PRICES cheap sarcasm about the futility of theoretical and abstract discussions. As well scoff at the mathe- matics which lies behind physics and astronomy as theoretical. Nor will it be wise to minimize the differences be- tween the old and new points of view in the theory of prices. It may be said that the quantity of money would have an influence on general prices in any theory. True; but that does not touch the crucial point at issue. The quantity theorists make the proc- ess of evaluation between goods and "money" depen- dent on the actual offer of the medium of exchange and goods for each other; an increase of transactions in goods is an increased demand for money, resulting, unless the quantity of money is increased, in falling prices. It is needless to say that the facts do not warrant these statements. CHAPTER II GOLD AND PRICES AFTER 1873 » § i. The principles regulating prices may now be tested by a study of the movement of prices since 1850. There seem to be three well-defined periods in the movement of prices since that date: one, an upward tendency to about 1873; another of declining prices from 1873 to 1896; and the last, of rising prices since 1896. In this chapter we are concerned with the period of falling prices since 1873. Having presented in the preceding chapter the forces governing prices, we are the better prepared to study these forces at work since 1850. Much of the difference of opinion as to the signifi- cance of recent movements of prices is due to the fact that the value of gold is a ratio which varies with a variation in either of its terms. Whether commodities fall in relation to gold or gold rises in relation to com- modities, in either case the value of gold has risen. The same phenomena, therefore, may be due to radi- cally different causes. So that, admitting the fall of prices, it is said, on the one hand, that the rise in the value of gold is due to some cause affecting gold it- 1 From the Quarterly Journal of Economics, April, 1887. This discussion of prices, written long before the present emphasis on the quantity theory, may be of interest for reasons relating to questions of method. 3i 32 MONEY AND PRICES self, such as scarcity; or, on the other hand, it is claimed that the fall in prices is due to causes con- nected solely with commodities, and not with gold. The believers in the scarcity value of gold in this period substantiate their position by reference to the falling off in the annual production of gold; the un- usual demands for gold since 1873 by Germany, Italy, and the United States; stringencies in the money market; the increased use of gold in the arts; the claim that the fall of prices is general; the excep- tional character of the depression of trade since 1873; the general existence of low wages, profits, and rents; and the absence of any progress since 1873 m the means of economizing gold and silver. These opinions have been prominently associated with Mr. Robert Giffen, 1 the statistician of the English Board of Trade, and Mr. Goschen, 2 then chancellor of the exchequer; while the evident connection of the main proposition with bimetallism gave it a semipolitical character, and many supporters in both Europe and America. § 2. Inasmuch as the rise in the value of gold since 1873 is in proportion to the fall of prices, it is a matter of some importance to look critically at the facts in regard to prices. With this object in view, the more important tables of prices since 1850 have been col- lected with explanations as to the methods of compu- 1 Journal of the Statistical Society (London), March, 1879. 2 Journal of the Institute of Bankers, April 18, 1883. TABLES OF PRICES 33 tation, sources, and reliability. It is hoped that a comparison of the diverse methods and results of these tables will serve a useful purpose. 1 Hitherto, the figures of the London Economist for twenty-two articles have been almost universally used as evidence in regard to the movement of prices; but it is time that the worship of this fetich should cease. Of late, much more trustworthy tables have been published. In Chart I a comparison is presented of the prices in Great Britain, Germany, and France. The un- trustworthiness of the Economist table as a basis for inferences in regard to causes affecting the whole world will be seen at a glance in the years 1862-67. The table of Mr. Sauerbeck, however, which gives the prices of thirty-eight articles, but all of raw produce, furnishes a somewhat better view of the movement of English prices to the present day. The French prices 2 show a less rise to 1873 and a less fall since 1873 than the English figures, which accords with what we know as to the exemption of France from the violence of the crisis of 1873. The table of American prices published by Burchard cannot be depended upon, and is not used. The Hamburg prices, published by Dr. Soetbeer, in the second edition of his Materialien (1886), furnish the most satisfactory, accurate, and 1 See my Principles of Money, pp. 171-224. 2 The number 100 in this table corresponds on the chart to 123.6 of Soet- beer's table, which is the average of the latter's numbers for 1865-69 (the years used as a basis in the French prices). 3740 3520 3300 3080 2860 2640 2420 2200 1980 l — « l— « M h-i fc« t-* fcf W o o i-> to co *- urea -a ooo oo o oo © 1850 " 1851 - 1852 - 1853- 1854- 1855 - 1856 - 1857 - 1858 - 1859 - 1860 - 1861 - 1862 - 1863 - 1864 - 1865 - 1866 - CJOOB». ■ _ i! i V \ ^ *-« wo ?cn * s.'mg * *b vA cr 5 « 8 3- ?EJ O B v -> > i I i tN •* j^- ' \ > * N j * * ' «f g S ^ 1 •i f 1868 - 1869 - 1870 - 1871 - 1872- 1873- 187.4 - 1875- 1876 - 1877 - 1878 - 1879- 1880- 1881 - 1882- 1883 • 1884 ■ i ■* J / ; f [ f •Si • „ \\ CHART I MOVEMENT OF PRICES IN GERMANY, ERAN06 AfrD GREAT BRITAIN 1850-1885 - - '* » i *<; k^ .' ;* * - 1 i ,' \ ,/ 1 / 1 \ ,<. 1 ^" ^~ / .--■ f* P k -~- \ \ S9 / ■\i 1 / ' , ^ V Pi> .' Z 1 * v .7 / 03/' /n & < 170 160 150 MO 130 128.7 123.5 120 110 inn oo to o -„-« o o o 1— > 1— '(-•>-' "- 1 ► M to co >f- en c o o o o o c : 5 18o0 ;j"=; — . iff. :!:ss~ 18 J 1 mnnra-B. J i _ X s :^ / ^- 1802 1 ::s£* 18V} 1 f 1 1 1 s ■ lbod -r^g-i _i . - — . 1854 s*>;>-£ 7 : \ ^t_ io:r Si = 5~-° _ . i- i ^ V \ ^■-: t j J*. ^s. *•.« N * - ■' c <» > r - ^5 -*— . -< -' 1857 a ^ A ^-%f— , — 1 2 - o - < n - 2 - -s : 00 _0 oil Ot - O > ^1> - oo ^ O i-i Otj - T> 70 O m (0 — a So T" m-o o — i__ 1000 : - c cug ^ 1 w > iqko ^ 2. looi) ro » - — 1 I— ^- *"""^>»*: — ^ ^ 1860 „- -3-' -/ A- sd t ^ ^ 1861 m . '-*_ S^ 5 -,: ififio o -i- =■- V ^ lOOJ ° -* K^-* ■» ■ : .-'g-lE lODJ — j J- \ -\- ' >, •- 9 1854 ; : s *.- ,* ^ -- *• ^^ ' 1865 -- j \ ^-^^ « « 1866 ,*- 7 J -<. *« > / / loo7 f -i *£ 1 * f •'' 1 1868 <; i i -a. s* A ' ,-f ■v. looy -% 4 - '' -/ / 1 < 18/0 "T " r'v s 1871 -X.- 1^ V, i 1 •*N »• lO/ii \ J JL "-[- >»' \ L. 1873 v-- ,_- * > . 1874 M T i- - i-rf: :: ? :2 ^ 1 187o £_ ^ A \ / :~l j* t - , > 1876 aI \ ,,- 7 s 1877 ; r " / ^^ — .■- / -? - ^ — 1878 ■■ , f - ,' >' 1 / ' ,' .' < ^ 18 /» ct— ~ \ s^ V ~^ > isfio S 3 Sk s v "7 1 -3*- ^ j 1 1881 v \ _X I 1QQ9 V L ^ ; k 1 J: s S 188 J ;r — ^ - > 1 Qfi^ ' Q _ /j_j ***+- —-"""" y m > s ; < — r- -i _ Zd'ZzZM -() 1885 * x oo H» i (-• tO CO K*. CI 1 e o o o o :> 36 MONEY AND PRICES complete collection of prices then made. It will be seen that, while Sauerbeck's English figures 1 show a greater fall since 1873 than the Hamburg prices, they do not fall so low in 1885 as the Economist prices. The very important fact to be observed, however, from the Hamburg table is that prices in 1885 were still 10 per cent, higher than they were before the discoveries of gold (1847-50); and it is significant that prices seem to have fallen less as we go to tables which include a greater number of articles. There is thus a difference of about 30 per cent, in the results of the Hamburg and Economist tables, much to the discredit of the latter; in fact, the Economist table is not of a kind to be compared with the other. The separation of the movements of prices in special groups of commodities in the Hamburg tables, as pre- sented in Chart II, shows a striking divergence in the prices of agricultural, animal, mineral, and manu- factured products. The eye is at once struck with the great rise in the prices of animal and agricul- tural products since 1850; while there has been the expected fall in the case of manufactured goods, ac- companied by a surprising fall in the prices of mineral products. Among other illustrations 2 of economic principles to be seen in these charts, there is one which Englishmen 'The standard ioo in Sauerbeck's table represents the average of the years 1866-77, which corresponds on the chart to 128.7 oi Soetbeer's table. 2 A verification is given of the principles laid down by Mr. Cairnes, Lead- ing Principles, pp. 11 7-146, on derivative laws of value. FALL OF ENGLISH PRICES 37 may well consider. It seems possible that English prices have fallen since 1873 more than prices in other countries. If so, may this not be attributed to a re- adjustment of the equation of International Demand, due to a lessened demand in other countries for Eng- land's products compared with England's demand for the products of other countries? Many complaints have been heard in England of the increasing competi- tion of Germany, France, and the United States in foreign markets; for only since the war of 1870 have Germany and France given full play to their modern industrial spirit. 1 In fact, evidences are multiplying to the effect that the demand for English goods has not grown in a sufficiently gratifying manner. How- ever this may be, it is much more likely that English goods, being largely manufactured products, have been affected more than other commodities by the force of improvements and inventions which have lowered prices. (See Chart II.) If these explanations be given full weight, it may suggest that other causes than the scarcity of gold are at work to bring about a fall of English prices. Too often, the reasoning on this subject takes for granted that what is true of Great Britain is true of all the rest of the world. It will not by any means be admitted that a lower range of prices, when once reached, has prevented prosperity 2 in other countries. 1 Cf. Fowler, Appreciation of Gold, p. 34. 2 The clearings in the United States for October 1, 1886, were one-fourth larger than for October i, 1885, at the lower range of prices. 38 MONEY AND PRICES § 3. Granting a fall in prices during about fifteen years since 1873 of 20 per cent., yet it will not be possible to reason directly from a fall of prices to a scarcity of gold. But this is the import of Laveleye's argument 1 in answering Mulhall— who had gone to quite as great an extreme in the opposite direction, and had denied 2 any connection whatever between prices and the quantity of the precious metals — for Laveleye even classes Mill among the believers in what the Germans call the Quantitats-Theorie, by quot- ing his words: 3 "The value of money depends, ceteris paribus, on its quantity, together with its rapidity of circulation. ... An increase of the quantity of money raises prices, and a diminution lowers them. This is the most elementary proposition in the theory of currency, and without it we should have no key to any of the others." In his final statement, however, Mill plainly says (book III, chap. XI, § 3) : "In a state of commerce in which much credit is habitually given, general prices at any moment depend much more upon the state of credit than upon the quantity of money. " The devices for economizing money which the progress of society has developed render it impos- 1 Contemporary Review, May, 1886, p. 632. 2 History of Prices since the Year 1850, pp. 138, 139; and Contemporary Review, August, 1885. 3 Laveleye str-angely omits the succeeding sentence: "In any state of things, however, except the simple and primitive one which we have sup- posed, the proposition is only true, other things being the same; and what those other things are which must be the same we are not yet ready to pro- nounce" (book III, chap. VIII, § 4). In his final conclusion, quoted above by me, he pronounces what they are. CREDIT AS PURCHASING POWER 39 sible to say that prices depend directly upon the quan- tity of money. 1 Credit in its full development is quite modern, and its relation to prices is not always carefully defined. Mill, 2 for example, prefaced his discussion of the effect of credit on prices by the remark: "It is not, how- ever, with ultimate or average, but with immediate and temporary, prices that we are now concerned." Now there is no conceivable moment but that of a total stoppage of trade when credit is not in active operation; and as credit is purchasing power of a highly efficient kind, often preferable to actual coin, it must be regarded as affecting prices not temporarily, but always, with greater or less force. At some periods it may be more actively used than at others. 3 In 1 Frewen, Nineteenth Century, October, 1885, p. 595, carries the error still further by claiming that prices change with the production of gold. One cannot assign much weight to Mr. Frewen, when he declares that capital is spent rather than accumulated in the United States, because of the heavy taxation (p. 601) ! Dr. Soetbeer, Malerialien, p. 81, reminds us that both Huskisson and Jacob attributed the depression which prevailed in Europe after 1815 to a scarcity of the precious metals. He also mentions an in- teresting book by J. Helfferich, published in 1843, which combated the Quantitats-Theorie, and explained that credit can separate the function of a medium of exchange from that of a measure of value, and can serve as the former without affecting the latter. Most German bimetallists (excepting Dr. Arendt) agree with Messrs. Giffen and Goschen in attributing the fall in prices and the depression of trade to the scarcity of gold. But, on the other hand, Bourne, Journal of Statistical Society, June, 1879, P- 4*7. who denies the scarcity of gold, claims, with Mulhall, that the quantity of gold had no relation to prices. 2 Book III, chap. XII, § 1. ' Between 1833 and 1839 prices rose 22^ per cent., and between 1839 and 1844 fell 44 per cent.; and "this great oscillation," Jevon« asserted, "was entirely due to the general expansion of trade and credit, and to its sub- sequent collapse." Contemporary Review, May, 1881, p. 752. Again, in 1857, at a time when the mines were yielding unprecedented auantities of gold, a collapse of credit produced a fall in prices of fully 15 per cent. 40 MONEY AND PRICES truth, looking only at the money side of the price ratio, the general level of prices for considerable periods (sufficiently long to permit the effect of changes in the business habits of the community, or changes in the existing stock of gold, to be felt) must, from Mill's point of view, depend upon a combination of the quantity of money with the various forms of credit. The two are inextricably bound together. So, there- fore, the level of prices (so far as it is affected by the offer of a medium of exchange) depends on the expan- sion or contraction of two factors, quantity of money and credit, each of which may change to a considera- ble extent independently of each other. Both may increase or diminish together, or the gain of one may offset the loss of the other. A great collapse of credit, for example, without any change whatever in the quantity of the precious metals, might lower the gen- eral level of prices; and, if this demoralization of con- fidence was sufficient to alter existing conditions of mind in the commercial classes, it would produce an effect over a considerable period of time. On the other hand, a period within which there occurred not only an enormous increase in the quantity of the metals used for money, but also an unusual expansion of credit, other things being equal, might show an advance of prices quite out of the natural order of things. Such a period was that from 1850 to 1873, if viewed from the theory that prices are affected solely from the side of money in the price ratio. CONDITIONS BEFORE 1873 41 § 4. The series of events which led to the expan- sion of trade and the collapse in 1873 were unprece- dented in their magnitude. The greatest production from the mines which the world had then seen was pouring gold into the channels of trade. In spite of the expansion of commerce and the absorption of gold by France, the new gold may have affected prices. But this set in motion other forces which had an effect on prices. The gold discoveries themselves created a spirit of adventure, and stimulated high hopes of 'gain in unusual ways. Then, too, a period of rising prices breeds speculation. The figures of home and foreign trade were swelled by the higher range of prices,* and added to the buoyant feeling under the inspiration of which new enterprises were eagerly entered upon. The Crimean War and the extraordinary rise of agri- cultural products (see Chart II) aided the movement, which received but a partial check in the panic of 1857. The war in Italy of 1859 was followed by the Civil War in the United States in 1861. The latter pro- duced a great rise in the prices of cotton, tobacco, and breads tuffs 1 in Europe; and the issue of inconvertible paper drove gold out of our country. Then Italy 2 also gave up her specie after 1865. The war between Prus- sia and Austria added to the abnormal extension of trade, which in 1866 again received only a partial 1 This is seen in the Economist figures, in Chart I. 2 The writer in the Edinburgh Review for July, 1886, p. 34, estimates the addition of gold to Europe from the United States and Italy as about $500,000,000. 42 MONEY AND PRICES check. The years from 1867 to 1873 in the United States witnessed an unlimited expansion of extrava- gance and overtrading, such as has been seldom equalled, accompanied by excessive railway building. Our imports were out of all proportion to our ability to pay for them. 1 In this period, also, came the Franco-German War of 1870, and the distribution of the indemnity of war by Germany. The extraordi- nary and exceptional demand for commodities in periods of war, at the very time of the great destruction of wealth, produced an unhealthy state of affairs; but on the outside all seemed fair, and men had begun to believe that prices were fated always to rise. The speculation in metals (see Chart II) in 1873 was of an unparalleled kind. 2 Nothing, in fact, marks this period from 1850 to 1873 (as compared with the period from 1873 to 1886) more distinctly than the extreme varia- tions in the rate of discount at the great banks of Europe. There were all the evidences of an unhealthy and abnormal condition of affairs. But the unchecked demand, when the actual power to buy had been greatly impaired, could not go on forever. When it was once found that men had been creating liabilities beyond their means to meet them, the end had come. The crisis of 1873 was the painful return to a conscious- ness of the real situation, after a prolonged fever of speculation for nearly twenty years, which had spread over many countries. The effects were the more seri- 1 C/. Cairnes, Leading Principles, pp. 364-372. 2 See Leroy-Beaulieu, Revue des Deux Monies, May, 1886, p. 393. CRISIS OF 1873 43 ous because the disease had got such great headway. The period since 1873, on the other hand, is stamped by a radical change in methods of business; and a new epoch in production practically dates from that year. The peculiar changes in the organization of industry will themselves sufficiently explain any ex- ceptional characteristics of that period. Those commodities, moreover, for which the demand in the period of overtrading had been most extended (and which were of a character capable of rapid pro- duction) would be the ones in regard to which, after the collapse, there would be the greatest difference between the power of production and the now lessened demand based on normal wants. Demand and supply had been thrown out of their reciprocal adjustment. Just as when a large scaffold, erected by fitting one timber or board to another, is levelled to the ground by a tornado, exactly the same structure can never again be reconstructed out of the old materials — for reciprocal parts are wanting — so, after a serious com- mercial disaster, like that of 1873, producers must make entirely new estimates as to the extent of de- mand, and supply must be adjusted to new condi- tions. In this way, a great derangement of trade and credit will produce unequal effects on different com- modities. § 5. To support the claim that we were forced to deal with practically new conditions of production, no facts of the industrial situation since 1873 can be ad- 44 MONEY AND PRICES duced which are more convincing than those relating to improvements and new sources of supply. The period following a great financial upheaval is naturally crowded with improvements in processes and in meth- ods of lowering the cost of production. Necessity becomes the mother of invention. The extent to which producers have been driven by the fierce competition since 1873 to cheapen production leads to the inquiry how far the fall of prices can be accounted for by influences connected solely with commodities, and not with gold. If these influences have been widely extended, it will be strong evidence that the scarcity of gold has had less effect than some suppose. In order to take a definite point of departure, I shall select from Mr. Goschen's list of articles 1 twenty-three which have fallen in price, and see whether the fall can be accounted for by conditions affecting each commodity itself. (See table on opposite page.) Taking thes*e commodities in the order given, we find the fall in price of sugar was due to the revolution in production since 1873 stimulated by the bounties on beet-sugar in France, Germany, and Russia. The sugar of the West Indies was thus deprived of the vast 1 Journal of Institute of Bankers, May, 1883, pp. 277-279. These com- modities, be it observed, are practically the same as those given by Mr. Giffen (see Journal Statist. Soc, 1879, p. 61, and Contemporary Review, June, 1885) to show the effects of a scarcity of gold in lowering prices. I have omitted from Mr. Goschen's table only cocoa, rice, indigo, cotton, hides, jute, and hewn timber; of which cocoa, cotton, and hides have prac- tically not fallen at all; rice and jute are affected by the fall of silver, while indigo and timber are subject to peculiar fluctuations. CAUSES OF FALL IN PRICES 45 1873 1883 Sugar, brown cwt " West Indian " Tea, congou lb. Coffee, Ceylon cwt Wheat qr. Pepper lb. Iron, Scotch pig ton Lead, English " Copper " Tin, foreign " Wool, English lb. " mohair " " Australian " " alpaca " Cochineal " Nitrate of soda cwt Saltpetre " Coals ton Paper Staves load Mahogany ' Railway-carriages Boots and shoes doz 6 21 91 142 1 1 3 10 11 in 3 s. 16 29 87 16 7 10 o o 2 3 2 2 2 16 10 10 o o 12 IO 4 d. 6 o o o 7 o o o o 3 3 o 9 5 6 6 o 9 o o o 9 12 20 5 70 2 6 2 9 13 15 65 93 1 5 9 85 2 o o 1 1 1 12 19 18 16 o 5 o 17 d. o o o o o S*A o o o o IO 3 IO o o o 3 European market. The supply was increased in this way without any connection whatever with the de- mand. From 1877 to 1882, the product of cane-sugar increased 33 per cent., and that of beet-sugar 40 per cent. 1 Tea had fallen in price, owing to the great increase of production in Japan, which rose to 45,000,000 1 Leroy-Beaulieu, Revue des Deux Mondes, May, 1886, p. 398. According to Fowler, Appreciation of Gold, p. 23, the price of sugar in 1830 was £50 per ton; in 1840, £40; in 1880, £25; in 1886, £16. He finds, Contemporary Review, April, 1885, p. 539, the imports of unrefined sugar from Germany into England in 1884 were seven and three-fourths million hundredweights as compared with four and one-half million hundredweights in 1882. 46 MONEY AND PRICES pounds, to the enormous extension of tea cultivation in India, and to the addition of large supplies from Java and Ceylon; while, unlike coffee, the consump- tion of tea has not increased in proportion to the in- creased production. 1 Coffee had not fallen in price to the extent shown in Mr. Goschen's table. The average price at Ham- burg in 1866-70 was expressed by 142; in 1876-80, by 207; and in 1881-85, by 139. Although the total production has increased, 2 the variations in the seasons cause violent fluctuations. The fall in the price of Brazilian coffee is accounted for by the extension of railways into the interior, which has dispensed with the carriage of coffee on mules to the seaports. A fall in the prices of wheat and agricultural products seems to strengthen Mr. Goschen's argument, for com- modities affected by the law of diminishing returns have a tendency to increase in price. A fall in the prices of such articles, therefore, might suggest a gen- eral cause, like the scarcity of gold. But at no time for centuries have there been in operation stronger forces to oppose this law than in this period. The tremen- dous gains in cheaper transportation have, as never be- 1 Tea is also bought wi:h silver in the East, and, like jute, its gold price has fallen; while the lowered freights have also had a serious influence. The exports of tea from India had quadrupled since 1873. See Sauerbeck, ibid., p. 23. 2 Leroy-Beaulieu, ibid., gives the production as follows: 1855, 321,000,000 tons; 1865, 422,000,000; 1875, 505,000,000; 1881, 588,000,000. The de- liveries of Rio coffee in New York in 1873 were 68,863 tons > but in 1886 189,319 tons. CAUSES OF FALL IN PRICES 47 fore, opened up new and superior wheat-growing soils, 1 so that the " margin of cultivation" for Europe is now found in the rich soils of India and the United States. The effect of this has been, irrespective of freight, to raise the margin of cultivation for Europe. It is only strange that the price of wheat has not fallen more seriously. Improved methods of farming, moreover, have enabled each acre to produce more than in 1870. Even in Europe, Leroy-Beaulieu thinks that, in the twenty-five years since i860, food has increased faster than population. Pepper had not fallen, but risen, in price since 1873. For 1871-75 the average prices at Hamburg are ex- pressed by 229.7, but for 1881-85 °y 2 33-8. The introduction of improvements in the iron in- dustry since 1873 shows the tendency to adopt new devices in a time of financial depression. 2 When a business is profitable, there is no reason for stopping at a great loss each day to introduce better processes. In a time of depression, a stoppage is no loss. The cost of production of the coal, ore, and lime which 1 The United States in 1870 had 88,000,000 acres planted with wheat, which was increased to 157,000,000 acres in 1884. India, moreover, in- creased her acreage from 18,000,000 in 1870 to 25,000,000 in 1884; while Europe planted 440,000,000 in 1870 and 482,000,000 in 1884. Leroy- Beaulieu, ibid., p. 396. Neumann-Spallert, Uebersichten der Wellwirthschaft, p. 155, states that from 1869 to 1879 the production of cereals in Europe was actually doubled; while the imports of grain in 1869-70 were valued at $409,000,000, and in 1879 at $817,000,000. 2 A few years after the panic of 1873, a large iron manufacturer, after lamenting the poor prospects in his industry, said : " And yet we were never making so many improvements as now." 48 MONEY AND PRICES enter into the production of pig iron, writes Mr. Joseph D. Weeks, had been lowered by the following agencies: "The use of steam-drills instead of hand-drills, of coal-cutting machines for the pick of the miner, of compressed air in place of steam, of locomotive and water carriage in place of mules and of human carriage, of dynamite and its associate explosives in place of powder, of lime and water cartridges instead of powder cartridges, of the long-walled system of mining in- stead of the pillar and room, etc. In the blast-furnaces there have been important changes in the lines of the furnaces — in the methods of blowing and admitting the air, of charging the furnaces, of using the metal without allowing it to become cold, and of improved hoisting apparatus. In the rolling-mill, the improve- ments are almost without number. Some of them are growths; that is, a little change to-day, another change to-morrow, until in months' or years' time a gradual improvement has taken place, as compared with the years before, that would hardly be believed without making the comparison. I presume that, had I time, I could name at least five hundred improvements, some that have decreased cost and others that have improved quality." Even in the case of improvements introduced before 1873, it has been only since then that their use has been applied on an extended scale. The manner in which improvements have lowered the price of iron illustrates the characteristics of modern industries in general. CAUSES OF FALL IN PRICES 49 The price of lead had fallen, as is well known, be- cause of the extraordinary amount of it liberated in treating the argentiferous lead ores discovered in Colorado, Montana, Nevada, Utah, and other Western States and Territories. The lead, being produced as secondary to the yield of silver, was sold for what it would bring, 1 regardless of the conditions affecting the mines worked solely for lead. The effect on prices of a sudden opening of new sup- plies has never been more marked than in the matter of copper. The discovery in the late seventies of im- mense deposits in Arizona, Montana, and Spain caused a revolution in this industry. The great yield in the West utterly overwhelmed the Lake Superior combina- tion, which formerly controlled the market in the United States. 2 In the spring of 1882, copper here fell from twenty-two cents per pound in the spring of 1882 to only eleven and a half cents in 1885 solely from the causes named. Tin had not fallen seriously in price. The average price in 1884 at Hamburg was about the same as for 1866-67. The unusual speculation in metals about 1873 (see Chart II) carried the price of tin higher than it had been for about forty years, so that the quota- tion for 1873 is 30 per cent, above the ordinary prices. 1 The white lead corroders west of the Mississippi getting their lead at so low a price, the corroders on the Atlantic seaboard were placed in a very critical position. The prices of paints, also, had thus greatly fallen at that time. 1 The Anaconda Mine in Montana led in the shipment to Europe of the vast excess of supply, and broke down the price abroad. 50 MONEY AND PRICES Passing this by, however, the downward movement since 1873, so far as it exists, is fully accounted for by the discovery of large deposits of tin in New South Wales, Queensland, and Tasmania. 1 The great decline in the prices of English wool (the grade known as "Lincoln"), mohair, and alpaca has a curious cause. Before 1874 they were used on a vast scale in the manufacture of stiff, hard, and lustrous fabrics for ladies' wear of which " alpaca" is a type. But, by a sudden freak of fashion, about 1874 these goods were wholly given up; and their place was taken by soft and pliable fabrics made from merino. The change was so marked as practically to destroy the demand for English long combing wools as well as for mohair and alpaca. 2 The price of the fine wools, how- ever, has been affected by the greatly increased prod- uct of Australia and South America. 3 Cochineal gives another illustration of the changes in modern industries. Cochineal, for which an exten- sive demand formerly existed in dyeing and printing cloths, has been superseded by the aniline dyes, owing to the discovery of coloring materials in hydrocarbons, 1 See Mineral Resources of the United States, 1883-84. I am also indebted for information to Mr. R. W. Raymond, of New York. 2 Lord Penzance, Nineteenth Century, September, 1886, says an English farmer who formerly received £1,400 for his yearly clip then got only £600. For very careful tables of prices of English wools and for information, I was much indebted to Mr. George William Bond and to Mr. John L. Hayes. 3 Leroy-Beaulieu, ibid., p. 397, finds a close connection between the falling prices of fine wool and the shipments from Australia, the Cape, and La Plata. The number of bales imported in 1864 was 458,000; in 1868, 879,000; in 1877, 1,272,000; in 1885, 1,740,000. CAUSES OF FALL IN PRICES 51 drawn chiefly from coal and petroleum. The yarn was weakened by cochineal, and spinners were glad enough to find that the cheaper aniline dyes gave as brilliant colors without weakening the yarn. Nitrate of soda and saltpetre fell in price because of the excessive yield from the deposits of Western South America. The exportation of "Chili saltpetre" (ni- trate of soda) has of late been larger than the world's consumption. 1 The average price for 1881-85 i s about the same as for the years 1874-76. The article, how- ever, is subject to great fluctuations of price. Coal varies greatly in price from time to time; but about 1873 it underwent an exceptional rise in price in England, while the later production was forced in an unusual way. In twenty years there was an increase of 145 per cent. Apart from the improvements in mining already referred to, iron could be smelted with one-half the coal formerly required, and so required less coal; while the growth of English stock companies stimulated the activity of producers. The industrial gains of society over nature were especially prominent in the case of paper. A pulp made from the fibre of wood, instead of rags, is used in its manufacture. Not only is the wood-pulp ground by machinery, but it is also prepared by a chemical 1 Wagner's Jahresbericht for 1884 states the facts as follows in metric tons: 1881 1882 1883 Exports from South America 319,000 410,000 530,000 World's consumption 286,000 372,000 468,000 52 MONEY AND PRICES process of decomposition. The latter variety is used for the better grades of paper. Of two kinds of book paper which in 1873 were sold at seventeen and four- teen cents per pound in the United States, the price, owing to the new methods, had fallen one-half. The use of pulp, moreover, cheapened the rags which are still partially used. Where the machine-made pulp was used, as in coarser kinds of paper, like newspaper stock, the fall in price was still more marked. Manu- facturers, also, were learning how to use these proc- esses to better effect; and the machinery was being steadily improved. The supply of white-oak staves for the United States, since the Civil War, has been drawn from Arkansas and Tennessee, which have been penetrated by rail- ways. This has made a vast difference in their price; but inferior wood is also used, which would have a similar effect on quotations. Mahogany has been affected by exceptional influ- ences. The chief supply formerly came from Cuba and San Domingo; but during the rebellion in Cuba, from 1868 to 1878, new sources of supply were sought for in Mexico, where operations were stimulated by the unusually high prices about 1873 due to scarcity. After the close of the rebellion, Cuba again furnished mahogany; and her exportations have since been in- creasing. This is sufficient to account for the fall in price, apart from the fact that inferior wood affects the quotations. CAUSES OF FALL IN PRICES 53 The fall in the prices of iron and steel, and all ma- terials* entering into the manufacture of railroad-cars, together with improvements in the tools and process of manufacture, would, in the United States, have accounted for any decline in the price of cars. The increase of strength, moreover, makes a great differ- ence in the weight to be carried, so that the superiority of the new cars had caused a depreciation in the value of the old ones. 1 The marked progress of improvements is also seen in the making of boots and shoes. In 1870 the op- erative was also a skilled shoemaker: now he is known only as an edge-trimmer, an edge-setter, or a laster, because machinery has been introduced which per- forms a special part of the manufacture. One ma- chine trims the sole, another the heel, another polishes the shoe; another, a beating-out machine, disposes of a whole row of shoes instead of one, as in former days. The buttonholes are now worked by a machine which enables one operative to make five thousand in a day. In the McKay sewing-machine, on which four hundred pairs were sewed in a day, a small arm made two movements to throw one loop of thread over the needle; but, when it occurred to the inventors to cause the arm to throw one loop at each movement, the opera- tive was enabled to sew eight hundred to one thousand 1 1 am indebted for information to Professor (now President) Arthur T. Hadley and to Mr. M. N. Forney, secretary of the Master Car-Builders' Association, New York. 54 MONEY AND PRICES pairs in a day. 1 Such changes are constantly going on, and it is little marvel that shoes are better made and lower in price. The fall of prices shown by Mr. Goschen can thus, without a question, be explained by causes other than the scarcity of gold. The course of progress, more- over, has gone farther and in more directions than those mentioned by him. 2 Suffice it to conclude with the facts in regard to the lowering of charges for trans- portation, which, affect the prices of a great range of commodities. The average rates of freight for wheat from Chicago to New York 3 had fallen by 1885 to less than 40 per cent, of the rates of 1873, whether we refer to transit by rail or canal. The charges for ocean transportation had fallen quite as much. 4 One 1 The Goodyear McKay welt-machine sews the welt onto the upper leather, and then sews the outer sole onto the welt, giving practically the advantages of hand-sewed work at a less price. 2 As illustrations, we may point to the character of the improvements introduced in the making of glass (which led to the labor riots at Charleroi, in Belgium). One new Siemens "tank-furnace" does the work of eight old coal-furnaces, while it requires only four men instead of twenty-eight. Common window-glass has consequently fallen in price one-half. (See Fowler, Appreciation of Gold, p. 39.) Again, steel rails can now be made at a less price than iron rails were made a few years ago, owing to well- known inventions. Still, again, in the cotton-mills, spindles which revolved four thousand times in a minute about 1873 now revolve ten thousand times in a minute. In connection with the great increase of supplies, see a suggestive investi- gation by Mr. Luke Hansard, in the Report of the Royal Commission on the Depression of Trade, Appendix, pp. 405-414. * United States Bureau of Statistics, January, 1885. * See Contemporary Review, April, 1885, p. 545, where Fowler gives the charges from Calcutta on jute, wheat, linseed, and rape-seed, from 1881 to 1884. See, also, Leroy-Beaulieu, ibid., p. 401; Fowler, Appreciation of Gold, pp. 45, 71; The Public, December 22, 1881. CAUSES OF FALL IN PRICES 55 of the mechanical triumphs of recent years has been the transformation of the old steamship into the new, 1 which, taken in connection with the improved grain- elevators and various expedients for receiving and discharging cargoes, warranted the statement that a single sailor in 1885 transported two times as much as he did in 1870, three times as much as in i860, and four times as much as in 1850. The fall in the rates of freight from Calcutta to London would alone ac- count for the fall in price of several articles in Mr. Goschen's list. The tolls and pilotage on the Suez Canal had fallen about one-third since 1873. 2 The steady extension of the electric telegraph, to- gether with changes in methods of doing business, helped to lower the cost of production of many com- modities. The means of instant communication with agents and correspondents in opposite parts of the world wholly obviated the carrying of large stocks of goods, and economized the use of capital like a labor-saving machine. The whole world was thus opened to any dealer, and the middleman was less used than formerly. Producers were brought nearer to consumers. Of the fall of prices in his table, Mr. Goschen says, "I am bound to say it appears to me that these fig- ures reveal an extraordinary state of things"; and 1 The improved ship, being a better and cheaper carrying instrument, is itself the cause of the depreciation in value of older ships. In fact, this is the natural result of improvements. This depreciation of capitalized prop- erty, owing to improvements, is Mr. Frewen's real difficulty, and is not ex- plained by the scarcity of gold. 1 Leroy-Beaulieu, ibid., p. 4. 56 MONEY AND PRICES he thinks it is due to the scarcity of gold. It has been shown conclusively, however, that, in every case investigated, a cause peculiar to the commodity has been found, without the need of referring to a general cause connected with gold. The opening of better lands to cultivation, the discovery of richer mineral deposits, the perfection and cheapening of transporta- tion by which all these distant resources have become easily available, the increased mobility of labor and capital in finding out these new resources, the steady and extraordinary development of mechanical and chemical improvements in a great number of indus- tries — these are some of the main causes 1 which had affected the prices of a variety of commodities since 1873. Laveleye, however, remarks 2 that improvements made even greater progress in the years 1860-70 than they had since then; but that prices in the former period rose from 18 to 20 per cent. Why, then, he urges, can the same cause have produced an opposite effect since 1873 ? To this, it must be said : If improve- ments multiplied before 1873, and yet the prices of the commodities affected did not fall, the expected result must have been masked or counteracted by other in- fluences. Surely, no one will contend for a moment that improved processes in particular industries will 1 Courcelle-Seneuil (Journal des ficonomistes, August, 1886, p. 163) finds that the completion of a period within which productive railways can be built has had an important influence in lowering prices since 1883. * Contemporary Review, May, 1886, p. 621. FORCES COUNTERACTING IMPROVEMENTS 57 not lower the value of commodities relatively to gold, if gold has remained unchanged in its conditions of production. This would lead one to suppose that the prices of many articles before 1873 must have shown a fall, had it not been for the vast extension of specu- lation and overtrading and the influences of the new gold. But, after the inflation and abnormal condi- tions of the previous period were left behind, the effect of improvements became more clearly apparent. In fact, when one considers that, with all the unparalleled development of cheapening processes since 1850 in almost every industry which ministers to human wants, prices in 1885 were no lower or, by the Hamburg figures, even 10 per cent, above the level of prices in 1847-50, one is penetrated by the conviction that prices are still buoyed up by the high tide of an abun- dant gold supply. Else why should prices not be much lower than in 1850? "If, under such circumstances," says Cairnes, 1 "prices did not fall, that could only be 1 "A rise in the price of commodities, if general, implies commonly a fall in the value of money; but, according to the ordinary use of language, alike by economists and in common speech, money would, I apprehend, in cer- tain circumstances, be said to have fallen in value, even though the prices of large classes of commodities remained unaffected. For example, sup- posing improvements to have been effected in some branch of production, resulting in a diminished cost of the commodity, the value of moneyre- maining the same, prices would fall. If, under such circumstances, prices did not fall, that could only be because money had not remained the same, but had fallen in value. The continuance of prices unaltered would, there- fore, under such circumstances, amount to proof of a fall in the value of gold. Now, when, in connection with this consideration, we take account of the fact that over the greater portion of the field of British industry im- provement is constantly taking place, it is obvious that the mere movements of prices here, taken without reference to the conditions of production, are no sure criterion of changes in the value of gold." — Essays, p. 106. 58 MONEY AND PRICES because money had not remained the same, but had fallen in value." Or it would be more correct to say that the cost of producing gold had fallen; for, if prices are now nearly the same as in 1850, in reality the cost of production of both commodities and gold has fallen, leaving them relatively to each other in very much the same position as in the beginning. When we once fully apprehend the influences of the progress of society on prices, we cannot admit that a fall of prices is connected in any necessary way with a scarcity of gold. § 6. The preceding discussion, however, does not account for a general fall in prices. If the fall of prices had been general, it might suggest a single cause affecting all commodities, such as the scarcity of the medium by which goods are exchanged. In fact, it seems to be quite necessary to a theory which explains the fall in prices by the scarcity of gold that the fall should have been universal. And this is so stated. "The most disastrous characteristic," remarked Mr. Giffen, 1 "of the recent fall of prices has been the descent all round to a lower range than that of which there had been any previous experience." In the case of English exports and imports, there will be found a 1 Contemporary Review, June, 1885, p. 809. This is the ground taken by Laveleye, Contemporary Review, May, 1886, p. 621. Frewen (Nineteenth Century, October, 1885, p. 601) says: "Prices have all fallen more than 20 per cent. . . . Prices all round are falling lower and lower still, because that circulating medium which measures values has diminished." THE HAMBURG TABLES 59 large collection of commodities which have actually risen in price since 1873, although that was a year of abnormally high prices. Mr. Palgrave 1 points out a rise in price in 1886, as compared with 1881, of six of the articles used in the Economist table. Moreover, in the same list, comparing the period before 1875 with that since 1880, sugar, tea, tobacco, butcher's meat, raw silk, and leather had been at times higher in the latter than in the former period. The Hamburg tables also give additional evidence that prices were not all moving in the same direction. I have collected 2 twenty-one articles, out of the one hundred quoted at Hamburg, which showed an up- ward tendency, by comparing the average prices of 1881-85 with those of 1871-75. The average of the numbers representing the prices of these twenty-one articles in the period 1871-75 was 164.2, and in 1881- 85, 183.8 In the same lists there can be found at least 1 Report of the Royal Commission, 1886, Appendix, p. 330. The articles are Jamaica rum, potatoes, flax, hemp, ashes, and tin (although tin is quoted by Mr. Goschen as showing a great decline in 1883). Malt Buckwheat. . Hops Veal Mutton Pork Butter Bristles Buffalo horns Herring Dried fish. . . 1871-7S 140 131 339 153 135 126 188 201 184 149 163 h-85 143-5 135-5 355-3 183.0 158. 1 126.9 191. 6 225.9 235-9 165.8 184. 1 Almonds. . . Wine Champagne Cocoa Pepper Allspice Rum Ivory Flax Gum elastic 1871-75 in. 1 221.9 121. 2 156.8 229.7 60.4 181. 8 1850 123. 1 141. 6 1881-85 127 284 124 230 233 72 199 194 128 157 6o MONEY AND PRICES twenty-one articles 1 which had shown a decided ten- dency to fall in price. The remaining articles do not show a marked movement in either direction. For- sell 2 makes an interesting analysis of the whole one hundred into two groups, classifying those which show a tendency to rise and those which show a tendency to fall. In the first class he includes fifty-one articles, and in the second forty-nine articles, with the follow- ing results in averages: 1847-50 1851-60 1861-70 1871-75 1876-80 1881-85 I II, IOO IOO 125.3 109.7 1303 114. 6 147. 1 121. 7 143-7 103.7 146.4 96.7 Whether to draw inferences as to a scarcity of gold from forty-nine articles, or to infer that gold was abun- dant, according to the prices of fifty-one articles, is an awkward dilemma for those who think that prices give direct evidence as to the quantity of money. As For- sell remarks, the theory of a scarcity of gold is incom- patible with the rise 3 in price of so many commodities. 1 Wheat, flour, rape-seed oil, linseed-oil, olive-oil, palm-oil, allspice, rice, sago, cochineal, logwood, quicksilver, salt, chalk, silk, wool, potash, pearl- ash, soda, stearine candles, and wax. 2 The Appreciation of Gold, etc., p. 22. 8 Mr. Giffen {Journal of Statistical Society, March, 1879, p. 306) referred to the rise in price of textiles and metals (and their manufactures) in 186 1- 65, their fall in 1865-68, their rise again in 1868-73, and their fall again in 1873-79; and yet he could not claim that there was any such corresponding changes in the quantity of gold in the world. Such fluctuations drove Mul- hall {Contemporary Review, August, 1885) to the extreme of asserting the absence of any connection whatever between prices and the quantity of gold. See, also, the irregularity of movement in the prices in Bourne's table, Journal of Statistical Society, ibid., pp. 41 i> 412. AS TO SCARCITY OF GOLD 61 The purchasing power of gold, moreover, has been indicated in other ways, such as the higher prices paid for services, domestic servants, rents for houses, and for a vast number of things which, in their nature, cannot be included in price-lists, but which absorb a large part of every one's expenditure. § 7. From the foregoing statements, it must be evi- dent that the connection between prices and the quan- tity of gold is not so simple as some would have us sup- pose. But Mr. Goschen and his followers saw reasons, in the direct and visible demands for gold, since silver was demonetized by Germany, to believe that gold 1 must have been scarce enough to cause a general de- cline in prices. "Gold to the amount of nearly £200,000,000 has been required for supplying Germany, the United States, and Italy with new gold currencies. 2 This ex- traordinary demand fell on a diminished supply. The annual production of gold during the first five years 1 Journal of Institute of Bankers, May, 1883, p. 302. Giffen {Contemporary Review, June, 1885, p. 815) computed the demand in the previous thirteen years of Germany at £80,000,000, of the United States at £82,000,000 (£34,- 000,000 for imports less exports and £48,000,000 for home production), and of Italy at £20,000,000. 2 Laveleye {Contemporary Review, May, 1886, p. 625) saw in the coinage by various countries since 1873 a cause for alarm. The coinage of £220,- 000,000 since that year he stated to be equal to the production of ten years. It is impossible, however, to judge of the demand for gold by the amounts coined, because there are received at the mints foreign and domestic coins, which should not be counted twice; and old plate is also brought to be coined. Mulhall probably overstates the case when he says {Contemporary Review, August, 1885) the annual average coinage of the world, 1870-84, 62 MONEY AND PRICES after the discoveries of 185 1 averaged nearly £30,000,- 000. It now amounts to less than £20,000,000. The new demand has been equal to the total supply of ten years. At the same time, we have to reckon with the normal demand for arts and manufactures, 1 while more gold has also been required to meet the wants of an increasing population and an increased balance of transactions in all gold-using countries. "No evidence is before us to prove that a fresh de- velopment of banking expedients has to such an ex- tent further economized the use of gold as to neutralize this normal rate of increase. On the contrary, it is believed that, in England alone, the gold circulation has grown by £20,000,000 in ten years." Now, if the existing stock of gold in the world, in- creased as it has been since 1850, has not been capable of meeting the demands specified by Mr. Goschen, in what way would the effects of a scarcity manifest themselves? If the insufficient quantity of gold has lowered prices, the process must have shown itself at some point in the machinery by which commodities was £14,000,000, of which one-half came from recoinage of old coins. One- fifth of the United States gold coinage in 1885 was from foreign coins and jewellers' bars, plate, etc., to the amount of about $10,000,000. At least, the coinage since 1873 was not a demand additional to that referred to by Mr. Goschen. But, when Laveleye (ibid., pp. 626, 627) referred to the falling off in the coinage of gold and silver since 1879 in England and France as evidence of a scarcity of gold, he forgot that this was, on the very surface, a reason for believing that the coinage was already so plentiful that no more was called for in these countries. 1 Soetbeer (Malerialien, p. 38) placed the annual consumption of gold in the arts at 90,000 kilograms, or nearly $60,000,000, and of silver at 515,000 kilograms, or about $21,000,000. An abundance of gold, however, would not affect the demand for plate, etc., by lowering the price of such articles; for the price in gold would not change. GOLD SCARCITY AND THE MARKET 63 are exchanged. Fortunately, Mr. Giffen 1 gave an ex- planation as to how he thought this scarcity of gold had made itself felt: "A sudden pressure on the stock of the precious metals at a given period tends to disturb the money markets of the countries using them, makes money dear, or creates a steady apprehension that it may at any moment become dear, and so, by weakening the speculation in commodities and making it really diffi- cult for merchants and traders to hold the stocks they would otherwise hold, contracts business and assists a fall in prices." And, later, 2 he asserted that — "The rate of discount and the interest of money do not depend on the scarcity or abundance of 'money,' using the term in its strict sense, but on the scarcity or abundance of capital relative to the demands of borrowers." As a consequence, Mr. Giffen, in looking over the years since 1871, has been struck with the succession of stringencies in the money market directly traceable to the difficulty of getting gold. Now, curiously enough, the period before 1873 was m ore remarkable for these disturbances than was the succeeding period. From 1855 to 1873, tne rate at the Bank of England 1 Journal of Statistical Society, June, 1879, p. 49. He claimed, also (ibid., p. 445), that, after a fall in prices due to a scarcity of gold, there was an apparent superabundance of gold, due to the lower range of prices. Or, as Laveleye puts it: "The more rare it [gold] becomes, the more it apparently exceeds the demand" (Contemporary Review, May, 1886, p. 631). 1 Contemporary Review, June, 1885, p. 816. 64 MONEY AND PRICES rose beyond 6 per cent, eleven times, and twice to 10 per cent.; at the Bank of France, for the same years, the rate rose above 5 per cent, ten times, and once to 9 per cent. ; at the Bank of Germany, it rose six times beyond 6 per cent., and once to 9 per cent. There must have been great difficulty in getting gold before 1873, if we are to judge from the frequency and in- tensity of the disturbances in the money market. But there is no corresponding evidence as to a scarcity of gold to be drawn from such disturbances since 1873. 1 In fact, in the very machinery of borrowing and lend- ing, where any such change might show itself, there was no evidence whatever of a scarcity of gold. In order to test this question thoroughly, I compiled 2 the table on page 65, which shows the total note circula- tion and the amount and character of the specie re- serves in all the principal banks of Europe and the United States (000 omitted): From these figures it will be seen that the reserves in the banks of the civilized world show a very remark- able increase in gold. Although the total note circula- tion was increased 29 per cent., the gold in the reserves 1 At the Bank of England, since 1873, the rate has never been higher than 6 per cent, and for only ninety-six days in all, divided between four occasions (in 1874, 1875, I 878, and 1882). At the Bank of France, in the same time, the rate has never risen higher than 5 per cent., and for one hundred and ninety days, divided between three occasions (in 1874, 1881, and 1882). At the Bank of Germany, also, the rate has never risen higher than 6 per cent., and for one hundred and thirty-seven days, divided between four occasions (in 1874, 1875, 1876, and 1882). See Report of Royal Commission on Depression of Trade, Appendix, pp. 370-373. 2 From figures given by Soetbeer , Materialien, etc. , pp. 58-70. For France, see Bulletin de Statistique Comparee, January, 1887, pp. 62, 63. GOLD IN BANK RESERVES 65 1870-1874 1885 Reserves Total note circu- lation Reserves Total note circu- lation Gold Silver Gold Silver Banks of the United Kingdom Banks of Australia. . . Banks of Italy National Bank of Belgium Bank of the Nether- lands Bank of Austria- Hungary Imperial State Bank [i872]$i53,825 [1874] 41.380 [1869I 131,800 [1870] 15,447 [1870] 4,893 [1871] 2,109 [1871] 16,651 [1871] 80.361 [1870] 1,749 [1873] 7,058 [1872] 3.801 [1871] 18,900 $106,600 33,695 14,230 55,320 37,i6o 4,775 4.325 1,535 6,980 • $198,540 20,580 274,100 88,487 40,505 62,857 119,000 429,486 7,327 11,794 16,877 284,561 $141,205 65,890 231.483 56,121 13,900 19,161 25,902 102,207 3,436 7,169 11,566 158,100 $217,087 11,203 6,540 38,366 48,646 676 777 846 7,900 $186,850 28,115 583.610 189,690 73.400 76,972 136,351 429,860 9,835 9.287 18,370 276,500 Imperial Bank of Sweden Bank of Norway National Bank of Denmark National Banks of the United States. . Total $477,974 $264,620 $1,554,114 $836,140 $332,041 $2,018,840 was increased 75 per cent., while the silver was also increased 25 per cent. In 1870-74, the gold reserves amounted to 28 per cent, of the total note circulation, and constituted 64 per cent, of all the specie reserves. In 1885, the gold bore a larger ratio to a larger issue of paper, or 41 per cent, of the total note circulation; and, in spite of unusual accumulations of silver (in the Bank of France, for example), the gold formed 71 per cent, of the specie reserves. This is a very significant showing. What it means, without a shadow of doubt, was that the supply of gold was so abundant that the character and safety of the note circulation had been improved in a signal manner. In 1871-74 there was 66 MONEY AND PRICES $i of gold for every $3.60 of paper circulation; in 1885 there was $1 of gold for every $2.40. * There are, moreover, strong and substantial reasons for believing, on independent grounds, that gold was abundant instead of scarce. When we compare the total production since 1850 with that since 1492, the result is very striking, and cannot be too strongly emphasized : 1 493-1 850. 1851-1885. Gold $3.3 I 4iS5o,ooo 4,45 2 ,525,ooo Silver $7,35 8 ,45o,ooo 2,399,475>ooo In the thirty-five years since 1850, one and one-third times as much gold had been produced as in the three hundred and fifty-eight years 2 preceding 1850, while only one-third as much silver had been produced in the same time. And yet we heard a great deal of the phenomenal yield of the silver-mines in those years. What has become of this vast quantity of gold? We are fairly obliged to explain why gold h.as not fallen in value. It certainly would have fallen, had not its use 1 In the face of these facts, Frewen's statement (ibid., p. 597) seems a little wide of the mark: "Not only does the note currency diminish as the gold represented by such currency diminishes, but, ... as gold becomes scarcer and prices tend to fall, so also does the entire system of credit con- tinue to contract." Cernuschi, the very apostle of bimetallism, himself ad- mits that " the fall in prices which is complained of is not due to what has been called a scarcity of gold — a scarcity which is purely imaginary." — Lon- don Economist, April 24, 1886. 2 The amount in existence in 1848 is only a matter of conjecture. The estimates vary from $1,000,000,000 to $3,150,000,000. ANNUAL GOLD PRODUCTION 67 been extended; and, out of the extraordinary addi- tion to the world's supply, the demands of France, India, Germany, Italy, and the United States have been easily met. The countries of the world were saturated with the new gold. 1 Mr. Goschen spoke of an addition to England's gold circulation in ten years of $100,000,000; while, strangely enough, Mr. Giffen was alarmed because there was no coinage at all in 1881-82 ! Laveleye, also, was troubled because the coinage in France was diminishing ! But we heard it said constantly that the annual production of gold was falling off, and that its value must rise. Now, this is what Mr. S. Dana Horton 2 calls the "sempiternal object of erroneous reasoning." The value of gold is affected by the total existing sup- ply, which is very large relatively to the annual sup- ply. And yet it was true that the annual production had fallen off from its highest point about 1853. Be- fore 1840, the annual production of gold amounted to about $14,000,000: it rose as high as $157,000,000; but in 1885 it was about $100,000,000. A millionaire, however, does not become poor because his annual in- crease of wealth is a few thousands less than it was at 1 Soetbeer (Materialicn, p. 70) gives the following summary of the amount of gold in the civilized countries by years (in millions of dollars) : 1877 1878 187Q 1880 1881 1882 1883 1884 1885 722 712 875 947 g7s 1,017 1,150 1. 170 1,260 7 Quarterly Journal of Economics, October, 1885, p. 58. Laveleye and Disraeli are addicted to the "sempiternal" fallacy. (See Contemporary Review, May, 1886, p. 623.) Cernuschi, however, remarks, "The power of the gramme of gold is proportionate to the whole of the gold, . . . not to the importance of the annual production" (Anatomy of Money, p. 11). 68 MONEY AND PRICES its greatest: his past accumulations are still his, and his yearly income is yet large. The yield from the mines in 1885 was enormous compared with any period previous to 1850, and this had been kept up for thirty- five years. The longer this continues, the less im- portant will be the variations in the annual supply. 1 § 8. Even though the gold production from 1850 to 1885 had been great enough to meet very heavy de- mands, yet it may be asked how far had the means for economizing money developed in that period. Mr. Giffen believed no evidence existed as to an extension of credit devices since 1873, that England and the United States were already fully "banked" before this period, and that the clearing system on the con- tinent showed no progress. The increase in popula- 1 The annual average production of gold and silver after 1850 is as follows: Periods Gold Silver 18^1-'? ■» $139,077,000 140,7 29,000 129,081,000 136,035,000 121,302,000 120,261,000 104,025,000 $40,096,750 41,177,250 49,827,000 59,924,000 86,162,000 95,5i5,Soo 107,190,000 1856-60 1861-65 1866-70 187 1-7 <> 1876-80 1881-85 The yield for the single years since 1880 is as follows: Gold Silver 1881 $110,810,000 103,564,000 100,822,000 101,940,000 $98,418,000 105,916,000 108,582,000 110,899,000 1882 1883 1884 Soetbeer, Materiolien, p. i. INCREASE OF GOLD .69 tion and commodities, he urges, had not only not been compensated for by any economizing expedients, but the increased demand for gold had fallen on a dimin- ishing supply. To examine, first, whether the issue of notes has saved the use of gold in the principal countries of the world since 1873, it will be necessary to compare the amounts of uncovered paper, not the amounts of the total circulation in the periods taken. To the extent, of course, to which the covered circulation has increased, no extension of credit has taken place. For this pur- pose, I prepared a table showing the amounts of the total circulation, and the amounts of the total circula- tion less the specie reserves, in the principal countries for the years 1870-74 and for 1885 (000 omitted): Countries 1870-74 1885 Uncovered by specie Total cir- culation Uncovered by specie Total cir- culation Great Britain 1 France* [1872] $44,719 [1869] 39,739 [1870] 168,000 [1873] 209,678 [1871I 135.750 [1873] 339,652 [1871] 505,400 $216,939 322,869 180,000 263,616 312,649 475,357 505,400 $45,644 135,041 170,000 188,646 124,500 525,000 172,000 $211,139 583,610 285,200 263,194 299.905 627,000 814,300 Italy 3 Austria-Hungary 4 . . Germany* Russia 6 United States 7 Total $1,442,938 $2,276,830 $1,360,831 $3,084,348 1 Soetbeer, Materialien, p. 59, and Statistical Abstract, 1884. *The mean of the highest and the lowest circulation is given for 1869. See Bulletin de Statistique Comparee, III, 21, and London Economist, January 23 and December 25, 1869. For 1885, see Soetbeer, ibid., p. 73. • See Relazione sulla Circolazione Carlacea, made to the Italian Chamber 70 MONEY AND PRICES From these figures, it will be seen that in 1885, as com- pared with the years about 1873, the uncovered cir- culation decreased by $82,000,000, or 5 per cent.; while the total circulation increased by $800,000,000, or 35 per cent. This indicates quite clearly the effects of the great addition to the world's stock of gold and silver since 1873. Specie to the amount of $800,000,000 had gone into circulation in the form of note issues, rep- resenting an equivalent amount of specie; but gold had not been economized by the use of credit in the form of notes. While the total circulation of these countries had increased 35 per cent., the paper had been much better protected; for in 1870-74 the specie was but 36 per cent, of the total issues, and in 1885 the specie was 55 per cent, of the total issues. From this table, then, we see where the gold referred to by Mr. Goschen had gone. About $750,000,000 of specie, of Deputies, March 15, 1875, Appendix, pp. 20, 41; and Haupt, L'Histoire Monitaire de notre Temps, p. 274. * See Soetbeer, ibid., pp. 64, 74; and Miilinen, Finances de VAutriche, p. 163. $ For 1871, the uncovered circulation is given by Soetbeer, ibid., p. 74. Taking the total circulation of all the German banks (given for 1871, p. 65), and supposing the Landes papier geld to be the same in 1871 as in 1870, I get the total circulation for the year 187 1 instead of 1870. 6 See Bulletin de Statislique Comparie, II, 161; Haupt, ibid., p. 366; and Soetbeer, ibid., pp. 66, 75. 'For 1871, from the $674,000,000 of United States notes and national bank notes there has been deducted $168,600,000 for notes held by the treasury and the banks. No notes could be presented for specie in 1871. For 1885, from $664,000,000 of United States notes and national bank notes, $134,800,000 was deducted for notes held by the treasury and the banks. The amount of specie which could be drawn on by holders of either kinds of notes, to the amount of $278,400,000 gold and $79,000,000 silver, was also deducted, to ascertain the uncovered note circulation. Cf. Finance Report, 1886, I, p. lxxx. CHECKS ECONOMIZE GOLD 71 mostly gold, had gone into circulation since 1873, in the form of covered paper issues, in the United States and Italy alone. The paper currency of every coun- try except Russia had gained in security, together with a large increase in many of the countries. The gold supplies had not merely permitted an enlarged note circulation, but had furnished a much better protec- tion to that increased issue. In regard to the use of checks and clearing-houses in economizing the use of money, Mr. Giffen was probably correct in saying that this system had at- tained its full growth in the United States and Great Britain before 1873; but an important conclusion is to be drawn from this. Just to the extent to which the system may have been perfected is it one which expands with the expansion of business. In the same proportion that transactions increased, this means of economizing the use of money would (approximately) increase. The clearing system, in fact, is one which grows with the work to be done. 1 Certainly, this is true of wholesale transactions; while in retail trade 1 How well this is recognized may be seen by the accepted custom of measuring the extent of business by the figures of the clearings. "The re- turns of the London Clearing-House," says Mr. Palgrave, " may be regarded as indicating approximately the value of the business of the country as in- dicated by price" {Report of Royal Commission, Appendix, p. 330). In the United States, of all the receipts by the i,q66 national banks on one day in 1881, 95 per cent, were made up of forms of credit, exclusive even of cir- culating notes; while in New York City this percentage was 98.7. At all the banks, only .65 of 1 per cent, of gold was used; and, in New York City, only .27 of 1 per cent, of gold was used. See Report of the Comptroller of the Currency, 1881, p. 14. Cf. also Journal Statistical Society, June, 1865, "Country Clearings." 72 MONEY AND PRICES the use of checks is steadily widening. An elastic sys- tem, so far as it is ready to perform exchanges in pro- portion to their increase, meets the need of more money the moment it appears. If there has been no increase in clearings under such conditions, it only shows that transactions have not increased, not that there is any less efficacy in the system. Where checks are in gen- eral use other forms of credit are of less importance. 1 On the Continent the borrower at a bank will, as a rule, prefer notes instead of the right to draw on a deposit by checks. Yet, even at the Bank of France, 66 per cent, of the transactions in 1877-78 were effected without the use of notes and coin. 2 But, on the other hand, the Chambre de Compensation, established in Paris in 1872-73 (including twelve of the large banks), with the help of the Bank of France, performed ex- changes 3 the first year to the value of $320,000,000, which in 1883-84 had risen only as high as $843,000,- 000. Clearing-houses were also established in Aus- tria and Italy in 1872, but they have made little gain. The exchanges at the Saldirungs-Verein in Vienna (formed by the four old banks of the Saldosaal of 1 The use of bills of exchange in Great Britain seems to be falling off, with an increased use of checks. Cf. Sauerbeck, Prices of Commodities, p. 8. * Cf. Journal of Statistical Society, 1884, p. 493. If Mulhall's Dictionary of Statistics can be trusted, the banking of the world since 1840 has in- creased elevenfold — three times faster than commerce, and thirty times faster than population. Leroy-Beaulieu reports that " checks have become every- where a more common instrument of payment" (Revue des Deux Monies, May, 1886, p. 403). 1 The figures for the continent are taken from Rauchberg's Die Entwick- elung des Clearing-Verkehres, in the Bulletin de I'Institut International de Statistique, I, p. 140, etc. SHIPMENTS OF GOLD ECONOMIZED 73 1864, together with ten other large banks) were no greater in 1885 than ^ 1872, being at that time about $200,000,000 a year. The clearings of the Stanze di Compensazione in the several cities of Italy show a gain from $129,000,000 in 1883 to $348,000,000 in 1885, with some promise for the future. But, in Germany, a decisive advance was made in 1883, under the lead- ership of the Reichsbank, in the establishment of clearing-houses in Berlin, Hamburg, Frankfort, Bremen, Cologne, Leipzig, Stuttgart, Breslau, and Dresden. In the year 1884, the exchanges amounted to the large sum of $3,032,000,000. Although not so large as the $30,000,000,000 a year in New York or London, it is a very promising increase in the means of economizing the use of specie on the Continent. In international trade, also, as Leroy-Beaulieu 1 sug- gested, it is not necessary that the precious metals should increase as rapidly as commerce expands. The ocean and land telegraph, the shortening of routes by canals, and the extraordinary improvements in the ocean steamships have resulted in economizing the shipments of gold between different countries. A few years ago, twelve or fifteen days were taken up in carrying gold from New York to London; but later six days were sufficient. Formerly, gold was ninety days coming from Australia to England; while only thirty-five days were later required. In this way, 1 Revue des Deux Mondes, May, 1886, p. 402. This is more or less con- firmed by Bourne's table {Journal of Statistical Society, 1879, P- 4 11 )- 74 MONEY AND PRICES gold being a less time in passing from person to person in international transactions, greater rapidity of cir- culation is assured, with all the effects of an increase in quantity. 1 The use of foreign bills of exchange is as great as ever between bankers in different countries; while there is far greater activity of late not only in the transmission of securities which discharge interna- tional liabilities but also in the extended use of inter- national money-orders. 2 § 9. To get more light on the question whether gold has risen relatively to all commodities from causes affecting gold itself, it would be profitable to examine into the movement of prices in India; 3 but this cannot be discussed here. It will be as well to close the present study by re- 1 Fowler (Appreciation of Gold, pp, 12, 13) says of English trade: "The total of our imports and exports from 1866 to 1875 was in round figures £6,000,000,000, and the total of bullion and specie imported and exported was, in the same period, £530,000,000; but the total of our imports and exports from 1876 to 1885 was £6,700,000,000, and this vast amount was moved with the aid of £493,000,000 of bullion and specie. If we take the gold alone, we used about £327,000,000 in the former decade against £278,- 000,000 in the latter." If we can trust Mulhall, in 1861-70 the amount of the precious metals transported was 12 per cent, of the sea-borne commerce of the world, while in 1871-80 it was only 8 per cent. 2 In the countries composing the Postal Union in 1885, the issue of inter- national money-orders had risen to $60,000,000, and the issue of domestic money-orders to the surprising amount of $1,821,000,000. See Statistique Generate du Service Postal, Berne, 1886. In the United States alone domestic money-orders have increased $80,000,000 since 1873. I am much indebted for information to Mr. C. F. Macdonald, of the Post Office Department. 3 These prices, so far as then published, can be found in Barbour's Theory of Bimetallism; in J. E. O'Conor's Report on Prices and Wages in India, 1886, Government of India, Department of Finance and Commerce; and in the Report of the Royal Commission on Depression of Trade, Appendix, PP. 331-342, 378-382. RENTS, PROFITS, AND WAGES 75 f erring briefly to the argument of the English writers, 1 that a scarcity of gold had brought about a fall in rents, profits, and wages. It will be recalled at once, in regard to rents, that a marked characteristic of the period since 1873 had been the opening up of new and fertile lands, whose products have been transported at a greatly diminished rate. But this in itself is a reason why lands in the older countries should be thrown out of cultivation, and why rents should be lowered. This phenomenon, then, can be accounted for on other grounds than the scarcity of gold. In attributing the fall in the rate of profits to the general fall of prices (due to a single cause, the scarcity of gold), these writers fall into an error which has been already thoroughly exposed by Mr. Mill, 2 who pointed out that "the fall of price, which if confined to one commodity really does lower the profits of the pro- ducer, ceases to have that effect as soon as it extends to all commodities." In some industries, however, owing to changes in relative demand and supply, in- tense competition had set in after 1873, an d producers had necessarily submitted to lowered profits. But, in so far as prices had fallen in all industries alike, that cannot have been the cause of a general fall of profits. If, however, labor has not fallen in price, while other things have fallen, "what has really taken place," says 1 Frewen, ibid., p. 599; Giffen, Journal of Statistical Society, 1879, p. 57, and Contemporary Review, June, 1885, p. 816; the writer in the Edinburgh Review, July, 1886, p. 39; and Sauerbeck, ibid., p. 42. 2 Principles of Political Economy, book IV, chap. IV, § 1. 76 MONEY AND PRICES Mr. Mill, in the connection already quoted, "is a rise of wages; and it is that, and not the fall of prices, which has lowered the profits of capital." It is quite certain that there had been no fall of real wages after 1873, while there is good reason to suppose that they had risen. 1 In the United States, money wages may have fallen slightly -in some industries; but an allow- ance must be made for the depreciation of paper pre- vious to 1879. American producers had been enabled to sell at lower prices, and yet pay relatively higher wages, only by a gain in efficiency. As a typical case, the accompanying facts were furnished me by a manu- facturer from his own books: Average wages per day Amount paid for a given piece of work December, 1867 1876 1886 $2.05 1.71 1.79 $1.00 .78K •37^ For Germany, Soetbeer gives a variety of evidence to show the rise of wages 2 since 1873. Money wages in Italy, 3 which were indicated by the number 179 in 1873, were m l88 4 expressed by 222. But it is not necessary to cite further evidence on this point. The fact that wages have risen tends to confirm the belief that the fall of prices was due chiefly to the introduc- tion of improvements. 1 See Report of Massachuestts Bureau of Labor Statistics for 1884, and Re- port on the Statistics of Wages, United States Census, 1880, vol. XX. 2 Materialmen, pp. 88, 90, 91. 8 See Movimento dei Prezzi di Alcuni Generi Alimentari dal 1862 0/ 1885 (1886), issued by the Italian Department of Agriculture, p. xxvii. PAYMENT FOR CONTRACTS 77 § 10. In the study of this subject, we have been confronted at the outset with a fall of prices after 1873 which happened to coincide with the demonetization of silver by Germany and the United States, and the beginning of a new epoch in the production of many commodities. To assume that because the fall of prices coincided with the demonetization of silver it was due to an appreciation of gold, without consider- ing whether the coincident phenomena were traceable to entirely distinct causes, is to fall into the fallacy of post hoc propter hoc. The forces which fix the level of prices at any time, moreover, are far too complex to admit of the inference that, because prices have fallen seriously, gold has become scarce. On the other hand, all the phenomena presented to show the scarcity of gold are explicable on other grounds. But — what is of very grave importance — we must admit that great changes in prices may take place irrespective of the scarcity or abundance of the precious metals. From this it follows that, as a standard of payment for contracts, neither gold nor silver, nor even gold and silver (if they should ever be firmly yoked together by international bimetallism), will change so as to correspond to the changes in prices brought about by a variety of causes independent of the quan- tity of the precious metals. Under such circumstances, the attention given to the question of a proper stand- ard of deferred payments can never be too careful. CHAPTER III CHANGES IN PRICES SINCE 1896 § i. In the last chapter attention was given to the reasons lying behind the decline of prices after 1873. This decline continued beyond 1885, and reached its lowest point about 1896. In this whole period it was a problem of falling prices and of explaining the causes then at work. A very different task now lies before us in the period since 1896. Here we have to do with rising prices. There is thus an opportunity and a duty to analyze the causes affecting prices in general, and to ascertain why in the early period prices fell, while in the later period they rose. Such a problem is certain to put the theories of price to a practical test. In order to place before us clearly and briefly the various elements in what is a large question, it seems best to present an analysis in topical form of these elements which influence prices not only in a time of falling, but of rising prices, as follows: Part I. Prices of Commodities a. Facts: Movement of Prices, 1890-1915 b. Causes of the Changes in Prices of Commodities: 1) The Increased Production of Gold: f 1. Gold (1) Money in Circula-1 2. Other Forms tion of Money 78 1. U. S. Notes 2. Bank-Notes 3. Silver Certificates 4. Silver Coin 5. Checks ELEMENTS INFLUENCING PRICES 79 1. Gold (2) Bank Re- . 2. Other Law- ful Money serves i.U. S. Notes 2. Silver Certificates 3. Silver Coin (3) Credit and Prices 2) Changes in Expenses of Production of Goods (1) Tariffs and Taxation (2) Wages, Unionism 3) Agricultural Conditions Food, Cotton, etc. 4) Monopolies, "Trusts" 5) General Extravagance 6) Speculation Part II. Prices of Securities a. Facts: (1) Prices of Railway and Industrial Securities (2) Specie Reserves (3) International Movement of Gold (4) Ratio of Loans to Deposits b. Causes of the Changes in Prices of Securities 1) Fall in the Value of Gold The Volume of Circulation 2) Earnings 3) Speculation Expanded Credit 4) Overissues At the beginning, certain ambiguities as to what is to be included in our present examination should be cleared up. Obviously we must include in a complete study not only the changes in the prices of goods but those in the prices of securities. Therefore, as indi- cated in the outline above, our discussion should break into two parts, one treating of the prices of commodi- ties, and the other of the prices of securities. Although, So MONEY AND PRICES in the past, the causes of changes in the prices of goods and securities have been often assumed to be the same, a very casual reflection will show that they are widely different, as may be noted by the causes briefly pre- sented in the outline. A full presentation of all the points raised by this outline would fill many volumes, 1 therefore, while the outline may serve as a map of the field, and of the relations of one point to another, it will also serve as a means of indicating the topics which must here be passed over, and those which have been chosen for examination. It is intended here to present a study only on changes in the prices of com- modities; and in this chapter, also, it is the purpose to treat mainly of the effect of gold on the general level of prices, namely : Part I, b, i). The Increased Production of Gold i. The Supply of Gold Table of Production, 1 890-191 5 2. The New Demand for Gold, 1890-1915 3. Effect of Gold on Prices, 1890-1915 (1) In Circulation as a Medium of Exchange (2) In Bank Reserves (3) In Expansion of Credit After having examined into the relation of gold to prices, some attention can then be given to the effect of changes in expenses of producing goods upon prices (e. g., Part I, 2). 1 In later volumes, for which these collected articles are only preliminary studies, it is hoped to give a full and systematic discussion of all the prob- lems here raised. In a series of volumes on money only that on The Prin- ciples of Money (1903) has yet been prepared. A SUMMARY OF PRICE THEORY 81 § 2. The other topics under Part I, not given de- tailed treatment, may be covered in the form of proposi- tions without argument. At the risk of possible repe- tition, we may thus present a summary of the forces determining prices in general statements: i. The price of a commodity is measured by the quantity of a given standard for which it will exchange. 2. A change of prices may be due to changes in the conditions affecting the supply (thus including ex- penses of production) of goods, as well as to changes in the demand for and supply of gold. A statistical statement of a change of price is not a statement of the cause of the change. 3. Probably there is not so much difference of opin- ion regarding the theory of prices as is sometimes supposed. Other causes being supposed constant, an increased supply of gold would tend to raise prices. No one can fail to see that, if by "money" is meant gold, a change in its quantity would, other things being equal, be a factor affecting prices. An increas- ing demand for gold, however, would work against the effect of an increasing supply. If the new demand offset the new supply, then, if changes of prices oc- curred, their cause must be sought in the influences touching the producing and marketing of goods. 4. The effective demand for goods (granting their utility) is limited by the buyer's purchasing power. This purchasing power is not identical with the quan- tity of the media of exchange in circulation, any more 82 MONEY AND PRICES than the value of the total exchangeable wealth of the community is identical with the value of the total money in circulation. In any event, demand alone does not determine price. 5. The general level of prices is not independent of particular prices; since there can be no such thing as a general level, or average, of prices which is not the resultant of a number of particular prices each arrived at by individual buyers and sellers. The causes of price changes must be sought in the forces settling particular prices. This does not exclude the con- sideration of any causes affecting the value of the standard in which the prices of goods are expressed, because the standard is itself a particular commodity. 6. In particular cases, competitive prices in this country are arrived at by the higgling of the market, which depends on buyers' and sellers' judgment of the demand and supply of the commodity (e.g., wheat); and, when the price is fixed, the credit medium by which the commodity is passed from seller to buyer comes easily and naturally into existence and, of course, for a sum exactly equalling the price agreed upon, multiplied by the number of units of goods. Price- making generally precedes the demand upon the media of exchange, and does not at all imply any necessary demand at the moment upon the standard in which the prices are expressed (cf. infra, 10). 7. The offer of "money" for goods is only a resultant of price-making forces previously at work, and does not measure the demand for goods (cf. supra, 6). That is, LOANS RELATED TO EXCHANGES OF GOODS 83 the quantity of the actual media of exchange thus brought into use is a result and not a cause of the price-making process. The supposed offer of money has no money as its basis, but is only the offer of a purchasing power, previously existing, based on sala- ble goods, which at the moment of payment appears expressed in terms of the standard. By credit devices the actual transfer of the standard is reduced to an inconsiderable minimum. In reality (as in foreign trade) goods are exchanged against goods. 8. The effect of credit on prices is to be traced mainly through banking facilities by which goods are coined into means of payment, so that, expressed in terms of the standard gold, they may be exchanged against each other. Thus credit devices relieve the standard to an incredibly great degree from the demand for the use of gold as a medium of exchange, and thus remove a demand, as trade increases, which would otherwise have enormously affected the value of gold. Thus the effect of credit on the general level of prices in considerable periods of time is shown by a tendency to reduce the demand on the standard gold, and hence to prevent the tendency toward falling prices. 9. A general proposition is that banks are limited in making loans by the quantity of their capital, a bank of large capital and deposits being able to make large loans, a bank of small capital and deposits, small loans. A second proposition is that the demand for legitimate loans varies with the exchanges of goods and collateral and the opportunities for investment. With an in- 84 MONEY AND PRICES creasing activity in business, however — either sound or speculative — the expansion of loans is limited by the resources of the bank. Next, a bank trying to carry a certain amount of loans, must hold a specified proportion of reserves to demand liabilities under the rule of banking experience or law. The amount of its capital and the funds left with it determine the rela- tive size of its loan item; and the extent of its loans and resultant deposits determine the amount of its reserves. The reserves of a bank are thus a consequence of the loan operations. This conclusion, however, as it af- fects the practical problem of the present day, is not, in my opinion, invalidated by the conceivable cases arising, when business tends to outrun banking facili- ties, in which anything that makes increasing reserves possible would increase the power of the banks to lend. When gold becomes increasingly abundant, the banks having large resources get more easily the gold reserves needed for their operations. It still remains true that the fact of an increased supply of gold does not of itself increase loans, unless conditions of busi- ness demand an increase in loans. Therefore, the ex- pansion of business is not a necessary consequence of an increasing supply of gold, any more than an ex- pansion of railway traffic is the necessary consequence of an increasing supply of cars. If increasing goods are in existence to be transported, then, of course, there is an increasing demand for cars. Likewise, if there are more transactions in goods, there are more loans, WORLD MOVEMENT OF PRICES, 1850 TO 1915 85 and there is an increasing demand for that which is lawful reserve. From which it results that the use of new gold in bank reserves, under present conditions, is not the significant causal force which expands business and raises prices (although it may be contemporary with it). 10. The problem of explaining the general level of prices is one of arriving at the adjustment between two terms of a ratio (the standard on the one side, and goods on the other), each of which is influenced by supply and demand. Gold being one, and goods being many, a cause working on gold alone, and important enough to show an appreciable effect, might explain a general movement of prices. In practical operation, however, because of the large existing stock of gold, very considerable additions may take place in the supply of gold without materially changing the world value of gold as related to goods in general. Rapid changes of prices are hence more likely to be due to influences in the market for goods, to changes in ex- penses of production, to speculative changes of demand for goods, or to psychological forces working inde- pendently of facts. § 3. Before proceeding to an analysis of causes, it is well to have before us the world movement of prices from 1850 to 1915, as well as the world production of gold by periods in the corresponding years. 1 Both are 1 This chapter is a combination of an address delivered before the Ameri- can Economic Association at St. Louis, in December, 19 10, and an address 86 MONEY AND PRICES presented together in Chart III, so that direct com- parisons between the two are made possible. The prices for the United States are taken from the Falkner table of the Aldrich Report from 1850 to 1892, to which are added the index numbers of the Bureau of Labor, reduced to the scale of the Falkner table in 1892. Since the currency prices from 1862 to 1878 have been reduced to a gold basis, by using the premium on gold as a means of changing paper to gold prices, it is obvious that the line of gold prices in those years would not be the same as if we had then had a gold standard. The sharp fluctuations during the Civil War, as shown in the chart, are not to be taken as normal. The corrective is to be had in the lines of British and German prices. Also, while the American index numbers since 1891 have been computed on a different base, and on quotations not the same in num- ber and articles as in the Falkner table, yet, as experi- ence has shown, the relative change of level as com- pared with the past is safely indicated by the decline shown in the solid line in the chart after 1891. The combined result of the English, 1 German, 2 and Ameri- before the Pan-American Scientific Congress at Santiago, Chili, in January, 1909, edited so that the statistics of gold and prices have been brought down to 1915. 1 Sauerbeck's figures, as continued by Sir George Paish in the Statist, are used as the only continuous table available, in spite of objections to the narrow range of articles quoted. The base, being different from that of the American table, ioo is placed at 115 on the chart, bringing a fair equality of starting-points. 2 The German index numbers are those of Otto Schmitz, given by W. C. 1493-1915 $16,163 M 150 125 100 ED 8 o o. o 75 50 15 YEARS 1901-1915 $6,077 M 1 — / — 1 — -f" / A / / ^ 1 / \-t- / sth~ Ti ft . ' „' '-J-'* 1 -" l v - "" ' - MM . —f 1 ! Price3 in L " ■ C »i ** c I I 1 150 125 100 rn s s "u a. (M a> "5 8 50 -■> 1850 185£ 1J05 1010 1915 CHART III 1850-1915 1493-1915 $16,163 M 1493-1900 $10,085 M 1493-1875 $6,332 M TOTALS 1493-1850 $3,158 M 50 YEARS 1851-1900 $6,927 M 15 YEARS 1901-1915 16,077 M 25 YEARS 1876-1900 S3, 753 M NEW GOLD 25 YEARS 1851-1875 $3,174 M 7" \ ', - ' ' b -A - r- _y V- \ A- 1 \ V V - ■^ - -7 ' /— 1011 gV —^ <: ^ ^.-\ ~ 7 ^-.«— s ■ -5- so 25 Pricot in Ufiled SUtei " » G.rm.n, - WORLD PRODUCTION OF GOLD 87 can figures seems to point clearly to a steady decline from 1873 to 1896; to a slow rise, since 1896, to a level not far different from that of 1850-60. The whole line since 1850 and down to 191 5 is used in order to provide the historical means of comparing causes and effects for the same forces working both in periods of falling and rising prices. Since the claim has been vigorously supported, at once in the earlier and the later periods, that prices have been directly affected by the supply of gold, on Chart III are placed areas to represent graphically the relative amounts of new gold produced during the periods in question, as well as the total stocks of gold produced by the end of these periods. The produc- tion of gold 1 may be summarized as follows: PRODUCTION OF GOLD BY VALUE Period Amount 1493-1850 $3,158,210,280 1851-1875 3,174,005,000 1493-1875 6,332,215,280 1876-1895 2,467,266,800 1896-1900 1,286,505,400 1876-1900 3,753,772.200 1851-1900 6,927,777,200 1493-1900 10,085,987,480 1901-1915 6,077,903,974 1851-1915 13,005,681,174 1493-1915 16,163,891,454 Mitchell, in the Bulletin of the Bureau of Labor Statistics, No. 173, p. 249. As the base is very near that of the American table, the same starting-point of 100 is used for both on the chart. 1 A careful summary of the annual world production of gold and silver in brief form, from 1493 to 1905, was printed by J. D. Magee in the Journal 88 MONEY AND PRICES The simple statistics of production, however, do not give us a statement of the actual stock of gold in the world at a given date, since allowance must be made for the steady losses of gold by abrasion, shipwreck, and especially in the arts. It is not easy to arrive at a definite sum for consumption in the arts. There are only rough estimates, which should be taken with much hesitation. With this understanding, some gen- eral idea, even though only approximate to the truth, may be reached as to the existing stock at certain dates, the ratio of the new production to the stock at those dates, and thus the probable supply of gold at the present day. The available stock in 1850, after the losses and consumption from 1492 to 1850, could probably not have been more than $2,ooo,ooo,ooo. 1 In the period of 1851-75 the consumption in the arts could not have been on the average more than $50,000,000 annually; in the period of increasing extravagance during 1876-1900 we may estimate the annual con- sumption at not less than $75,000,000; while, since 1900 it may have been greater, perhaps, at least $100,- ooo,ooo. 2 On the basis of these estimates we may formulate the general results as follows (in millions of dollars) : of Political Economy, January, 1910. These are brought down to 1915 from the Reports of the U. S. Mint. 1 There is a possible error here of perhaps $500,000,000. 8 The estimate of the director of the U. S. Mint for 1908 is $113,996,000 (cf. Report of 1909, p. 80). Soetbeer's estimate for earlier years was about $60,000,000. GOLD STOCK AT CERTAIN DATES 89 Years 1850 1851-75.. I87S 1876-1900 1900 1901-15. . 1915 New gold Lost in the arts, etc. 5,174 3,753 6,077 Si, 250 (25 years) i,875 (25 years) i,5°° (15 years) Net addi- tion to the stock $1,924 '1,878 4,577 Existing stock at certain dates >2,ooo 3,924 5,8o2 10,379 Percentage of new gold to existing stock 158 95 104 Thus it is supposed that out of a total production from 1492 to 191 5 of $16,163,000,000, some $5,784,- 000,000 have disappeared. In my judgment this loss is quite too large; and it is quite likely that the exist- ing stock in 1915 is much greater than $10,379,000,000. The above estimates, however, are given for what they are worth. At least they throw some light on the supply of gold. It is to be noticed that in the latest period (1901- 15) of rising prices the percentage of new gold to existing stock is not very much larger than in the previous period (1876-1900) of falling prices. § 4. In the problem of discovering the causes of changes in the level of prices, it is necessary first to reach a conclusion as to those causes which operate on the gold standard in which our prices are expressed. By so doing we may locate the general level — so far as the standard is concerned — or the one thing which 9 o MONEY AND PRICES might work as a cause common to all goods. The re- lation between gold and goods might be illustrated by the familiar mechanical illustration: a rod balanced on a fulcrum, on one end of which work the forces affecting the value of gold, and on the other end the forces affecting the value of particular goods. The relation between goods and gold being a ratio, as one end of the rod goes up, the other necessarily goes down. There are, as we all know, various forces at work to produce the resultant price level. We may here start from a proposition on which we can all agree. An increase in the quantity of the monetary standard in the world— such as gold— would tend, other things being equal, to lower its value and thus raise prices. In trying to find the causes in the price level at any given time (as in 1896-1915) it is necessary, therefore, after having stated the facts as to the increase of gold, to examine also into the influence of "the other things." To begin, we may take up the demand for gold, which, of course, is both monetary and non-monetary. As to the non-monetary demand we have already furnished the data. The monetary demand should now be taken up. It will be found that it has cer- tain definite characteristics. Whether it be prejudice, or enlightened business judgment, the commercial na- tions of the world have shown a persistent and con- tinuing disposition to adopt a gold monetary system as soon as their own means, or the forthcoming supply of gold, has made it possible. The United States led DEMAND FOR GOLD 91 in 1853, when we declined to change the ratio in order to bring silver into circulation when only gold was in use. Beginning in 1871-73, Germany, and later the countries of the Latin Union, Austria-Hungary, the United States (with the resumption in gold in 1879), and India (in 1893), in response to the preferences of the commercial world, placed themselves on the gold standard by legal enactments. The demand for gold all through this period was based upon considerations independent of the movement of prices. For this was a time of falling prices when much was heard of the appreciation of gold and the need of silver. In spite of this tendency toward falling prices, the movement in favor of the adoption of gold went on. Moreover, as may be seen by Chart III, the oncoming supply of gold in the earlier period (1851-75) was very large in comparison with the existing stock (the percentage being 158 as compared with 104 in the period of 1901- 15). But it was precisely this large new supply of gold which enabled the commercial nations to gratify their desire for what they believed was a more stable standard. That is, the demand increased pro tanto with the supply. As we enter the later period (1896-1915) we find this momentum toward the gold standard still in force; and other countries in emulation planned to put them- selves on an equally stable standard with those whose means had permitted an earlier action — quite irrespec- tive of the fact that this last was a period of rising 92 MONEY AND PRICES prices, while the former was one of falling prices. In this period, Russia, Japan, various states in South America, such as Peru, Argentina, and Brazil, and more recently Mexico, have emphasized the movement away from silver to gold. Moreover, as backward lands, like Turkey, parts of Asia, Egypt, and various districts of Africa, have developed their resources and increased their trade, they have taken on gold in their monetary systems. With increasing trade also there are more exchanges of goods; hence, even in countries (like Great Britain and the United States) that do not use gold to speak of, except in reserves, there are in- creasing loans and deposits and thus somewhat of a demand for more gold in banking reserves. Con- sequently, in countries long established on the gold standard there will be a steadily increasing demand for gold as exchanges expand. We find this to be a special characteristic of the demand for gold (cer- tainly not existing in the demand for silver). The power of developing countries to soak up new gold is as marked a part of present conditions as is the power of a porous and sandy soil to soak up a heavy rainfall. We must, therefore, take full account of the noticeable fact that the recent demand for gold seems about to keep pace with the new supply; that a shipment of gold from the mines to London is to-day eagerly com- peted for, not only by European countries, but by Egypt, India, Turkey, Argentina, and Brazil. It appears that from 1896 to 191 5 the monetary use RECENT MONETARY DEMAND FOR GOLD 93 of gold has increased by over $4,000,000,000; while that of silver has decreased by about $1, 800,000,000.* Seven-eighths of this total of gold was in banks or public treasuries. The countries which have been taking on gold most extensively are as follows (in millions) : United States Russia Germany South American States United Kingdom Austria-Hungary Italy Japan 1896 1915 Increase $672 $2,299 $1,627 488 1,058 S7° 675 7i4 41 40 3i3 277 584 661 77 167 (1910)351 184 IOO 335 23S 79 143 64 Besides the demand for gold in the arts, and the apparent monetary demand, as thus already presented, we must not omit to take into account also the large stocks of gold held by banks and institutions which publish no statements. In the hands of large private institutions like those of the Rothschilds, Bleichroders, 1 See the figures for the monetary stocks of gold and silver in the prin- cipal countries of the world given for 1896 and 19 15 in the Reports of the Director of the U. S. Mint, 1896, pp. 46-47, and 1916, pp. 220-221. It is not safe, however, to assume that these estimates are wholly correct. 1896. 1915- Stock in Monetary Use (in Millions) Gold $4>i43 8,258 +$4,115 Silver $4,236 2,441 — $i,705 94 MONEY AND PRICES and others, great amounts of gold are carried. It is from these stores that the needs of states, such as Austria-Hungary, France, Italy, and even the United States (in Cleveland's administration), have been sup- plied without drawing down visible reserves. The difference between the sums of gold in circulation and in public reserves, on the one hand, supposedly over $8,000,000,000, and the total stock in 191 5, on the other, probably over $10,000,000,000, may be regarded as the amount of gold held by those not obliged to publish their holdings. Thus far, then, we have examined the one factor of demand for gold, among the "other things" (which were supposed to remain equal). There is abundant evidence to show that the demand for gold, in this recent period of rising prices (1896-1915) has been as strong as, or even stronger than, the demand for gold in the previous period (1873-96) of falling prices. § 5. Some writers carelessly reason directly from the recent large annual production of gold to the re- cent contemporary rise of prices. This is an old fal- lacy. The new supply in any period should be com- pared with the total stock of gold in existence at the beginning of that period. The total available stock is not — as, for instance, it is in the case of wheat — the annual supply, but all the gold mined since 1492 less the amount lost by accident, abrasion, or destruc- tion in the arts. The durability of gold causes all the ANNUAL GOLD SUPPLY AND STOCK 95 remaining past product — unlike that of such commodi- ties as wheat — to form the stock of to-day. Because of this durability the total stock is constantly increas- ing, and as we approach the present time the annual production, even though large, bears a constantly smaller ratio to the total supply. A change in the demand or in the annual supply affects at once very slightly the value of the large total stock; while a sudden new war demand for, or a shortage in the annual yield of, wheat produces a great change in its price. Therefore, in order to change the value of the total stock of gold, the new supply must be large — not absolutely, but in relation to the total world's supply. A great rainfall in France a few years ago disastrously raised the level of the Seine, but it did not perceptibly raise the level of the Atlantic Ocean. It takes a long time, moreover, for an increasing sup- ply of gold to make its influence felt on the value of gold throughout the commercial world. It may be months after the heavy rains in Abyssinia before the water rises in the Nile of lower Egypt. That is, changes in prices due to changes in the value of the total stock of gold, under the influence of new produc- tion, must necessarily be slow and gradual. The larger the accumulated stock of gold — now over $10,- 000,000,000 — the less likely is it to be influenced in short periods of time by any causes affecting gold alone. On the other hand, a commodity like wheat, may undergo rapid or extreme changes in price for 9 6 MONEY AND PRICES causes in no way connected with gold and which affect only the commodity itself. Consequently, seri- ous and rapid changes of price must in general be due to other causes than gold— that is, to causes touching the goods themselves. We arrive, then, at the con- clusion that changes of price due to gold can only be very slow in operation, while quick and frequent variations of price must be found in causes affecting only goods. The influence of the large production of gold upon the level of prices in the last few decades presents one of the most interesting problems in theoretical as well as in practical economics. Since Ricardo, and even before him, the familiar theory has been held that an increase of the circulating medium necessarily pro- duced an increase in the prices of goods. Yet, in the United States, we have had falling prices with an in- creasing circulation. Indeed, the old theory of Ri- cardo and Hume no longer holds undisputed sway. There seems to be general agreement that the price of an article, like wheat, is the quantity of the given standard for which it will exchange. Obviously, price is an expression of the exchange ratio between a com- modity, like wheat, and a standard, like gold. Hence, in these later days, it has been seen that this ratio can be changed by forces affecting either term of the ratio. While the causes influencing the supply of and de- mand for gold are supposed to be constant, we know that causes touching the demand for and supply of CAUSES AFFECTING GOODS CHANGE PRICES 97 wheat can modify its gold price. A scanty harvest and a reduced supply of wheat, or a new demand, will raise its price; while reduced freights, improved proc- esses, an increase of supply, or a diminished demand, will lower its price. These facts, touching wheat alone, are self-evident; and they show that changes in price are not to be attributed solely to forces affect- ing the gold factor of the price ratio. Yet, it is also true that the price of wheat, or of all commodities, expressed in gold, would be affected by anything which was important enough to change the value of gold. Thus we see that the problem of price is one which includes a study of two sets of forces: (1) those influ- encing the standard, and (2) those influencing the com- modities in the price lists. A change in a list of prices, in itself, implies nothing as to the cause of the change. The originating cause may be operating upon gold, or upon the goods; or there may be causes working at once upon both sides, opposing or co-operating. It is, therefore, unsafe to dogmatize upon the causes of a change in prices without an investigation into all the facts touching both gold and goods. § 6. Those who believe that the rise of prices since 1896 is due to the abundance of new gold have diffi- culty in showing by what direct economic processes the new gold affects prices. Theoretically, it is as- sumed that the increased gold must be offered against goods and thus declines in value. But what is the 9 8 MONEY AND PRICES force that impels a man with gold in his pocket to give more than before for a commodity freely pro- duced and sold in the open market ? If any one seller raised his price in view of larger buyers' funds, without an increase in his expenses of production, other pro- ducers and sellers would compete in keeping down the price. Such a theory is too detached from the facts to receive credence. It may be claimed, however, that the entrance of new gold in large sums into the currencies 1 of the world since 1896 indicates precisely the way by which it can be offered as increased purchasing power against goods and thus increase prices. But in precisely the same way one might say that the new crops of the United States — new wealth created from the soil in one season, worth (without counting expenses of pro- duction) from $8,000,000,000 to $12,000,000,000 — give new purchasing power to its owners, as well as new gold; that they, too, are offered for other goods and thus ought to raise prices. Moreover, if the new gold has increased prices by entering the currencies of lead- ing countries, how does it happen that prices have risen quite as high in the United States as elsewhere, in spite of the fact that with us gold— although the standard of prices — is almost never used as a medium of exchange in the actual purchase of goods? The better thinkers, to meet this difficulty, urge that the new gold flows into the reserves of banks, INCREASED GOLD AND BANK LOANS 99 makes larger loans possible, thus increasing the credit or purchasing power offered against goods and con- sequently raising general prices. Here again appears the old fallacy of supposing that the prices of freely reproducible goods are fixed only by the demand. Indeed, it ought not to be necessary to repeat that supply (and expenses of production) also affects price as well as demand. Steel rails have a price fixed not merely by the fact of an urgent demand, but by the expense of producing the needed supply, which expense is far less than it was a few decades ago. But let us appeal to banking practice. Because there is more gold in the world do banks in the United States necessarily expand their loans? Certainly not. First, a bank decides whether the loan is safe or not; then, if a new loan is made, and a credit in the form of a deposit account is given, the bank may need more reserves. It is possible in times of prosperity, that an increasing number of persons who have salable goods in warehouses or in transit may wish loans. Speaking generally, the more goods produced and exchanged the more loans are wanted. Thus, first having met the demand for legitimate loans, the bank as a conse- quence arranges to supply the reserves (whether in gold, or even in lawful money) required by law or banking experience. As a matter of banking common sense, the increase of loans is the cause of increased reserves; not that the increase of reserves is the cause of making loans. It is not the presence of gold in the ioo MONEY AND PRICES country which is the cause of increased loans, any more than an increased number of freight-cars is the cause of an increased movement of goods. If increased loans are wanted, the ease in getting gold reserves makes the process easier; just as when crops are large an abun- dance of cars makes shipment easier. No matter how plentiful gold may be, if the bank has not the means to offer for the gold, how can it increase its reserves? No matter how abundant railway-cars may be, crops may be scant. However abundant gold is, a bank can meet the demand for increased loans only out of the capital or deposits in its possession. It would be absurd to assume that an abundance of new gold would allow a bank having a capital of only $100,000 and small deposits, to lend indefinitely, say, to $100,- 000,000. A large bank carries a large sum of loans, not because gold is abundant, but because its funds in hand are large; it uses out of its large funds only that sum which is necessary to get the gold or lawful re- serves that experience shows are necessary for its discounting business. To say that the presence of abundant gold is the cause of increased loans is to put the cart before the horse. It would be like saying that the cause of the excavation of earth in the Panama Canal was the existence of steam-shovels, irrespective of the grant of funds to buy shovels. The banks lend the use of capital, not money; while cash reserves are only a tool, or a part of the machinery necessary in banking operations. Indeed, millions of loans are RECENT RISE OF PRICES 101 made and repaid by checks without the use of a cent of money. In fact, no matter how abundant gold is, a bank keeps not a dollar more of inert, non-earning reserves than is necessary for carrying the sum of loans consistent with its present resources. § 7. There are, moreover, other objections to ascrib- ing the rise of prices since 1896 to the abundance of new gold. Some writers have been induced to assign the chief role to gold under the impression that the rise of prices has been general throughout all countries, that all commodities have been affected, and that such a result must have been due to a single universal cause like gold. In Great Britain, the Economist and Sauerbeck tables have been referred to as showing a great fall in the value of gold due to the rise of prices. Curi- ously enough the index numbers of the London Econ- omist (for only 22 series) show a figure of 2.236 in 1890, 2.136 in 1905, 2.197 m 1909- That is, in the twenty years from 1890 to 19 10 there was no rise of Brit- ish prices, in spite of a new production of gold in these years amounting to $5,881,000,000. A rise of prices came later, in 191 2-14. In Sauerbeck's table (chiefly extractive products) the index number was 72 in 1890 and 1891, 72 in 1905, 73 in 1908, and 78 in 1910. The average of 1902-11 was only 74. Obviously these English figures do not prove that any serious rise of prices to 191 1 took place in all countries. In Ger- 102 MONEY AND PRICES many, Schmitz's total index number in 1890 was 107.5, and in 1910 was 11 3. 6 — not a startling change of level (some 5.6 per cent.). In the United States the rise was greater than in the countries just mentioned, but not as great as is generally supposed — chiefly because comparisons are apt to be made with the exceptionally low level of 1896. Bradstreet's index number for January 1, 1890, is 90.191, for 1905 is 100.318, for 1910 is 123.434 — about the same level as in 191 2. The index number of the United States Bureau of Labor (Bulletin 173) for 1890 was 1 1 2.9; for 1905 was 115.9, and for 1910 was 13 1. 6. That is, there was an average rise of 16 per cent, in American prices. Certainly the recent rise of prices has not been the same in all countries. If we make a comparison of the general level (see Chart III) in 191 5 with that of 1850-60, it is surpris- ing to discover that prices on the average are no higher in 191 5 than in 1850-60, in spite of the fact that the available stock of gold has been quintupled since 1850. Such cold facts make it very plain that many other forces than the quantity of gold have been working on the level of prices. But neither has the rise of prices been uniform in any one country like the United States — the ground for attempting to prove a common cause such as the value of gold. A study of the tables of the Bureau of Labor discloses the remarkable fact that out of 203 commodities, 36 actually fell in price by 1908, and 2 RISE OF PRICES NOT UNIFORM 103 remained unchanged. These 36 were: hops, sugar (granulated), mutton (dressed), soda-crackers, apples (evaporated), pepper, prunes (California), tea (For- mosa), mackerel, Rio coffee, soda (bicarbonate), covert- cloth, ginghams, sheetings, chinchilla overcoatings, can- dles, matches, lead pipe, shovels, nails (wire), wood screws, silver, putty, quinine, alcohol (wood), white granite cups and saucers, nappies (glass), tumblers (glass), carving-knives, knives and forks, manila rope, manila wrapping-paper, and wood paper for news- papers. Then, too, while the average rise of all the 203 commodities from 1890 to 1908 was only 9 per cent., there was no uniformity of movement in the various groups within the whole list. For instance, farm prod- ucts rose from no.o to 133. 1; fuel and lighting from 104.7 to 130.8; while drugs and chemicals show little or no rise at all. Moreover, there are wide variations in the prices of the same goods within any one year, which show how important other causes than gold must be; for these great changes cannot possibly be assigned to gold. A few instances of changes of whole- sale prices entirely within the year 1908 will suffice: Cattle 110.3-142.0 Lard 115.4-159.0 Fresh beef 117.0-142.3 Mutton 87.5-150.0 Hides 100.7-170.8 Cotton 118.7-150.4 Milk 88.2-156.9 Calico 90.6-133.7 Butter 102.5-141.8 Cotton flannels 109.6-128.9 Bacon 106.4-161.2 Ginghams 90.6-115.3 Hams 97.2-131.8 Print-cloths 105. 7-145.3 104 MONEY AND PRICES In studying the movements of prices it is to be ob- served that the single index number giving the com- bined average of the changes in price in any one year will not in itself disclose the diversity of changes going on in separate groups of goods, or in any individual article. In order to get the facts for any investiga- tion into the causes affecting the movement of prices in certain groups of commodities, [there are presented in Chart IV the diverse movements of eight groups of products which formed the basis for the computation of the general average of prices by the Bureau of Labor. It will be noted at once that the separate variations of the several groups are so marked as to make clear the absence of any one common cause. The only infer- ence as to a general cause seems to be that there was a distinct fall of prices following the panic of 1893, and a general tendency to a rise after the beginning of recovery in 1897. As we have shown elsewhere, these sudden and extreme fluctuations of price could not have been due to gold, but to causes necessarily affecting trade in the goods themselves. For the same reason that light is thrown on the forces influencing prices by separating the total aver- age into the averages for each group (Chart IV), it would also be desirable to separate the average for each group into the lines representing the changes of price for single commodities. Inasmuch as the actual quo- tations for each separate article are the elements out of which the resultant average for all goods is computed, o I o o CO n a, o> 2~ H "3 iy kH 0) bfl -: U d IB n > U •«— t < r/i II 1 i— 1 \ © V © © k_ \. 1-1 s \ in > V © N \ i-i \ to 1 ■«* ui V © © f— \ < 1— c y 1 1 © © f/1 Q *>- ffj 8 \ I H z S* I N s © © H s © 3 ° « as, s OS £ \ 1 * s I 1- o & © O 9 £ a> 2 ^ ffl j 9 - 1 £ 8 © © i-H ■ © II "g \ © e 5 | > , \ u. 5 - \ 00 \ © 00 1-1 © 00 UI ■o §1 \ \ 1-1 * k *- ~ © CO 1-1 "O «B O -*• U- or- U5 © CO t-H es: > -> > \o O U. V« +^ »- *^ •** © 5 £ 5 1 i:^- ' q: q. / n © CO 1-t 8 d ui J / a: w © 00 rH a 00 fH © © CO .1-1 LU M a-ui 01'O0Q<0aM£!O°0art in redeem- ing all coins bearing its own imprint that can stay in circulation within its limits. And that is all that monetary science asks of any system. Free coinage of silver would here be an absurdity. It would be somewhat like the printing of unlimited paper; it would destroy the convertibility by which its value was maintained. We do not recognize that legislation has any duty whatever "to keep up the value of silver" or of any other commodity; but even from this point of view a country which by redemption maintains all the silver it can use at twice its value is doing more real service to the value of silver than it could by any agreements upon ratios. Consequently, the Domini- PROFIT TO GOVERNMENT 227 can law restricted the amount of silver in circulation to sums decreed by the government. 1 We have here, then, the two necessary conditions for a stable conver- tible currency: (1) redemption and (2) limitation of quantity. The action of India, June 26, 1893, in closing its mints to the free coinage of silver was a necessary measure; but it was only a half step. The aim in India was to maintain its own silver coins — not all silver— at a stable par in gold. It took then the first step toward limiting its quantity. The next step was inevitable — it must eventually adopt a system of re- demption of its own rupees. In no other way has a depreciated currency ever been maintained at par. In the Santo Domingo scheme this was frankly recog- nized; and it is interesting to note that two members of the Indian Currency Committee {Report, p. 42), Messrs. T. H. Farrer and R. E. Welby, strongly recom- mended this measure for India. India in the end had to come to this. The quantity in circulation, it was hoped, would be determined automatically. On the one hand, by giv- ing to the Dominican government the sole right to coin silver, there existed the inducement to coin as much as possible, because of the very large profit of about 50 per cent, in the seigniorage. But, on the other hand, this means of profit would disappear unless the system of redemption were maintained intact. An excessive 1 Sec Law, chap. Ill, art. 13. 228 MONEY AND PRICES issue of silver would come back on the redeeming offices, and no excess beyond the needs of the circulation could stay out. There was thus a sure check on ex- cessive issues of silver; the self-interest of the govern- ment was enlisted to maintain redemption, since only by maintaining redemption could any profits be reaped. The supply of coins was provided by direct outlay of the government; but the gain of the government from the seigniorage was such as to stimulate it to put out all that would circulate. The more put in circulation, the more profit from seigniorage to the government; and the government would not be slow to use this op- portunity. Every dollar of silver, costing to coin at the then price of silver about fifty cents, was issued by the government at its face value for one hundred cents in gold. This profit of one-half on the whole of its silver coinage, however, was dependent entirely on the maintenance of redemption in gold. If silver coins were not kept at par in gold then their value fell, and the profit on seigniorage pro tanto vanished. This explains why it was for the interest of the government to keep the redemption system intact. On every million dollars of silver coins issued it gained a profit of half a million dollars. The only deduction from this gain was the interest on the reserve fund of gold re- quired to be kept on hand for redemption purposes; but this reserve need never be large, unless there was an attempt to issue silver beyond the amounts needed for circulation. In general, beyond the early tests GOLD EXCHANGE ALLOWED 229 made solely to establish a common belief in redemp- tion, the probable demands would be somewhat in proportion to the savings of the community; for sav- ings would usually be converted into gold before being buried or hidden. And, of course, if imports for a time much exceeded exports, gold would move outward. But exports usually exceed imports. 1 With an in- creased production, however, and a consequently greater purchasing power of the country, gold would have an increased tendency to move toward Santo Domingo. Prosperity would support the system. The building of railways and all improvements would work to this same end. A precautionary measure 2 against possible hostility to the system provided that gold exchange on New York might in an emergency be used in redemption. The occasion might arise when an enemy would pre- sent an enormous amount of silver at once at a branch office in order to discredit the system. A resort to gold exchange, however, would be a most infrequent occurrence. It was allowed only because the island was not in immediate connection with the continent and the reservoirs of gold. 1 The statistics of exports and imports are not very trustworthy, but the figures for 1891 and 1892 are approximately correct: Year 1891. 1892. Exports $2,926,039 3,035,660 Imports $2,687,558 2,011,735 1 Law, chap. Ill, art. 16. 230 MONEY AND PRICES (3) When it is remembered, also, that persistence of monetary habits 1 is very determined, account must be taken of the Mexican dollar. It was, of course, the interest of the government to discredit all foreign sil- ver coins; for to the extent that they circulated they kept out Dominican silver coins and thereby diminished the profit of the government. Working to the same purpose were the well developed associations of loss and injury connected with the Mexican dollar during the fall in the value of silver, and which were wide- spread. Without relying on this favorable sentiment, however, the plan provided its own means 2 of driving the Mexican dollar out of circulation. By refusing to receive it in any payments except at a rate which made the Mexican dollar worth more for exportation elsewhere, it would result that as the new silver came in, the old would go out. (4) Gold and silver coins were made an unlimited legal tender; since silver coins were convertible into gold. Existing indebtedness could meanwhile, until the new coinage was prepared, be settled in Mexican dollars at their market value in gold. All debts con- tracted before the first day of June, 1894, were to be paid in the money in which they were contracted. After that date, while contracts could be made in any money, in default of an express stipulation of course 1 In the United States, for example, many people still reckon prices in "shillings" and the like denominations, some of which have not existed as coins for over a hundred years. 2 Chap. Ill, art. 13. NEW COINAGE 231 the national gold or silver coins would be the proper legal tender. Other considerations entered into the law which were of no importance to the general scheme. There had been, for instance, a concession previously granted to a French company by which the Banco Nacional de Santo Domingo was established in the island; and this institution had been granted the right to coin all na- tional money. When, however, recent conditions de- manded a new coinage system, and the present scheme was decided upon, the Banco Nacional was, by virtue of its concession, given the choice of accepting or re- jecting the functions created in the law for a Fiscal Agency which should see not only to the coinage but also to the redemption of the money. The provisions 1 regarding the Banco Nacional were introduced merely to provide for carrying out the system in case this in- stitution was unwilling to undertake the task. (5) It might be asked, finally, how were the means to be found to provide the new coinage? The first burden would fall, of course, on the revenues; but, as must have been seen, the sums taken from the revenues to pay for the coinage would be only in the nature of an advance. Since the new coinage system provided a profit to the government, it could not be in any sense a burden upon the revenues. Not only did the country get relief from what was crushing trade, not only was exchange prevented from fluctuation, not 1 Law, chap. Ill, arts. 14-19- 232 MONEY AND PRICES only was the credit of the country and the value of its bonds increased, but the government gained a large profit on the seigniorage, while the country was enabled to go on quietly using silver in its retail transactions. The scheme was simple and compact. Its merits, whatever they are, arose from following correct mone- tary principles. CHAPTER IX THE REFUNDING BILL OF 1881 » § i. The lack of sound financial judgment in Con- gress has been so unfortunately familiar as scarcely to excite surprise. The method of selling our bonds during the Civil War, the needless passage of the Legal- Tender Act, the fatuous refusal to permit contraction of the currency, and the insane enactments of the Bland silver bill are mortifying chapters in our finan- cial history. And while modern credit and banking is at once a most intricate and sensitive thing, yet in nothing else has Congress more boldly interfered. In primitive times, goods were exchanged directly for each other. A hungry warrior bartered a coat of mail for fat oxen. Civilization has gone on, and among its many marvels none is less interesting than the sys- tem of banking expedients, by which we are returning to a new but skilfully adjusted method of barter. It is a system grown up from the slow experience of cen- turies and cleverly adapted to the needs of trade — a natural outgrowth of the increased exchange of goods. It is the heart of the industrial body. Without it, business, in anything like its present magnitude, could 1 House of Representatives Bill, No. 4592, Forty-Sixth Congress, Third Session. 233 234 MONEY AND PRICES not exist. And on this sensitive mechanism Congress has often laid its rude hand with a strange mixture of confidence and blundering ignorance. Banks are not merely lenders of capital, but are the agencies through which the titles to goods pass, so that one article can be offset against another. Like divi- sion of labor, international trade, and great railways, banks are a means of abridging human labor. While ponderous trains thunder into our Eastern cities from the Western grain-fields, and others, in return, roll west- ward across the country filled with silks and cottons, the titles to these goods (and the means by which all are exchanged one for the other) are being carried to and fro in the shape of bills and drafts by the banks, the great railways of credit. For every transaction, every line of steamers, every network of railways, there is a corresponding credit service, tallying with each exchange of goods — as it were, in the air overhead and unseen, but really running on its quick despatch through the mails, the telegraph, and the telephone, and officered by the bankers of the country. It is as distinct, separate, and legitimate an employment as is that of a common expressman. Modern banking and the business of the country go together, like the two blades of the scissors. Take one away, and you de- stroy both. § 2. While the national banking system was the best the country had enjoyed, it had existed only since 1864. SPECIAL RESERVES 235 Before that time the old state banks were regulated by each State according to varying standards of hon- esty, with the marked exception of the system in New York, established in 1838, and memorable as the model for the regulation of our national banks. By the New York law a bank was not granted the power to issue notes unless a deposit of state or United States bonds with the state comptroller was made, sufficient to se- cure the ultimate redemption of the notes. This plan of a special reserve for circulation is similar to the basis of the English Act of 1844, an d implies a very different policy from that which keeps no special reserve for any one liability more than another. A bank is like a man in debt, who owns bonds, coin, and securities, to exactly the amount of his debts. He has debts (called liabilities), and he has an equal amount of wealth (called resources) with which to pay. The Bank of England before 1844, the old United States Bank, and the larger number of state banks set aside no special fund for the redemption of their note cir- culation. One might liken the resources of a bank under that which is now the old system to the crew of a ship, all suddenly called upon to take to their guns; without a man at the sails, a change of wind would be disastrous, and the ship would be wrecked. This, in effect, was what nearly happened to the Bank of England in 1825. The National Bank Act contained the special- reserve plan, and gave absolute security to the note-holder. 236 MONEY AND PRICES No man ever lost one cent by having in his hands a note of an insolvent national bank. But in this system of circulation Congress proposed to introduce very astonishing changes by the refunding bill of February, 1 88 1, the history of which is worth preserving as a valuable means of teaching — on the principle that a sign-board often warns us where not to go. The pro- vision by which a separate fund was set apart is simple. The banks were required to deposit with the United States treasurer in Washington to secure their circula- tion United States bonds of any kind, and were per- mitted (there was no compulsion about it) to issue notes to the amount of only 90 per cent, of the par value of these bonds. (Revised Stat, sec. 51 71.) The requirement as to the increase or reduction of this deposit formed section 16 of the Act of June, 1864, and section 5160 of the Revised Statutes: "The deposit of bonds made by each association shall be increased as its capital may be made up or increased, so that every association shall at all times have on deposit with the treasurer registered United States bonds, to the amount of at least one-third of its capital stock actually paid in. And any association that may desire to reduce its capital, or to close up its business and dissolve its organization, may take up its bonds upon returning to the comptroller its circulating notes in the proportion hereinafter required, or may take up any excess of bonds beyond one-third of its capital stock, and upon which no circulating notes have been delivered." WITHDRAWING NOTES 237 The important words for the present explanation are "Us circulating notes," meaning the notes of the given national bank. Should a bank see fit, in a time of depression, to reduce its circulation, it would be able, under this section, to do so only by presenting its own circulating notes, and receiving therefor its deposit of bonds. In actual practice, however, a bank holds but very few of its own notes, and could get them only at the places of redemption. National bank notes, being equally good with greenbacks, are never, in fact, presented by the public to any amount for redemption at the counter of a bank. Moreover, an institution is required to receive the notes of any other national bank, and has no object in presenting the notes for lawful money except in cases of insol- vency or retirement. The outstanding notes of a given bank are in circulation (by virtue of the sound character of all the national bank circulation) not merely in the locality where the bank is known, but in the hands of merchants, banks, and farmers in almost every part of the country. What is important to ob- serve is that the process of drawing in notes by a bank is a very slow one, and a slow one just in proportion as the national bank note is a safe money anywhere in the Union. For the holder, finding it perfectly good and safe, has no object in presenting it in exchange for other kinds of money, even though the bank may have an object in getting it redeemed. A given bank, con- sequently, could not reduce its circulation and recover 238 MONEY AND PRICES its deposit of bonds except by presenting its own notes, and it could never get possession of such as had left its hands until after long use had so worn or muti- lated them that they would be sent in to the redemp- tion agency at Washington. The weak spot, then, of the Act of 1864, appeared in the practical impossibility of reducing circulation at the will of the bank. This difficulty was removed by the Act of June 20, 1874, which repealed sections 5159 and 5160 of the former act: "That any association organized under this act or any of the acts of which this is an amendment, desiring to witltdraw its circulating notes, in whole or in part, may, upon the deposit of lawful money with the treasurer of the United States, in sums of not less than nine thou- sand dollars, take up the bonds which said association has on deposit with the treasurer for the security of such circulating notes; which bonds shall be assigned to the bank in the manner specified in the nineteenth section of the national-bank act; and the outstanding notes of said association, to an amount equal to the legal-tender notes deposited, shall be redeemed at the treasury of the United States, and destroyed as now provided by law: Provided, That the amount of the bonds on deposit for circulation shall not be reduced below fifty thousand dollars." It will be seen at once that by this change a given bank could withdraw the bonds behind its circulation instantly and rapidly by presenting, no longer its own circulating notes, but merely lawful money; that is, WITHDRAWING OF LAWFUL MONEY 239 greenbacks or coin. The importance of the section, of course, is found in the words "lawful money"; for this was a kind of money which any bank could com- mand at once, and in large sums. An institution could thus send to Washington lawful money to the amount of its bonds, withdraw the deposited bonds, and leave a complete security to the note-holder in the shape of greenbacks or coin in the treasury at Washington, to await the slow incoming of the notes for redemption. The effect of the change was simply in the direction of greater ease and rapidity in reducing circulation. This was the position of the banks in regard to their circulation when the abortive refunding bill of 1881 came before Congress. But to understand clearly the results, it will be necessary to give a short explanation of the generally misunderstood amount of profit derived by the banks solely from their note issues. The method of comparing the amount invested in bonds with the same amount loaned directly to the public does not give the full case against the profits on circulation. If the alternative to investing in bonds were the placing of a like sum in bank reserves, that reserve would carry liabilities (resulting from loans) of three or four times its amount, and the profit from not investing in bonds would be that on loans yielding several times as much as the sum put into bonds, leaving no gain at all on circulation, but rather a heavy loss. The comptrollers, however, have used a simple arithmetical method arrived at by answering the ques- 2 4 o MONEY AND PRICES tion : What profit would the banks lose by withdrawing their whole circulation ? As the lowest rate of interest paid by the government at that time was 4 per cent., I shall present a computation of Comptroller Knox, based on a deposit of 4 per cent, bonds: Interest on $100,000 U. S. 4 per cent, bonds $4,000 Circulation issued on above $90,000 Deduct premium on bonds $1 2,000 Deduct reserve (5 per cent.) 4,500 16,500 Leaving loanable circulation $73,500, 6 per cent, interest on which is 4,410 Total income on circulation $8,410 Deduct 1 per cent, tax on circulation $900 Deduct cost of redemptions 81 981 Leaving as net receipts $7,429 $100,000 capital loaned directly at 6 per cent 6,000 Difference in favor of circulation $1,429 When it is remembered that the functions of deposit and discount in banking could be carried on without the consent of the treasury, and that the profits on circulation were practically the only reason why a bank remained in the system, or in fact why the na- tional bank currency existed at all, the inducement did not seem very large. But what is more, without any change in the relation of the banks to the treasury, a rise in the market rate of interest (a matter wholly beyond the control of either banks or treasury) would PROFIT ON ISSUING NOTES 241 have the effect of reducing the profits arising from cir- culation. To illustrate: suppose the rate of interest became 7 instead of 6 per cent., in the above computa- tion; then the $100,000 could be loaned directly for $7,000 without the owners of it going through the ceremony of becoming a bank, or being examined by a government officer. Of course, the $73,500 would likewise be loaned for $5,145; but the final profit from circulation would be only $1,164, instead of $1,429, when the rate of discount was 6 per cent. This will therefore show that an increase in the rate of loans in the money market reduced the profit arising solely from bank circulation. But, supposing the rate of discount to remain the same, a change in another element may produce a similar effect. If the banks were obliged to deposit bonds bearing 3 per cent, interest, instead of 4 per cent., then the item of $4,000 in the above computation would be changed to $3,000. This would reduce the net receipts to $6,429, and leave only $429 as the profit which would be lost by withdrawing circulation. So that, if it should happen that the interest on the bonds were to be decreased by a refunding bill simultaneously with a rise in the market rate, the profit would wholly disappear between these two millstones. It must be clear, then, that the profit on circulation depended both on the market rate of loans and the rate of in- terest paid by the government on the bonds required as a deposit to secure circulation. 242 MONEY AND PRICES § 3. But still, a consideration wholly apart from the mere rate of interest on the bonds deposited would have affected the profit on circulation. Then the banks could deposit, to secure circulation, any United States bonds, of whatever description. This was an important provision when great changes were going on in the form of our bonded indebtedness, either (1) because the bonds were soon to fall due, or (2) because of a change in the market rate of interest. For, in the first place, as the date of payment of a maturing bond draws near, it gradually falls in value to the par which will be paid for it by the government, even though it may be a bond bearing a higher rate of interest than a new one proposed to be substituted for it. The "sixes of 1880" were bonds bearing 6 per cent, interest, but as they fell due in December, 1880, they gradually came to be worth only their par value ($100), while a 4 per cent, bond, but just issued, was worth $112. At the same rate of interest, a bond running for a long term of years is better for an investment than one for a short term. The lumberman, who looks at two trees of equal diameter at the base, estimates the total value of each according to the height of the tree. Then, again, a bond running for a short term may be worth less than one for a long term, even though the first bears a higher rate of interest. That is, to re- sume our illustration, one tree, not rising very high, although larger at the bottom, may not contain so many feet of lumber as another, with perhaps a less CURRENT RATE OF INTEREST 243 diameter at the bottom, but which stretches much higher up into the air. This briefly explains the effect of its term on the value of a bond. But, in the second place, the market value of a bond fluctuates with changes in the commercial rate of discount. If a 4 per cent. United States bond should sell at par, it means that 4 per cent, is the high- est rate to be obtained in perfectly safe investments; but if the rate paid by such investments should decline, say, to 3 per cent., the bond which regularly returns $4 a year to its holder pays a rate higher than can be got for other equally safe securities, and consequently rises in its value beyond par to such a figure (about $118) that $4 of interest on this last sum is equal merely to the usual 3 per cent, to be got in the money market; that is, the holder of the 4 per cent, bond can sell it so much above par that the buyer can get in the $4 (of annual return) only 3 per cent, on the amount paid for the bond. In short, all bonds, securi- ties, stocks, land, or any transferable investment yield- ing a regular income rise or fall in their selling price with the customary rate of loans in the community. If a piece of rented land yield to the owner $100 a year on an investment of $1,000, or 10 per cent., and if other persons can now get but 5 per cent., then the owner could sell his land for $2,000; because the same annual return of $100 would give 5 per cent, on $2,000, the usual rate of interest. So that, without any change in its actual income, the land has risen in its capitalized 244 MONEY AND PRICES value, only because of the change in the usual rate of interest. In this way the United States 4 per cent, bonds, which were at first sold at par (or a very slight premium), had risen in value from $100 to $116 or $117. The price of such a bond, therefore, was a measure of the market rate of interest on safe securi- ties. At the time when the refunding bill was before Congress these bonds were worth 112 or 114, realizing to the investor about 3X per cent. These brief ex- planations will perhaps make it clear that United States bonds have been constantly fluctuating in value, either (1) because some bonds are falling due, or (2) because the market rate of loans varies with the state of trade and general causes. It is to be observed, also, that some changes in the value of the bonds were due to the action of the government itself, and to causes en- tirely outside of the control of the banks. The banks had been charged with reducing circula- tion merely in order to speculate on bonds. But if the premium on their deposited bonds rose, it prac- tically amounted to these bonds costing them just that much more; for they had securities in the hands of the government which they could at any moment sell for the increased value. Then it follows that the profit of a bank on its circulation may be diminished by a rise in the value of the deposited bonds. It may be objected, however, that the banks have gained by the rise in value while they held the bonds. True, but they would have profited likewise by investing their DISPOSAL OF BONDS 245 funds in bonds, purely as dealers in securities, without entering the banking system. They do not get that increase simply because they sent in bonds to secure their circulation; hence it cannot be said that the gain, in any sense, is derived wholly from circulation, or because they are national banks. If the circulation were discontinued, that opportunity for profit would not disappear, and so it is no inducement to continue note issues. The privilege which banking capital will always claim is that of holding its funds with such free- dom that it can turn them in any direction where the market offers the best return. If Congress were to ask the national banks to lock up their bonds, they would be required to forego a reward enjoyed by other cap- ital, and there would be a positive disadvantage in re- maining in the national banking system. § 4. A short time before the introduction of the refunding bill, the machinery of the banks with which Congress tampered so rudely consisted of over 2,000 institutions, with a circulation of over $300,000,000, a capital of over $500,000,000, deposits of about $900,- 000,000, and loans of over $1,000,000,000; but all these banks together had only $56,000,000 of legal-tender notes and the small sum of $18,000,000 of their own circulating notes, among their resources. To the in- experienced, however, these very figures might give some reason for the constant tirades by certain con- gressmen against the growth of the money power, and 246 MONEY AND PRICES the fear that it was fastening its monopolistic fangs on the heart of the country. Yet when it is recalled that the number of banks, the amount of deposits and loans (except in times of speculation), are the result of and are in direct proportion to the growing wealth and prosperity of the whole business community, an at- tempt to "crush out" the banks is as if a horse-breeder, on finding that some of his colts are developing great beauty and speed, should take this as an injury and forthwith cut their ham-strings. Now this was pre- cisely the nature, strange as it may seem, of much of the speech-making on the refunding bill; but how the bill itself was a covert thrust at the banks, and how it brought on a panic, may not have been clear to the general reader. A refunding bill was necessary, be- cause several classes of United States bonds, issued in previous years, fell due in 1881, and authority had to be granted by Congress, in a new bill, to the secretary of the treasury, to borrow funds wherewith to redeem them. Considerably more than $400,000,000 of 5 per cent, bonds fell due May 1, and about $200,000,000 of 6 per cent, bonds June 30. Since these 6 per cent, bonds were issued, twenty years before, our credit as a nation had so far improved that a 4 per cent, bond sold, at this time, at a premium of about 112, which implied that an investor in government bonds would be satisfied with 3^ per cent. Without recounting details, a bill entitled An Act to Facilitiate the Refunding of the National Debt was THE REFUNDING MEASURE 247 introduced (February, 1881) into the House of Rep- resentatives by the Committee on Ways and Means. The first section authorized the issue of $400,000,000 of 3 per cent, bonds, payable in five years, at the pleasure of the government, but which must be paid in ten years; and $300,000,000 of "certificates" (mean- ing treasury notes), redeemable after one year, but necessarily paid in ten years, and bearing 3 per cent, interest. These last were analogous to English ex- chequer bills, and were intended to catch that large amount of floating capital which has not yet found a permanent investment. The rate of interest was placed below the (then) market rate, and, instead of compensating for this disadvantage by a long term, the time at which the treasury could begin to redeem was fixed at five years — a condition likely to lower the at- tractiveness even of a bond bearing a higher rate of interest. The discussion in the House centred almost wholly on these points; and the ignorance developed was considerable, of course, but not surprising. The important part of the bill, however, and that which made the refunding bill famous, was the fifth, or "Car- lisle," section; but the discussion did not embrace its probable results when in operation: "See. 5. From and after the first day of May, eighteen hundred and eighty-one, the three percentum bonds au- thorized by the first section of this act shall be the only bonds receivable as security for national bank circulation, 248 MONEY AND PRICES or as security for the safe-keeping and prompt payment of the public money deposited with such banks; but when any such bonds deposited for the purposes afore- said shall be designated for purchase or redemption by the Secretary of the Treasury, the banking associa- tion depositing the same shall have the right to substi- tute other issues of the bonds of the United States in lieu thereof: Provided, That no bond upon which in- terest has ceased shall be accepted or shall be continued on deposit as security for circulation or for the safe- keeping of the public money; and in case bonds so deposited shall not be withdrawn, as provided by law, within thirty days after interest has ceased thereon, the banking association depositing the same shall be subject to the liabilities and proceedings on the part of the comptroller provided for in section fifty-two hundred and thirty-four of the Revised Statutes of the United States: And provided further, That section jour of the act of June twentieth, eighteen hundred and seventy- four, entitled, 'An act fixing the amount of United States notes, providing for a redistribution of the na- tional bank currency, and for other purposes,' be, and the same is hereby, repealed; and sections fifty-one hundred and fifty-nine and fifty-one hundred and sixty of the Revised Statutes of the United States be, and the same are hereby, reenacted. ,y The aim of the first part of the section was to force on the banks the bonds which they would not take willingly. Otherwise, there would have been no reason for the requirement. But the obligation to hold 3 per cent, bonds on deposit in itself would probably not have produced any general desire to withdraw from THREE PER CENT. BONDS 249 the national banking system. It is true that if, while in receipt of only 3 per cent, on their bonds, the banks could loan funds at the commercial rate of 6 per cent., that of itself would reduce the profits arising supposedly from circulation to less than one-half of one per cent. But, on the other hand, lenders of money could not be sure that the average rate on safe investments would not continue to fall somewhat, and make 3 per cent, a fair return. On this chance the banks might have been willing to run the risk of the rate going the other way ; that is, of rising instead of falling. Moreover, it does not seem to have been generally known to the public that Comptroller Knox gave his opinion informally to the effect that the reading of the first part of the section would not require 3 per cent, bonds to be sub- stituted in the place of 4 per cent, or 4^ per cent, bonds, already deposited and not redeemable. So that, as the banks, taken collectively, held nearly one- third of their capital on deposit in these two classes of bonds, this proviso would create a market at the most, for only about $60,000,000 of the new bonds. By fixing the rate of interest below the market rate, and, in addition, handicapping these bonds by the short term, thereby creating a situation which made it extremely doubtful whether the new loan would be taken up, and expressing beforehand the lack of con- fidence of the government in the success of the loan by trying to force the banks to subscribe, Congress tried to lock up the capital of the banks invested in these 250 MONEY AND PRICES deposited bonds by making it impossible to withdraw them. The machinery for this purpose was contained in the last proviso of the fifth section, by which the fourth section of the Act of 1874 was to be repealed, and the sections 5159 and 5160 of the Act of 1864 were to be re-enacted. These last were the provisions, pre- viously explained, treating of the means of reducing circulation. If this fifth section had remained in the bill, it would at once, on its passage, have taken away the power of withdrawing deposited bonds by sending to Washington lawful money (as permitted by the Act of 1874), and would have restored the old process (see sections 5159, 5160), by which the bonds could be with- drawn only after the considerable time necessary for the banks to present their own circulating notes. Prop- erty belonging to citizens, and deposited at Washington with the understanding that it could be withdrawn at any time, was to be suddenly seized (on the passage of the bill), and held for years; and this retention would prevent the banks from changing the nature of their investments, a power wholly indispensable to the proper carrying on of the banking business. All men are guilty of a little weakness, to be sure, in disliking to see others seize their goods, and bankers are but men in charge of their own and depositors' money ! The reason why there was not greater indignation expressed by the general public was probably due to the fact that not one man in a hundred understood what was going on, while bankers did, and refused to be robbed. If REFUNDING BILL 251 the 3 per cent, bond changed in value by the opera- tion of natural causes, the banks would not have had the power of withdrawing from their (voluntary?) connection with the government; all they could do would have been to practise the noble virtue of forti- tude. 1 History must record with mortification that the bill was passed in this shape by the House, and sent to the Senate, where it was generally believed by the country that it would be changed in the interests of sound finance; that the rate of interest on the bonds would be raised to 3 J/2 per cent., and the extraordinary fifth section struck out as disgraceful. It seems as if there was a spice of irony in entitling the bill An Act to Facilitate the Refunding of the National Debt. The finance committee of the Senate (of which Mr. Bayard was chairman) reported the bill to that body, with the expected changes. Secretary Sherman had appeared before the committee and given his reasons why he thought a 3 per cent, bond would not be successful. Estimating the market rate of interest at $% per cent., on the basis of the price of 4 per cent, bonds, he pre- *It is to be observed, also, that the re-enactment of sections 5159, 5160 would have restored the requirement that one-third of the capital should be kept in bonds at Washington (whether notes were issued or not), and repealed the Act of 1784, by which a fixed amount of not less than $50,000 (no matter what the capital) should be kept by each bank. A large bank (like the Chemical Bank of New York), which had previously cared nothing for circulation, and withdrawn all its bonds down to $50,000, would have had to add a very large sum in bonds in order to raise the amount to one- third of its capital, and so be forced to take circulation, whether willing or not. 252 MONEY AND PRICES sented tables to show what the value of 3 per cent, and 3^2 per cent, bonds, respectively, would be at certain terms in the future. Years to run to Corresponding price of 3 per Corresponding price of 3^ per payment cent, bonds cent, bonds 1 99.76 100.24 2 99 So 100.48 3 99 30 100.71 4 99.10 100.93 5 98.90 101.15 6 98.60 101.35 7 98.50 101.55 8 98.30 101 . 75 9 98.10 101.90 10 97.90 102.10 IS 97-oS 102.90 20 96.30 103.70 30 95 20 104.80 5° _ 93 80 106.20 Perpetuity 92.30 107.70 The second column shows to the eye that an arrange- ment which ties up a man's funds, so that he loses something each year, is worse just in proportion to the number of years he is required to lose; while the third column, on the other hand, shows that if the market rate is 3X per cent., a 3^ per cent, bond is worth a slight premium at the start, and, as it returns each year more than the ordinary rate, it is worth more the longer it continues to pay this higher rate. § 5. Despite these lessons in finance, the Senate, on the 1 8th of February, 1881, rejected the amend- ments of the finance committee, and passed the bill as THE COUNTRY AROUSED 253 it came from the House with slight alteration. Be- sides one or two minor matters, the term was changed from five-to-ten years to five- to- twenty years; but what is painful to recall is that the fifth, or "Carlisle," section was retained in the bill by a vote of thirty-two to twenty-nine. The few amendments, however, re- quired the bill to go back to the House for their concur- rence before it could be sent to President Hayes for his signature and finally become a law. This parlia- mentary delay gave the banks time to awake from their sense of security, caused by the general feeling that the Senate, at least, would be honest. In the House, the element which fifteen years before was in- flationist, four years before rabid silver men (led by Ewing, Weaver, Bland, and De la Matyr), was anx- ious to push the bill, and "stab the money power" — as if the " money power " did not include the sav- ings of the industrial classes, even including poor washerwomen and sewing-girls, who were thus repre- sented as constituting a "menace to our liberties." Finally, the whole country was stirred, and protests against the fifth section began to pour in at Washing- ton; and inasmuch as it required a two- thirds vote to take up the bill from the speaker's desk in preference to other business, then fast accumulating at the end of the session, it seemed for a short time as if it would be difficult to push the bill through the House. But after several days of manoeuvring the friends of the measure gained their point. Now, however, since the banks, under the existing 254 MONEY AND PRICES law, had the power to withdraw their bonds at any moment by the deposit of legal-tender notes, rather than be caught in a trap by the refunding bill, they found themselves obliged to alter the whole character of their present business — a very serious step, but one to which they were inevitably driven. As honest men, the officers of the banks had no choice but to act so as to prevent the virtual confiscation of a part of the property of their shareholders. The law could not compel them to issue circulation any more than it could force farmers to plant thistle seed in their wheat- fields. In short, Congress, either not knowing what it was about, or being maliciously disposed, really forced a sudden contraction of the currency, even against the will of the banks. The result was a panic. Men who want capital go to a bank, just as a man who wants corn goes to a grain store. It is hardly necessary, also, to point out that modern business is largely done upon credit. A firm with a capital of $10,000 does a legitimate business of ten times that amount. Men buy, agreeing to pay at a fixed time in the future; and they sell goods, to be paid for in the same way. So that, although a man is perfectly solvent, his receipts may be so affected, temporarily, that he may need a loan for ten, thirty, or sixty days, until his own collections are made. If the banks, in such cases, are suddenly unable to loan, it is as if the human heart should cease to warm and support the members of the body. That which for the moment CONTRACTION OF BANK RESERVES 255 affects the ability of the banks to loan is the ratio of their reserve to their liabilities; or, in other words, the amount they keep on hand with which to meet any demands compared with the amount of those possible demands. By law the national banks were required to hold their reserves in "lawful money. " Therefore, anything which acted to subtract from the market the very kind of currency kept as reserve vitally affected the power of the banks to loan; while the only means the banks had of extricating their bonds from the grip of the government, in the few days before the refunding bill could become a law, was by sending lawful money to Washington, to be locked up in the vaults of the treasury until the bank-notes should become mutilated and sent in for redemption, or be purchased at a premium. Between February 19 and March 4, one hundred and forty banks had sent in to the treasury $18,819,585. The dis- appearance of this amount of money caused a violent paroxysm in commercial circles. Where a dam is thrown across a stream, the backwater forms a wide reservoir, from which a small constant supply of water is led off through a mill-race to turn the wheel of the mill. So the banks form the reservoir of capital (drawn from all classes in the country), from which the smaller stream needed for daily loans is drawn off to "turn the wheels of industry." The sudden with- drawal of lawful money to reduce circulation was of course like shutting off the water from the mill, and 256 MONEY AND PRICES the wheels of industry were suddenly stopped. The usual indications of a commercial panic instantly ap- peared. No one had money to loan; "industrial strangulation" was going on; and had the stringency increased, the business of the country would have come to a standstill in a few days. Money was borrowed at the rate of about 400 or 500 per cent, per annum. And what is important to note is that the distress which the hostile or ignorant element in Congress be- lieved they were inflicting on the banks really passed on to the people in general, who were powerless to help themselves. In view of all this, it seems almost in- credible that a senator of the United States should rise in his place and soberly propose the following reso- lution : "That the hostile attitude assumed by the national banks to the refunding of the national debt at a lower rate of interest, and their recent attempt to dictate the legislation of Congress, are contrary to the best interests of the people, and calculated to excite their alarm for the future." It is as if a burglar should declare it was against the best interests of the community that prudent people should lock their doors and windows in order to keep him out of their jewel-boxes. It is not an exaggera- tion to say that the "Carlisle section" was a piece of impudent bad faith, of that kind which has always had the greatest effect to lower our credit. A nation REFUNDING BILL VETOED 257 gains, even in money, by being scrupulously honest and fastidious in dealing with its creditors. I scarcely need say that, although the refunding bill passed both Houses of Congress, it was promptly vetoed by President Hayes, and failed to become a law. The danger to the banks ceased at once, and business again went quietly on. We make these things possible in this country by allowing the untrained congressional bull such extravagant smashings in the financial china shop. But there is little hope of the idea entering his shaggy head that some things are of too delicate mechanism to be brushed by a swing of his tail. A large number of the charters of the banks were to expire in 1884, and a better attitude was neces- sary to maintain a good banking system. In view of the almost constant struggle between ignorant legis- lation and our business prosperity, it was well that we give very careful study to the development of war banking methods now and in the future. CHAPTER X GOVERNMENT VS. BANK ISSUES § i. While the problem of the standard in the United States has been largely settled, other monetary questions of great importance still confront us. Cer- tain forms of our media of exchange, ultimately re- deemable in the standard coin, may be issued either by the government or by the national banks chartered by the government. Viewed in the light of wisdom and experience, should these notes be emitted by the general government or by the banks? In spite of the passage of the Federal Reserve Act it still remains a pivotal monetary question. It is certainly a mo- mentous one deserving impartial examination. We may then weigh the arguments (i) for and (2) against government issues and those (3) against and (4) for bank issues. Leaving out of account inconvertible paper, it has been claimed that the issue of convertible paper by the general government would be a saving to the peo- ple. It is assumed that in issuing paper money a profit exists which should be reaped by the State. Obviously, every country must invest a certain part of its wealth in its machinery of exchange; and it is 258 CONVERTIBLE PAPER 259 economy to keep this investment as small as possible consistent with the highest efficiency. Convertible paper is resorted to, not because of a scarcity of gold, but because it saves the expense of using gold; since the reserves for preserving convertibility need not be more than 40 or 50 per cent. The interest on the difference between the total amount of paper and the reserves, therefore, represents the saving in question. This difference can be set free to be used in industry, and the earnings on it constitute the country's saving in issuing paper in place of gold. The saving, of course, is only the interest on, not the whole of, the difference. The validity of this theory can be tested by our actual experience with the greenbacks, which were inconvertible from 1862 to 1878, and convertible from 1879 to the present time. Assuming a reserve of $150,000,000 in gold to be necessary for the redemp- tion of our $346,681,016 of greenbacks, we may say, in round numbers, that $200,000,000 is the amount of the uncovered issues, on which the interest at 3 per cent, (at which any gold bond in time of peace could be easily floated) would be $6,000,000. This last sum represents the annual gross gain to the people if, on other grounds, it should be regarded as best to sup- plant a gold currency by a convertible paper issued by the government. 1 1 In reality, the gain from using the convertible paper is not a positive gain, but only the reduction of a loss. Suppose all the wealth of the coun- try to be earning 3 per cent. Take out of this total the sum of $350,000,000, 260 MONEY AND PRICES Immediately, however, the question is raised: Does it cost anything to maintain the reserve? Of course, the political or financial management of the state, whether good or bad, will directly influence the ability of the state to keep its reserves intact. Any policy which excites distrust as to the willingness or ability of the treasury to redeem its paper in gold will create activity in the presentation of its notes for coin. Only on the assumption that the government will always be wise and capable will the reserves always remain in- tact. If not, the reserves will be drawn down, and new loans must be made in order to supply additional gold for the reserves. But our monetary policy has not always been wise : it has often been cranky, foolish, and most ill-judged. Our national vagaries with silver were known the world over. Hence, it was inevitable that the people should have had to pay the price. In truth, so often and great was the fear that we could not maintain gold payments that several times the gold reserves were almost exhausted. Our foolishness re- duced to figures means that, to maintain a reserve for $346,681,016 greenbacks, we have had to increase the public debt by $357,815,400, on which the additional which is used in the form of a gold currency, and while so used yields no concrete returns. The total loss, or price, which the country pays for a currency consisting entirely of gold is the 3 per cent, on this $350,000,000, or $10,500,000. But, if this $350,000,000 is partly economized by using $200,000,000 of convertible paper, $200,000,000 is released to go back to productive industry; hence the loss to the community is reduced to 3 per cent, on $150,000,000, or only $4,500,000. The so-called gain of $6,000,000 annually, which is the 3 per cent, on the $200,000,000 released, is not a positive gain; it is only a reduction of the total loss. FOLLY OF "ENDLESS CHAIN" 261 interest charges to the taxpayer are $i5,632,6i6. 1 Thus, as against the reduction of loss by $6,000,000, the issues of the government have entailed an enormous annual expense of $15,632,616. It does not do to base expectations solely on theory. Indeed, it is a serious question whether our governing class is suffi- ciently intelligent in managing monetary matters to allow our nation to issue paper money except at a fearful cost to the people. But the above statement of the cost is not all. The iniquitous act of March 31, 1878, required that the notes redeemed by such a vast increase of debt should be reissued. This is the act which created the " end- less chain" and the constant drain on the treasury in time of danger. Consequently we have the silly re- sult of having actually redeemed more than $407,000,- 000 of greenbacks, by an increase of debt ($357,815,400) greater than the total original issues of the greenbacks — and yet we have the whole amount still outstanding ! It sounds childish, but it is literally true. In fact, if we had borrowed the $346,681,016 by issuing 4 per 1 Amount of Debt Created Rate of Interest % Interest Charge 1877-78 , ( $65,000,000 \ 30,500,000 50,000,000 50,000,000 62,315,400 100,000,000 4 5 5 4 4 $2,920,000 1,220,000 2,500,000 2,500,000 2,492,616 4,000,000 February i, 1894 November 13, 1894 February 8, 1895 February 15, 1896 Total $3S7.8i5.400 $15,632,'' c6 262 MONEY AND PRICES cent, bonds, at the time of resumption, the annual in- terest charge would have been only $13,876,240, or an annual saving of $1,765,376 on the interest of the debt actually incurred in keeping up the reserves. If the rate of interest on the bonds had been 3 per cent., the saving would have been still greater. On the face of experience, at least in the United States, it can scarcely be urged that there is any gain to the people in issuing government notes. Still many persons think that government notes are "a loan without interest," and hence a saving to the state. So well-known a politician as Secretary Sherman thought so; 1 but the facts already given re- move the whole basis for this opinion. It never has been shown that the treasury was unable to borrow at some rate at the time (1862) when the first green- backs were issued, or at any time since. Moreover, if the state had to borrow, it did not follow, therefore, that it must borrow by issuing notes; it was egregious 1 "United States notes are now, in form, security, and convenience, the best circulating medium known. The objection is made that they are issued by the government, and that it is not the business of the government to furnish paper money, but only to coin money. The answer is that the government had to borrow money, and is still in debt. The United States note, to the extent that it is willingly taken by the people, and can, beyond question, be maintained at par in coin, is the least burdensome form of debt. The loss of interest in maintaining the resumption fund, and the cost of printing and engraving the present amount of United States notes, are less than one-half the interest on an equal sum of 4 per cent, bonds. The public thus saves over $7,000,000 of annual interest, and secures a safe and convenient medium of exchange, and thus the assurance that a sufficient reserve in coin will be retained in the treasury beyond the temp- tation of diminution, such as always attends reserves held by banks."— Report of Secretary of Treasury, 1880, p. xv. LOAN ON DEMAND 263 folly to borrow in the form of paper money, which was certain to disturb the standard of value, change con- tracts, cause an upheaval of prices, and create riotous speculation. Indeed, a loan put out in the form of demand notes is highly objectionable as compared with a loan in the form of bonds issued for a term of years. The demand obligations may be, and generally are, presented for payment in times of distrust and danger, just when their redemption by the treasury is most difficult, and when their conversion adds to the severity of a crisis. On the other hand, a loan on time in the form of bonds gives no trouble beyond the payment of interest, and is not turning up at critical emergencies to be redeemed. Even if the cost to the people of both methods were the same, the latter method of borrowing should be recommended on every ground of theory and experience. Indeed, the confusion of mind between the fiscal and the monetary functions of the treasury is highly dangerous; the two should be kept widely separated. § 2. Without doubt, the least recognized, and yet the most far-reaching, consideration involved in dis- cussing government issues is, as already noted, the failure to separate the monetary from the fiscal func- tions of the treasury. Almost all our monetary ills from 1862 to 1900 can be traced to it. The crude idea that, when funds were urgently needed, they could be obtained by issuing demand obligations bearing no 264 MONEY AND PRICES interest, which could be circulated as money, has long been prevalent, and has produced endless trouble. Ignorant of the principles regulating the monetary sys- tem of a country, the treasury might, solely from a need of income which has no relation whatever to the demands of trade for a medium of exchange, inject additional sums of money into the circulation, and upset the whole delicate machinery of exchanging goods. Foolishly to unsettle the monetary standard and the confidence of the public by trying to borrow in a form certain to interfere with the nation's currency is only a way of crippling the power to borrow in gen- eral. Thus, two evils result from this fateful confusion of mind: (1) changing the supply of money without any adjustment to the needs of trade is a blow at the very vitals of exchange, prices, contracts, and business secu- rity; and (2) the credit of the treasury being dependent on its management and resources, the issue of paper money is a blow at credit, because it is an open con- fession of inability to borrow in the market on normal conditions. Because the government, in 1862, when borrowing had not yet been fully tried, issued incon- vertible notes, without providing any reserves what- ever, it could not escape the charge of having descended to the last resort of a bankrupt treasury; and this unwise action enormously injured the credit of the United States and increased the rate at which it was subsequently forced to borrow. There is only one way to borrow: that is, to pay the price fixed by the GOVERNMENT PAPER A MENACE 265 credit of the borrower in the open market. From this there is no appeal. Indeed, the depreciated paper caused to the Union a loss of at least $500,000,000 in the creation of additional debt due to higher prices, speculation, and the diminished amount received for bonds due to a damaged credit. In no way can the facts of our experience support borrowing by issuing forms of money. § 3. Cest le premier pas qui coute. Once a false step has been taken, it is apt to lead to serious conse- quences. The very existence of paper issues, originat- ing in a wrong method of borrowing, is a constant menace. The mere lapse of time in which no injury has been incurred unfortunately serves to lull the fear of danger. If retained, such issues are a suggestion for similar crude expansions in the future, when men are too excited to judge calmly of their acts. Their very presence is an incentive. If legislators were all monetary experts, and never influenced by political considerations, there would be little risk in retaining for a time our greenbacks; but we must take men as they are, and provide for the probable acts of those who are incompetent and ill-advised. Obviously, these national guardians of our monetary system do not personally lose anything when they get the treasury into desperate straits; they have no weight of respon- sibility due to any personal relation to the issues — thus being quite differently affected from the bankers 266 MONEY AND PRICES in their relation to bank issues. Humiliating as it may seem, the maintenance of the convertibility of greenbacks into gold has again and again been im- perilled. The whim of the executive, or the sudden use of an unreasoning campaign cry, may make it im- possible to keep the slight gold reserves which protect our standard of value and prices. Until recently re- demption in gold as against silver was largely a matter of the personal choice of the executive. All in all, the very presence of government issues is too much of a danger to be kept forever hanging over a great com- mercial nation. What is still more dangerous is the fact that the whim of the government is the only limit to its issues. Ordinarily, sane business men would concede that the quantity of the media of exchange should bear some direct relation to the amount of exchanging to be done. In the case of government issues, the quantity as well as the quality depend on a vote of Congress. If a fancied need presses upon men inexperienced in mon- etary operations, especially if they have been inocu- lated with the fallacy that the more money a country has the better off it is, there will be excessive issues, followed by raids on the reserves. The paper will depreciate — and the country will undergo rapid fluc- tuations in prices, an unsettling of contracts, a period of mad speculation, leading to the inevitable ruin of a commercial crisis. These are not matters of imagina- tion; they are only mild descriptions of what the FALSE DOCTRINE PERSISTS 267 country actually suffered from 1862 to 1879 because of government issues. The crisis of 1873 was directly traceable to the speculation inherent in the fluctu- ating greenback standard which followed the Civil War. Naturally enough, false doctrines expressed in gov- ernment action may poison the whole course of public opinion for generations to come. There was the be- lief that a government stamp created value. If so, why did its solemn promises to pay, although made a full legal tender, depreciate to thirty-five cents on the dollar? Then also came the fallacy that the more money the more wealth; as if wealth came into exist- ence by increasing the counters for wealth. Again, because paper was depreciating and prices were soar- ing, the conviction grew that prosperity came with increasing the quantity of paper money. The fact was, the prices rose to keep up with the depreciation of the standard. And, far and wide has the belief spread to-day — aided by our experiences with the de- preciated greenback — that prices depend upon the quantity of money in circulation. Thus the ground was prepared for the silver agitation; on the theory that gold was insufficient in quantity. This whole brood of heresies is traceable to the crude'conceptions which led Congress to attempt to borrow by issuing inconvertible paper in 1862. § 4. If judgment be given against government issues on the grounds thus presented, we are next forced to 268 MONEY AND PRICES weigh the claims for and against the only other alterna- tive instrument to be used as paper money — bank- notes. There has come down to us from the State banking orgies before the Civil War, as well as from the period of depreciated greenbacks, a belief that the right to issue money gives to the issuers the power to control the money market; to put prices of goods and securi- ties up and down; and even to bring on panics. The "money octopus" is supposed to work through the power to manipulate the issues of banks, and to wish to confine the sole right of issue to the banks. The problem we are here discussing has nothing to do with inconvertible paper of changing value. The real issue is between government issues and bank issues — each convertible into gold. Issues of either kind of money, if kept redeemable in gold, would have no greater effect on prices than gold itself would have. The only way in which the "money power" can con- trol prices and securities is by obtaining control over capital and purchasing power, and thus influencing the demand. This purchasing power obviously can be had by loans from banks. The pith of the matter, then, lies in the ability to get loans. Now, suppose the "high financiers" have got the loans, where do the bank issues come in? Nowhere. When a loan is given, the borrower's deposit account is credited with the amount. Then payments are made, especially in all large transactions, by checks on these deposit BANKS AND PANICS 269 accounts. No bank-notes to speak of are used. It would be an inconvenience to the borrowers to be forced to take the bank's notes; and as the profit to the bank arose from the discount on the loan, that profit would be realized just the same whether the bank gave a deposit and checking account or whether it gave its own notes. The National City Bank of New York, the largest bank in this country, had (in 1909) loans of $135,405,002, but it issued only $9,217,497 of notes. All the largest city banks have made their profits and accumulated huge surpluses by use of checks on de- posits, and with very little use of their note issues. The same is clearly seen in the accounts of the bank- ing department of the Bank of England. Quite apart from the issue department, it does the main banking work of the greatest financial centre in the world by the use of checks drawn on deposits. There may be many persons — of the Upton Sinclair type — who really think that banks may wish to bring on panics. A bank is ex natura so placed that to bring on a panic would bring on its own destruction. Every one knows that in the liabilities of a bank account ap- pear the items indicating its obligation to shareholders for the capital, surplus, and profits, as well as the items of deposits indicating its obligations to de- positors for the sums left with the bank which may be drawn on demand. On the other hand, the bank lends its resources — whether coming from capital or deposits — and receives as its only security promises to 270 MONEY AND PRICES pay (supported by assets) from whose recurring ma- turity its loans are repaid. If these assets, such as collateral composed of stocks and bonds, or paper based on the sale of goods, should lose their basis of value, the banks would lose. They have already given the borrower the right to draw, and they get repay- ment by the borrower only in the future. Hence, the only chance of the bank to regain what they have parted with lies in the possibility that the assets will retain value enough to cover the loans already made. To suppose, therefore, that the banks should ever have a motive for bringing on a panic would be like supposing that a sailor afloat on the ocean in an open boat would have a motive for punching a hole in the bottom of the boat — the only thing which saves him from de- struction. The popular supposition that the bankers gain a special profit by the issue of notes, which by right should go to the government, is doubtless wide-spread. In truth, there is per se no banking profit except that arising from the discount on loans; and since dis- counting, or lending, can go on without issuing notes — as is seen at all banks and trust companies organized under State laws — then it is patent that the profit of banking is not due to the issue of notes. 1 1 For the sake of brevity and clearness, I omit the claim that a national bank depositing bonds to secure its notes gets a profit both on the bonds and on the notes when issued. In reality, other things being equal, a bank which stays out of the national system can make more profit than one in it. If each have the same reserve of $100,000, it would support $400,000 of loans on a 25 per cent, reserve; and the profit would be, say, 6 per cent. NOTES ISSUED BY BANKS 271 Yet, even if it were desirable to have the banks issue the paper money, it has been claimed that the banks would be unable to issue enough money for the enormous trade of so great a commercial country as this; and consequently, the government is the only authority competent to meet so great a task. Those who think thus overlook the patent fact that (omitting gold) the note issues, either of a government or a bank, are not much used in actual transactions of any im- portance. In fact, payments are usually made by checks. Therefore, the monetary service to be per- formed is not that coterminous with our trade, but a service coterminous with the need of reserves and of those retail and minor transactions in which buying and selling are closed only by the passage of some form of coin or paper money. We may need cash for buying a railway ticket, but not for buying a cargo of wheat. It is the banks which supply a deposit cur- rency, offsetting checks at clearing-houses, by which in the United States over $250,000,000,000 of goods per year are exchanged, and without recourse to silver, gold, bank-notes, or greenbacks, except for settling small balances. on $400,000 in case, as of a State bank, no notes were issued. But if the bank went into the national system, and if its borrowers called for notes when a loan was made, then the whole reserve must go for bonds which at best would support only $100,000 of notes. Thus its loans would be lim- ited to $100,000, and its gains would be restricted to 6 per cent, on thai sum, with a small interest on the bonds. If it had sufficient discount busi- ness, the bank could earn much more outside than in the national system, and wholly without the issue of a single note. Cf. supra, chap. IX, § 4. 272 MONEY AND PRICES A more interesting point is the suggestion that bank- notes are unconstitutional. Obviously this point has no reference to banks chartered by the national gov- ernment. That issue was settled long ago, in 1819. 1 If the claim has any relevancy, it has it only in regard to notes issued by banks chartered by the several States. The Constitution forbids States to emit bills of credit, but it does not forbid a State to incorporate banking institutions. In constant practice, from the beginning, State banks have been allowed to issue notes. Webster urged that the power of the general government to regulate coinage included the right to supervise all State bank issues; and the right of Con- gress to regulate the issue of State banks, or tax them out of existence, has also been settled. 2 Therefore, all there is in this objection applies only to notes of State banks, and in no way affects the right of national banks to issue notes under an act of Congress. In favor of government issues is the obvious claim that they would be uniform throughout the different States of the Union, and prevent the condition of variety and depreciation which existed in the State currencies before the Civil War. But this admitted advantage in favor of government notes is no argument against bank-notes, if the latter, as in the case of the national bank notes, can also be made safe, redeema- ble, and uniform throughout the whole country. 1 Veazie Bank vs. Fenno, 8 Wallace, 533. x McCullock vs. Maryland, 4 Wheaton, 316. WHEN NOTES ARE NEEDED 273 § 5. When we come to positive arguments in favor of assigning to banks the duty of issuing the notes needed by the trade of our country, we are obliged to ask: What other institutions than banks exist which can know when and for how much a demand exists for notes in transactions which cannot be per- formed by checks? Certainly, Congress cannot know. Whether we like banks or not, the fact is that they are the institutions of credit, evolved by centuries of experience to serve the needs of trade; and whether they like it or not, the banks must satisfy these needs, or cease to exist. Through them idle and new funds pass into the hands of producers; they disburse cap- ital; and they alone can know in just what way the public wish the capital transferred to it — whether through the medium of gold, silver, paper money, or checks. In this respect the bank is the slave of the business public. If the public wish only a deposit account, the banks provide it; if they wish notes, the bank must give notes. If such be the case, the banks are the only organiza- tions which can provide an elastic currency. We have seen that the treasury cannot do it. As a matter of fact, the greenbacks have been rigidly limited since 1878. Although a circulation of bank-notes secured by bonds can never be anything but inelastic, since the amount of notes is made to depend upon the price of bonds and the rate of interest, the banks can be given a safe method of issues, quickly redeemable, such as 274 MONEY AND PRICES would provide the necessary seasonal elasticity not possible with government issues — elasticity, of course, which contracts as well as expands. Leaving the elasticity to the banks is the only democratic way. There could be no overissues under a system which pro- vides for immediate redemption of bank-notes at many centres; and they would go out only when there was a need, such for instance as arises in the autumn har- vests. Far different, however, from this seasonal elasticity is the demand for elasticity in a time of crisis. In such a crisis as that of 1907, when an antecedent ex- pansion of speculation, undue rise of prices, and reck- less promotions, had paved the way for disaster, an elastic currency, although it could not have prevented the panic, would yet have in some measure modified the severity of the crisis. In times of emergency such as this, instant response to the need, and at the spot where the need exists, whether for loans or for notes, could have been made only by banks to their borrowers. Treasury expansion, publicly advertised, would have been a certain means of frightening de- positors and borrowers, and would only have aggra- vated the disaster. § 6. It being understood that convertibility into gold is the prime requisite either of government or bank issues, it is appropriate to note that the cost of maintaining coin reserves, which we found to be so heavy in the case of the greenbacks, would be removed CONVERTABILITY 275 from the people and put wholly upon the banks, were the latter to be required to furnish all the notes. In truth, the banks would never have any real difficulty in maintaining gold payments, provided the govern- ment maintained the gold standard and redeemed its own obligations in gold. The national bank note has from the beginning always been as good as the govern- ment note into which it was convertible; and the most significant thing in this result is that the national bank notes have not been and are not now a full legal tender. Clearly enough, more depends on redeema- bility than on legal tender. If the government at any time needs gold it has to go to the banks or to allied institutions to get it. But if the banks were delinquent in maintaining re- demption, have we any means of compulsion to keep them up to the mark? In this respect the bank cer- tainly occupies a better position than the government. A bank failing to redeem can be immediately sued in the courts, and can be obliged to keep its promises or go into liquidation. Not so with the treasury. If the treasury ceases to redeem it cannot be compelled to fulfil its obligations against its own consent. Only if Congress permits, can the holder of its note proceed against the government for failure to redeem. For seventeen years, 1862-78, the government was in fact derelict in paying coin, and was able to do so with impunity. The great wealth of the country did not save us from this ignominy. Yet the opinion is prevalent that the whole wealth 276 MONEY AND PRICES of the nation lies behind the government paper, for which the credit of the country is pledged. Therefore, government issues would have a greater safety than those of banks. To this it might be said that no boy should be without apples as long as there are trees full of apples in well-guarded enclosures. There are the apples; but the boy does not own them. How can he get what he does not own? Similarly, the great wealth of the country is not owned by the state; and the state can take that wealth only by the forms of law which permit its acquisition by taxation or borrowing. It cannot steal. Then, if there is no limit to taxation and borrowing, say government-paper advocates, the state can always secure gold enough to maintain its paper at par. But men do not always do what they ought to do. Even if there is boundless wealth, but if none of it is taken to secure the paper, the great wealth of the country adds no more value to the paper than a summer's crop of thistledown. Moreover, the trea- sury may have reached its limits of taxation and bor- rowing and can obtain nothing to be used for the pro- tection of its paper money. And since it cannot be required by court procedure to redeem its money, if it wishes not to redeem, then it is clear that the char- acter of the paper is dependent not on the wealth of the country, but on the whims of Congress to whom the currency is subject. The case is even more favorable for the banks than this. Apply to government paper the same test as NOTE ISSUES 277 that applied to bank-notes. If a bank issues its notes as the result of a loan, it must receive assets in the form of promissory notes or securities as an equiva- lent. Indeed, the quality of such assets is constantly brought into discussion. A skeleton account of a new bank would show the situation: Liabilities Assets Reserves 100,000 Here the issue of notes is followed ipso facto by the receipt of an amount of assets sufficient to secure the repayment of the loans. With this compare the op- erations of the treasury: Liabilities Assets Reserves (perhaps) 100,000 By the very nature of a government, it does not receive collateral when it issues notes. It is not a bank. It does not get assets which equal the sum of note issues. As a rule, what the government gets for the notes when issued is (as in the buying of munitions of war) consumed, or made unavailable as an asset of value. And the scraping up a gold reserve is re- garded as a very virtuous deed. Now, a bank which 278 MONEY AND PRICES took the assets received for its notes and used them up would be jeered out of existence. But if the di- rectors spent the $400,000 of the bank's assets in champagne suppers, they would still have quite as good a protection for the notes as the treasury. In truth, bank-notes can be made as safe as any kind of money by proper rules as to reserves, guaranty funds, lien on assets, and the like. The treasury, on the other hand, is little likely to submit to shackles which are easily imposed on a bank. Since the quality of the government paper is not really maintained by the wealth of a country — any more than the thirst of a prisoner in a dungeon is slaked from the cool lake he sees outside — it is obvious that the value of the paper is determined by the action of a Congress usually made up of active politicians. In short, government notes are at the mercy of every passing whim of the voters, whom the politicians sed- ulously court. Money should be left to experts; but in fact government paper never can be so left, as long as it is the plaything of politics. That is the curse of all government issues of notes, just as it is the curse of custom duties which are made political issues. Therefore, the strongest possible reason for relegating the system of paper issues to the banks, under general rules fully providing for elasticity and safety, is that they would be entirely removed from politics. If no other argument were presented, this one alone, judging not by theory but by actual experience, should be BANK ISSUES 279 sufficient to induce us to decide in favor of bank issues. And this conclusion seems to have been already reached by those great commercial nations which are our closest rivals for the trade of the world. Thus, in the great case of Government vs. Bank Issues before the people, the jury ought to find in theory and in fact in favor of the Bank Issues. Such a finding would be a protection against arbitrary party action by a central government under mere political pressure and it would be in line with the democratic tendencies of the age. CHAPTER XI THE MONETARY COMMISSION OF 1897 § i. Calm and yet friendly critics of democratic institutions, like Mr. Lecky in his Democracy and Lib- erty, have pointed out the existence of unmistakable dangers which have appeared in the process of our political development. To these dangers we are not blind; but while we always regard them as serious, yet to our American optimism they seem sporadic and not chronic. We have fallen into the habit of accept- ing the fact that American life and ideals are not truly expressed in our political activity, or in our legislation; that intentions and results are badly mated. The superiority of our ideals over our political action — if that be granted — seems to be due to a neglect of politi- cal duties. The preoccupation of an intensely indus- trial community, engaged in exploiting the amazing resources of a new country, has left us temporarily neglectful of our civic obligations. From this point of view, it is reasonable to suppose that political indifferentism — sometimes too long con- tinued, as in the case of an abiding endurance of bad monetary legislation — must be ascribed to an absorp- tion of mind in other directions. Moreover, although 280 ' POLITICAL INDIFFERENCE 281 the losses and damage wrought by erroneous politics are extraordinary, yet the return of wealth to skilled human effort is so great, and our phenomenal resources yield such enormous totals, that the losses are accepted and forgotten. This way of doing things may not in- dicate a discriminating and frugal mind; but it is the way that is natural to an immature people in the midst of rapidly accumulating riches. To some minds, the stolid acquiescence for decades in vicious legislation — so long endured that its vicious- ness has become notorious — seems* to be an exhibition of American indifference so discouraging that we should frankly, although reluctantly, admit the "degradation of American politics" as an inevitable consequence of democratic institutions. There seems indeed to be a basis for such reflections. That a bad monetary system like that of the United States should not merely have found a place in our legislation, but should also have remained in force for more than a generation, when qualified observers at home and abroad had repeat- edly foretold disaster; that losses of untold millions should have been suffered in commercial ruin directly traceable to defective monetary enactments, when the application of plain business principles would have made this damage impossible; that our country should have been painfully writhing in distress and weighed down by industrial depression at the very time when foreign countries were recording the largest exports and imports and the greatest prosperity in all their 282 MONEY AND PRICES history — all this seems inexplicable and astounding. Is it any wonder that, by many thoughtful people, this long continuance in a blundering and costly policy by an ambitious country should be regarded as proof of a deep-seated incapacity on the part of a democracy to successfully meet its problems — to appreciate, for instance, the gravity and complexity of problems such as must arise in establishing a sound fiscal and mon- etary policy, and then rise to a fit solution of them. There are some of us, however, who might take a more cheerful view. In spite of some inexplicable aberrations from sound judgment, and of some strange hallucinations for a brief time, no estimate of the American electorate is correct which fails to recognize its fundamental good sense, honor, and intelligence. A sympathetic, and therefore a truer, insight will lead one to notice symptoms indicative of very sane and healthy action, but which are often overlooked in the hasty bustle of obtaining immediate political results. The reserve force of right action in the American peo- ple, which can be called upon in any great emergency, must always be reckoned with by statesmen. The great democratic giant moves on his busy way, ab- sorbed in developing the crude resources of a new land, settling the pressing needs of a new, but ambi- tious, community, striding on magnificently to material wealth, self-centred and often serenely unconscious of ugly signs of disease, which, as yet, have made little or no impression on his inner strength and vitality. SIGNS OF AN AWAKENING 283 An unexpected tumble, a surprising blow, now and then, seem to have no perceptible influence in retard- ing his ultimate and confident progress. But when, by recurring twinges, this big personality is once made fully conscious that something is permanently in- jurious to his health — when, for instance, he discovers that his monetary diet gives him an excruciating colic, increasing in intensity — we are likely to witness the direction of great energy toward the discovery of a cure. And, if I am not greatly mistaken, that is what we were able to observe in the movement for the re- form of our monetary legislation. There arose unmistakable evidences that the indus- trial interests, quite irrespective of party affiliations, were exhibiting a change of emphasis; withdrawing their attention, for a time, from the engrossing tasks of production and manufacture in order to examine into and remedy the dangerous consequences of a vicious monetary policy. This was a decidedly healthy and encouraging sign. Our great democracy, noting a pronounced lassitude in its system, racked in every part of its body by suffering and distress, stopped in its onward strides in the path of prosperity, and re- luctantly admitted that it could take up its work again only after its disease had been diagnosed and proper remedies applied. Those of us who despair too easily of the republic must, therefore, be patient, and allow time enough for large forces to complete the cycle of examination and reform. A return to 284 MONEY AND PRICES sane methods may be slow, but it is inevitable, if we are to remain a commercial nation. Foreigners are often pleased to speak condescend- ingly of American optimism — a confidence that, in spite of corruption and malodorous administration, everything will eventually work out a good result. After all, is this so-called optimism anything more than a surer knowledge on the part of those who know our democracy most truly? If it be a fact that, as I have already observed, there is a great reserve force of good sense, honorable purpose, and shrewd intelli- gence among our people, which in supreme crises, or after long irritation, is sure to rise spontaneously to set the nation aright, then we, who have faith in our country, are not basing our hopes on imagination or sentiment. Even though the moral force of the com- munity sometimes slumbers until impatient persons announce its extinction, it is still there, to be awakened when there is less preoccupation with the eager pur- suits of industry. It is the peculiarity of our democ- racy — hardly a vice, unless a habit of procrastination may be called a vice — that time and effort are needed to awaken its consciousness to a proper understanding of an evil, and to connect an aroused moral sense with some definite plan of legislation. It is to be observed, moreover, that a passing craze should not be mistaken for an awakening of the public consciousness. A temporary flirtation with an issue, tricked out in false braws to counterfeit beauty, is not MONETARY REFORM 285 the same as the deep affection which guides permanent action. The public may flirt with this or that danger- ous issue for a time; but a permanent alliance is out of the question. In our land, an impression upon the inner consciousness by a grave matter is slow and difficult. Geographical separation and diverse cli- mates within our own boundaries make practically separate communities, with different feelings and standards, and with diverse points of view. Hence, when those who have a common purpose to attain are many in numbers, it is difficult to find each other out and to act in concert. This explains why it is that the creation of a common understanding is a slow process, often obtained only through panics and suffer- ing, and that leadership and organization to carry this understanding into positive legislation are of first importance. The mere fact that an ill has been long endured is not in itself discouraging; for when the existence of an evil has once been generally recog- nized, the end is not far, if a leader appear. § 2. Whatever the immediate causes, it will be admitted by all that the public consciousness had been at last thoroughly awakened to the evils of a bad monetary system — or rather lack of system. The sufferings of the industrial organism were acute and unprecedented : the consciousness of disease was every- where felt. If this be granted, the end was not far off. The questions universally asked were: "What is 286 MONEY AND PRICES wrong ? What are the remedies ? ' ' This in its briefest form was the raison d'etre of the Monetary Commis- sion. It met to diagnose impartially the disease, and to prescribe the remedy. It was the outcome of a movement which reflected the healthiest operations of democracy that have been observed in recent years. It came from the people, by the people, and for the people. Above all party, above all sectional feeling, it was in the interests of the whole country, and not in the interest of any one man, nor of any particular region. Larger than any one industry or vocation, it was the outcome of all industrial life throughout the length and breadth of the land, and stood for the dignity of labor and production when these demanded the right to be freed from artificial barriers to profita- ble and steady employment. It gave evidence of the healthy condition of popular government. Stulti- fying acquiescence much longer in a fatuous monetary policy might properly have been regarded as proof of the degeneration of our institutions, and of the flab- biness of the public conscience. The extent of this movement among the business interests, its spon- taneous origin, its non-partisan character, were ex- ceedingly hopeful. Although long delayed, it showed itself so steady, so direct, so uncompromising, that it became a wholly novel and unprecedented part of political activity. Never before in our history had the business interests of the country combined to se- cure the formulation of a sound monetary system, MONETARY CONVENTION 287 with the evident purpose to follow the announcement of that result by a formidable campaign in every dis- trict and precinct of the nation. It was a strong demand based on the dignity and self-respect of our industrial life. On November 18, 1896, the governors of the In- dianapolis Board of Trade invited the Boards of Trade of Chicago, St. Louis, Cincinnati, Louisville, Cleveland, Columbus, Toledo, Kansas City, Detroit, Milwaukee, St. Paul, Des Moines, Minneapolis, Grand Rapids, Peoria, and Omaha to a conference on the 1st of December following, to consider the advisability of calling a larger convention from commercial organiza- tions throughout the country for the purpose of dis- cussing the wisdom of selecting a non-partisan com- mission to formulate a sound currency system. This preliminary conference, after long deliberation, issued a call for a non-partisan monetary convention of busi- ness men, chosen from boards of trade, chambers of commerce, and commercial clubs, to meet in Indian- apolis, on January 12, 1897. In the call, attention was drawn to the fact that a necessity for such legis- lation as would establish our currency upon a sound and permanent basis was generally conceded by busi- ness men. In view of what I have said, it is note- worthy that the call contained these significant words: "The business men have been accused of neglect of political duties. In ordinary times there may be some 28S MONEY AND PRICES foundation for this charge; but at every critical junc- ture in the history of our country, when the nation's prosperity, honor, or general welfare was seriously in danger, they have, in the spirit of enlightened patri- otism, risen to the full measure of their duty; and we believe that the painful experience of the country under the existing laws on the subject of the currency admonishes the business men that we have reached a point where it is their duty to take an active part in helping to solve the great questions involved." Here is the evidence that the public consciousness had been awakened. At the convention, held January 12, 1897, there as- sembled, with credentials, two hundred and ninety- nine delegates — men of high character and distinction — representing business organizations and cities in nearly every State in the Union. Indeed seldom had a more influential body of men of experience and ability been brought together. The result of its deliberations was expressed in resolutions conveying the idea that no progress could be made until a definite plan of monetary reform should have been agreed upon, to which public attention could be directed. The reso- lutions, which received enthusiastic adoption, began as follows: "This convention declares that it has become abso- lutely necessary that a consistent, straightforward, and deliberately planned monetary system shall be in- augurated, the fundamental basis of which should be,' A COMMISSION AUTHORIZED 289 First, that the present gold standard should be main- tained. Second, that steps should be taken to insure the ultimate retirement of all classes of United States notes by a gradual and steady process, and so as to avoid injurious contraction of the currency, or dis- turbance of the business interests of the country, and that until such retirements provision should be made for a separation of the revenue and note-issue depart- ments of the treasury. Third, that a banking system be provided, which should furnish credit facilities to every portion of the country and a safe and elastic circulation, and especially with a view of securing such a distribution of the loanable capital of the coun- try as will tend to equalize the rates of interest in all parts thereof." Recognizing the absolute necessity of committing the formulation of such a plan dealing with compli- cated currency questions to a body of men trained and experienced in these matters, a commission was pro- posed. In case no commission should be authorized by Congress in the spring of 1897, the executive com- mittee of the convention was authorized to select a commission of eleven members, "to make thorough investigation of the monetary affairs and needs of this country, in all relations and aspects, and to make appropriate suggestions as to any evils found to exist, and the remedies therefor." When the labors of the commission had been com- pleted, it should make "report of its doings and sug- gestions in such manner and form as it shall deem 290 MONEY AND PRICES best adapted to present the same to this convention and its members for action, and, if legislation is deemed advisable, shall accompany such report with a draft of such bill or bills providing for such legislation." Congress did not authorize the appointment of a monetary commission; and the executive committee of the Convention selected a commission of twelve members, 1 which began its sittings in Washington, September 22, 1897. § 3. The reason why the movement for currency reform crystallized in the appointment of a monetary commission was solely because of the impelling force of public opinion. The monetary panic of 1893 and the disasters of 1896 were not suffered in vain, if, out of the stress and strain of those four years there came a deep-seated conviction that indifference to great evils was no longer possible. The whole purpose of a commission was that it might present definite recom- mendations for which a public opinion had already created a demand. Was it not well to protest against the indiscriminate criticism of Congress on the ground that it had taken no action toward currency reform? Certainly it were far better to put the responsibility where it really lay — with the absence of a definite con- 1 George F. Edmunds, Vermont, chairman; George E. Leighton, Missouri, vice-chairman; T. G. Bush, Alabama; W. B. Dean, Minnesota; Charles S. Fairchild, New York; Stuyvesant Fish, New York; J. W. Fries, North Carolina; Louis A. Garnett, California; J. Laurence Laughlin, Illinois; C. Stuart Patterson, Pennsylvania; Robert S. Taylor, Indiana; and L. Carroll Root and H. Parker Willis, secretaries. CONSISTENT POLICY 291 viction as to specific measures on the part of the gen- eral public. Indeed, some persons question whether Congress should ever legislate except in answer to a clearly expressed mandate from the people. At any rate, it was puerile to waste time gossiping as to who was to blame for the existing evils in our currency system. If any one body was more to blame than another, it was the general public. In fact, we had about us as good — or bad — a monetary system as we deserved, considering the intelligence that had been given to it. The really important matter was the general belief that conditions then contained poten- tial disaster, and that they must be changed for the better. If our currency were in such a state of un- stable equilibrium that any future alarm, such as the one which came in the summer of 1896, might produce a paralysis of trade and industry, then it was bad business policy to leave our currency as it was then. The striking thing in looking back over forty years is, that we have never observed any steady, continu- ous policy in regard to our currency. During most of that time, industry was handicapped by the uncer- tainty of a depreciated, or a doubtful, standard of prices and payments. The whole importance, there- fore, of the spontaneous uprising of business interests in the Convention of January 12, 1897, resided in the creation of a commission, instructed to formulate a consistent monetary policy, which might be laid before the public with a view to its guidance and instruction. 2Q2 MONEY AND PRICES A struggle could then be inaugurated to incorporate into legislation, as rapidly as possible, one part after another of this general plan. In short, the commis- sion had it in its power to set up a pillar of cloud by day and a pillar of fire by night, to guide the followers of sound monetary principles through all the marches and campaigns of coming years, until they should reach the promised land where freedom from monetary disturbances should be ever secured. Granting that all the conclusions of such a commission could not at once be enacted into law; yet the very existence of such a body of recolnmendations would in itself be a fact which must be reckoned with. It was high time that some monetary Sheridans should appear far in front of the hesitating armies, to order the battle- standards to be planted well forward, and courageously to form the troops upon the new and advanced line. It should be especially noted that the whole move- ment, of which the commission was the outcome, was essentially democratic. Members of chambers of commerce and of other commercial bodies, represent- ing all parts of the country, assembled for consulta- tion and for the formulation of remedies for existing dangers to industry. They gathered together and appointed their representatives to act for them in regard to currency legislation in the same manner as would any convention of merchants seeking redress, for instance, from injurious bankruptcy laws. The commission was merely the agent of the great business RIGHT OF PETITION 293 constituency. The commission and the body from which it sprang were parts of but one movement. If it was impertinent for the commission to deliberate upon currency matters, then it was equally imperti- nent for the business interests to give attention to them. It is hardly necessary to point out that these prac- tical men of our land were acting wholly in the letter and spirit of the First Amendment to the Constitution, which preserves "the right of the people peaceably to assemble, and to petition the government for a redress of grievances." The right of petition has been effec- tive on many important occasions. In England, peti- tions brought about the abolition of slavery, the eman- cipation of the Roman Catholics, and the repeal of the corn laws. Petitions which should prayerfully pre- sent the conclusions of the Monetary Commission would not offer the opinions of a self-constituted body of eleven men, but those of the duly accredited rep- resentatives of the commercial, manufacturing, bank- ing, and agricultural interests in different parts of the United States. It was not impossible that a " Mer- chants' Petition" in the New World might give an- other date to the records of progress in commercial history. 1 § 4. The merchants of our country, moreover, in this movement which culminated in the creation of a 1 The work of the commission resulted in the Act of March 14, 1900. 294 MONEY AND PRICES commission, took a position that indicated the appear- ance of a new dignity and self-respect. It is a com- monplace of democratic government to insist that all forms of labor — each and all the industrial occupations — should be regarded as equally honorable, and that there are no privileged classes. The day, when no "tradesman" can be presented at the official recep- tions of our government will never dawn for an Ameri- can. All this may be true, and more. It is not as generally recognized as it might be that the great pre- ponderance of the brains and genius of our people is to be found in the industrial occupations of our land. The men who officer the great industrial machinery of production and trade are constantly putting forth an effort of mind, a creative force, an originating power, such as seldom appear in other professions. In fact, the ablest and most competent men are, by the opera- tion of our social development, drawn into the service of business. Had the scholars of our time the driving energy and intellectual quality of their industrial brothers, scholarship would advance by leaps and bounds far faster than it does now. Nothing in our American life is more marked than the prodigious dis- play of virile and penetrating intelligence in all the departments of business activity. Only too often are men obliged to seek the so-called learned professions because they cannot possibly achieve success in com- mercial life in face of the intense competition of strong men. SERVICE OF BANKER 295 Yet it is not uncommon to hear depreciative remarks about "mere business men." Indeed, by some strange survival of traditions, there has been impalpably con- veyed to the public judgment a bias, more or less pronounced, which has placed the business man in a doubtful rank of influence. Strangest of all, in a democracy like ours, the man of affairs has felt con- strained at times to assume an apologetic attitude toward his fellows. In view of his powers and his daily services to society this seems quite inexplicable. In illustration of this attitude reference may be briefly made to the profession of banking. I am fully aware that what I may say in this connection may be mis- quoted and misconstrued and regarded as showing a weak subserviency to wealth. The question, however, is "What is the truth?" not "What will men say?" And it is high time that some one should have the courage to tell the truth about bankers and bank- ing. The widely diffused prejudice against bankers comes from persons who know nothing whatever about the business of banking, or are ignorant that bankers gain a profit only from their discounts by buying and selling something in no other way than other men do who may have invested their capital in dry goods. The banker does a service which others require. No one is obliged to accept a loan. The service is rendered by voluntary action on both sides. In no sense does a banker earn his profit in any way different from an expressman or 296 MONEY AND PRICES a cab-driver: the one invests his capital in the work of supplying society with the machinery of exchanging and transferring goods, the other invests his capital in a machine for the transfer of persons or goods from one spot to another. It is as ignorant and childish to say that all bankers are bad as to say that all cabmen are good. Bankers are every day rendering a service to society without which industry could not possibly go on: they make exchanges of goods possible in a marvellously skilful manner, and increase the power of production and the efficiency of labor in ways little understood. The relation of the banker to his clients is generally a closer and more confidential one even than that of the clergyman to his parishioners. Every man in business, sooner or later, needs assistance at critical moments. Not to get it means failure, bankruptcy, and poverty for his family. Perhaps no man in the community, therefore, is the recipient of more sacred confidences, more inside knowledge of his client's struggles and hopes, than the banker. And every day we are intrusting our savings and investments to his honor and probity. Think for a moment of the ser- vice to society performed by a banker who vigilantly keeps intact for our daily use the millions upon mil- lions of dollars of deposits ! If he were ever distrusted for one hour, imagine the chaos that would supervene, and picture the loss to innocent people who are obliged to rely on skilled advice for investment! Is it not RIGHT TO DEMAND JUSTICE 297 then a piece of cowardly and unmanly wrong on the part of some of our people to describe these men as "harpies" and "plunderers of the poor"? The sense of fair play should require retraction of such untruth; for untruth it is. It is set afloat by persons who have absolutely no knowledge of what they are talking about; it is tossed about by those whose stock in trade is to excite antagonism between the rich and the poor. So far has it gone, that the banker is almost excluded from public life. The demagogues and charlatans have actually led bankers to assume an attitude which admits that they have no influence. If, therefore, this rising of the business men of the whole country meant anything, it meant an increasing sense of self-respect and dignity. They have as much right to unite in a movement for the protection of trade and industry from ignorant or dishonorable assault as to arrange for immunity from burglary or sandbagging. The right-minded man of affairs has the same inalienable privilege of demanding justice and freedom for his work as the religious man has to demand protection and freedom in the exercise of his conscientious scruples. But so long had the busi- ness interests been accustomed to bad monetary legis- lation that the apologetic attitude of mind was not easily thrown off: they at first hesitated to demand all that was rightfully theirs. Then, however, the spirit began to change. It began to assume with busy men the character of a holy war for justice and for 298 MONEY AND PRICES their rights. They refused any longer to permit mat- ters of vital interest to employers and employed — to industry as a whole — to be tossed about the political field in the game of politics. APPENDIX LAW OF SANTO DOMINGO, 1894 The National Congress in the Name of the Republic At the initiative of the Executive Power, upon previous declara- tion of urgency, and the three constitutional readings, has passed the following: LAW CONCERNING DOMINICAN COINS AND THEIR COINAGE CHAPTER I MONETARY SYSTEM Article i. The Dominican Republic shall have coins of gold, of silver, and of nickel. Article 2. The fineness for all gold and silver coins shall be nine hundred thousandths of pure metal for one hundred thou- sandths of alloy. The alloy of the gold coins shall be of copper, or of copper and silver, the silver not exceeding one-tenth part of the alloy. The alloy of the silver coins shall be of copper. The nickel coins shall be of copper and nickel, being composed of three-fourths parts of copper and one-fourth part of nickel. Article 3. The legal monetary unit in the Republic shall be the "gold dollar." The legal weight of thi^ gold dollar shall be twenty-five and eight-tenths grains, of troy weight, for the gold coins, of which twenty-three and twenty-two hundredths grains shall be of pure gold. That of the silver coins shall be four hundred and twenty-two and two-ninths grains, troy, of which three hundred and eighty grains shall be pure silver in each silver dollar. Article 4. The "dollar," or unit of account, shall be divided into one hundred parts, called "cents," and the weight of the "half-dollar," of the "quarter-dollar," and of the "ten-cent" 299 300 - APPENDIX pieces shall be respectively the half, the quarter, and the tenth part of the weight of the silver "dollar." Article 5. I. The gold coins of the Republic shall be the following: a) The piece of gold of 20 dollars, which shall weigh 516 grains, troy gold weight. b) The piece of gold of 10 dollars, which shall weigh 258 grains, troy gold weight. c) The piece of gold of 5 dollars, which shall weigh 129 grains, troy gold weight. II. The silver coins of the Republic shall be the following: a) The silver piece of one dollar, which shall weigh 422% grains, troy gold weight. b) The silver piece of fifty cents, which shall weigh 211% grains, troy gold weight. c) The silver piece of twenty-five cents, which shall weigh 105% grains, troy gold weight. d) The silver piece of ten cents, which shall weigh 42% grains, troy gold weight. III. The nickel coins shall be the following: a) The nickel piece of 2^ cents shall be of the same weight and dimensions as those now in circulation. b) The nickel piece of 1% cents, idem, idem. Article 6. The gold and silver coins shall be circular in form, with milled edges. The size or diameter of the different coins shall be the following: I. Gold coins. a) The gold piece of 20 dollars shall have a diameter of 34.28937 millimetres. b) The gold piece of 10 dollars shall have a diameter of 26.66951 millimetres. c) The gold pieces of 5 dollars shall have a diameter of 21.58960 millimetres. II. Silver coins. a) The silver pieces of one dollar shall have a diameter of 38.09931 millimetres. APPENDIX 301 b) The silver piece of fifty cents shall have a diameter of 30.47944 millimetres. c) The silver piece of twenty-five cents shall have a diameter of 24.12956 millimetres. d) The silver piece of ten cents shall have a diameter of 17.77967 millimetres. Article 7. The design for the nickel coins, as well as the other conditions of said coins, shall be fixed by decree, which the executive power shall be authorized to make. Article S. The design for the gold and silver coins shall be as follows: Upon one face, that is, upon the obverse, the figure of Liberty, looking toward the right, the head bound with a fillet, upon the surface of which is engraved the word "Libertad," and the figure surrounded by the letters expressing the value of the piece, and the date of its coinage. Upon the opposite face, that is, upon the reverse, the coat of arms of the Republic, sur- rounded by the inscription, "Republica Dominicana," and, underneath, the numbers or figures expressing the weight and fineness of the respective coins. CHAPTER II COINAGE OF COINS Article 9. The coinage of national money, in accordance with the provisions of the present law, during the continuance of the concession of the "Banco Nacional de Santo Domingo," granted to the "Credit Mobilier," 15 Place Vendome, Paris, on the 26th of July, 1889, or during the existence of said "Banco Nacional," shall be executed in preference by that establish- ment, in accordance with Article 15th of the law of its creation. In case the "Banco Nacional de Santo Domingo" should not be able to execute the coinage in conformity with this law, the Executive will sign the necessary contracts with foreign mints, the operation of which shall be under the inspection of the Fiscal Agent of the Dominican Republic, its Minister or Consul, who resides in the place where the coinage is struck. 302 APPENDIX Article 10. The maximum and minimum of the gold and silver coins, or the deviations permitted in their weight, shall never exceed the following limits of tolerance: I. In the gold pieces of 20 dollars and 10 dollars, the half of a grain. In the piece of 5 dollars, one-quarter of a grain. II. In the silver pieces of one dollar, of fifty cents, of twenty- five cents, and of ten cents, one and one-half grains. CHAPTER III OF CIRCULATION Article 11. The pieces of five-francs, one-franc, and a half- franc, ordered to be coined in conformity with the law of July 16, 1890, and of which there are in circulation 950,000 francs, are subject to the provisions of the Decree of December 23, 1891, and, therefore, will be received at the same rate as the Mexican dollar, and the fractions thereof; that is, the Domini- can piece of five-francs shall continue to circulate at the rate of one Mexican dollar; that of one-franc shall circulate as a fifth part of the same Mexican coin; and the piece of a half- franc in the same proportion. §. The nickel and bronze coins, now in circulation, shall con- tinue to do so at -their nominal value in Mexican coins, which serves as a basis for their present circulation. Article 12. All debts and obligations, both public and pri- vate, contracted before the 1st of June next, shall be paid in the same money in which they have been contracted. The debts and obligations which are contracted after that date thence- forward shall be satisfied conformably to agreement between the parties. §. The national gold coins shall be a legal instrument for the payment of any sums whatever; the same with the national silver coin and its fractions. It is provided, nevertheless, that until the coins created by the present law are coined and ready to enter into circulation, public and private debts, including fiscal and municipal taxes, may be satisfied in Mexican silver APPENDIX 303 money, which shall be received for what it is worth as com- pared with American gold. § §. The "Contaduria General de Hacienda" will com- municate to the offices under its jurisdiction, weekly, the ex- change rates that exist between gold and Mexican silver, in order to fix regularly the rate at which said Mexican silver shall be accepted in the payment of fiscal duties; and this same rate shall govern the payment of municipal taxes. § § §. As soon as the Executive Power shall have announced to the public that the new national coinage is ready to be put in circulation, the Mexican silver dollar shall be receivable in payment of fiscal duties at five cents less than the value for bid quotations in the markets of the United States of North America. Article 13. There is not designated in the present law the amount of gold and silver coins, or minor coins, which shall be issued in accordance with the provisions contained in it, and the Executive Power shall announce by means of a decree the amounts that are to be coined to meet the requirements. Article 14. In view of the lack of a mint, or mints, by the Government of the Republic, it is authorized to create a Fiscal Agency for the manufacture, issuance, and redemption of its coin, and for the maintenance at par in gold of the silver and other coins of the national coinage; for which purpose this Agency shall have its principal office in the capital city of Santo Domingo, and branches in Puerto Plata, Sanchez, and Santiago. Article 15. It is understood that this Agency and its branches mentioned shall remain under the charge of the "Banco Nacional de Santo Domingo," if said establishment, in accordance with the power already mentioned, which was granted to it by Article 15 of the Law of Concession, claims the right to coin the Dominican money, and contracts with the Dominican Government for all that concerns that operation. Article 16. The dollars and other silver coins and minor coins, provided that they have the weight and fineness which are indicated in Chapter I of this monetary law, shall be ex- 304 APPENDIX changeable at their face value for Dominican gold coins in sums of not less than five dollars on presentation at the offices of the Fiscal Agency, or of the "Banco Nacional." § If, by reason of any extraordinary or unexpected demand for the redemption of silver coins by gold, the deposit of gold in reserve in the treasury of the Fiscal Agency, or of the Bank, or of any of their branches, should become exhausted, said Agency or establishment, or branch, may tender as payment in said redemption a draft on a financial institution in New York, meanwhile approved by the Government, and payable in the gold coin of the United States of America, and of equal value to the sum exchanged, at sixty days sight, together with interest at the rate of six per centum per annum. Article 17. The "Banco Nacional de Santo Domingo," hav- ing, as stated, the privilege of coining the national money which the Government of the Republic desires to manufacture for the commercial and fiscal necessities of the Nation, the Executive Power, immediately after the promulgation of the present law, and of that which it requires and directs, shall communicate it to the principal establishment located in this capital city, as also the amounts of the respective denominations of coins which are to be manufactured, and the time within which said coins must be delivered for their circulation in the Republic. Said bank shall then, within the sixty days after its notification by the Fiscal Agents of the Government in Paris of the necessity for the coinage, state in writing to the said Executive, or to the agent selected by him for that purpose, its intention to comply with the provisions of the present law, and with the said notification which is made to it to coin the amount of na- tional money which is ordered to be manufactured, in which case, the said bank shall be constituted the Fiscal Agency of the Dominican Government for the issue and redemption of the coins as herein provided, and shall have all the powers, priv- ileges, profits and obligations which may be derived from such capacity. Article 18. If the said " Banco Nacional de Santo Domingo " APPENDIX 305 shall not announce its intention to comply with the provisions of this law and with the notification of the Fiscal Agent of the Government in Paris, within the specified term of sixty days, such omission shall be considered as a waiver of the right to make this coinage; and if, after having expressed its intention to comply, it does not do so within the time fixed by the Execu- tive, it shall be deemed as a like waiver. Article 19. In case of an express waiver of the coinage, or of the right to make it, as well as of the functions of the Fiscal Agency to redeem and distribute it, under all the provisions of the present law, the National Executive is authorized to desig- nate the bank or company which shall perform the duties of said Agency; and the regulations which shall be established by the Executive with the Agency referred to in the form of a contract, shall have the force of law. CHAPTER IV IMPORTATION OF COINS Article 20. No coins, of gold, nor of silver, nor of the minor coins, shall hereafter be issued by the Government of the Dominican Republic, which are not of the denominations, standard, and weights, herein established; and no person or company whatever shall be permitted to import these coins except the parties to the contract for furnishing these coins, according to the agreement with the Executive Power, in ac- cordance with all the provisions of the present law. Article 21. The national coins shall be imported by the persons or companies with whom the contracts may be entered into for their coinage and introduction; and they shall come accompanied at each importation by official documents signed by the persons specified in Article 9 of this law, declaring that the pieces bear their seal, and conform in all respects with the legislation therefor. 306 APPENDIX CHAPTER V GENERAL REGULATIONS Article 22. Upon publication made by the Executive re- garding the date at which these coins ordered to be coined shall enter into circulation, proper arrangements, wherever neces- sary, shall be adopted for introducing the denominations of the new system of money in all the accounts of the Government offices and of the municipalities. Article 23. All coins manufactured by other persons than those who may be parties to contracts with the Government under the present law, shall be seized wherever found. The value of the metal in such coins shall be the property of the informer, and all those who may be adjudged as principals or accomplices in such acts shall suffer the penalties which the criminal laws provide for the counterfeiters of money. Article 24. All laws and provisions contrary to the present law shall be deemed after its publication as null and of no value or effect. Article 25. The Executive Power shall decree the rules and regulations which he shall judge necessary for the strict ob- servance and enforcement of the present law, and all that concerns it. Article 26. The present law shall be sent to the Executive Power for its publication and other constitutional purposes. Done in the Hall of Sessions of the Honorable National Con- gress, on the 28th day of the month of April, 1894, the 51st year of Independence and 31st of the Restoration. The President : Jorge Curiel. Secretaries: R. Garcia Martinez, C. Noboa, hijo. Let it be executed, communicated by the proper Secretary, and published in all the territory of the Republic for its enforce- ment. Done in the National Palace of Santo Domingo, Capital of APPENDIX 307 the Republic, on the 28th day of the month of April, 1S94, the 51st year of Independence and 31st of the Restoration. The President of the Republic, U. Heureaux. Countersigned : The Minister of Finance and Commerce. Rivas. INDEX Africa, gold standard in, 92. Agricultural products, rise in prices of, 36, 41 ; fall in prices of, 46. Agriculture, deterioration in, 122; causes of unrest in, 152-175. See also Fanning. Alpaca, fall in price of, 50. Anaconda mine, 49, w. Animal products, prices of, 36, 124. Arendt, Dr., 39, n. Asia, gold standard in, 92. Assets, bank, 147-151, 277. Australia, wool production of, 50. Austria-Hungary, clearing-houses in, 72; gold standard in, 91; note cir- culation of, 69. Banco Nacional de Santo Domingo, 231. Bank, deposits, 17, 18; loans, 83-85, 99-101; loans in relation to re- serves, 146-149; reserves of the world, 65. Bank-notes, constitutionality of, 272; convertibility of, 275; only elastic currency, 273, 274; and the money power, 268; profit not due to, 270; and prices, 181; fund for redeem- ing, 235-239; safety of, 278. Bank of England, use of checks by, 269; rate at, 64; no special reserve before 1844, 235. Bank of France, use of checks in, 72; rate at, 64; reserves and note cir- culation of, 65. Bank of Germany, rate at, 64. Bankers, service of, 295-297. Banking, inflation in, 145-151; mod- ern, 233, 234. Banks, functions of, 273; the rail- ways of credit, 234; profits of, 240, 241 , 295 ; free disposal of bonds by, 244, 245; amount of deposits and loans, 1 88 1, 245; separate fund of, for redeeming notes, 235-239; withdrawal of circulating notes by, 2 37 -2 39> 2 5°> 2 555 contraction of reserves of, 255; can be forced to redeem notes, 275; panics disas- trous to, 269, 270; variation in rates of discount in European, 42. Beef, rise in price of, 123, 124. Beet-sugar, 44, 45. Bills of Exchange, 72, «., 74. Bond, George William, 50, «. Bonds, interest rate and value of, 243; term and value of, 242; re- quirements as to 3 per cent., 248- 252. Boots, price of, 53, 141-143. Borrowing, government, by issuing forms of money, 264, 265. Bourne, 39, «., 60, n. Brazilian coffee, fall in price of, 46. British Indian Currency Committee, 209, 227. Bryan, W. J., 153. Burchard's table of prices, 33. Bureau of Labor, tables of, 102, 104. Business men, high quality of, 294- 298. Cacao production, 201. Cairnes, on movement of prices and gold value, 57. Cane-sugar production, 45. Cars, price of, 53. Cattle, supply of, 124, 125. 309 3io INDEX Cernuschi, 66, n. Chambre de Compensation, 72. Checks, increased use of, 71, 72, 180, 269, 271; and prices, 181; in United States, 71, 180, 271. Chicago convention of 1896, 153, 192. Circulating notes, 237, 250. Civil War, American, 41. Clearing-houses, 71-73. Clothing, price of, 141. Coal, fluctuations in price of, 51; lowered cost of production of, 47, 48^ Cochineal, price of, 50, 51. Coffee, price of, 45, 46. Coinage, gold, 61, n., 62, w. Combinations, monopolistic, 127- 129. Competitive prices, 82. Congress, blunders of, in financial matters, 233, 257; panic forcedjby, 254- Convention of 1897, 287-293. Convertible paper money, 137, 138. Co-operative societies, 133, 134. Copper, price of, 49. Corporations, crusade against, 193; and large production, 194, 195. Courcelle-Seneuil, 56, n. Credit, meaning of, 20-22; inflation of, 145-151; injured by paper money, 264; and prices, 22, 23, 83; as purchasing power, 39, 40. Crimean War, 41. Cuba, mahogany from, 52. Debtors, legislative favors to, 187. Demand for goods, what constitutes, 12,13; and prices, 99; and supply, 43- Demand notes, 263. Deposit currency, 17, 18. Dingley Act, the, 109-111, 128. Dunbar, C. F., 18. Duties, protective, 108, 128. Dyes, aniline, 50, 51. East, farming in, 160, 161. Economist table of prices, $3, 34, 36, 41, «., 59, 101. Egypt, gold standard in, 92. Elastic currency, 273, 274. Ellstaetter, 207, n. "Endless Chain," the, 261. England. See Great Britain. Europe, addition of gold to, 41, w.; increased paper issues and prices in, 143, 144; variations in bank discounts in, 42. European War and inflation, 137- 151- Exchange, evils of fluctuating, 207, 209. Exchange, media of, and standard commodity, 3; increase of, 4; effect of quantity of, 9; demand for, 15-20; many kinds of, 17; and prices, 4, 5, n, 178-182. Exchange value of money, 1. Falkner table of prices, 86. Fanaticism, 153-155. Farming, special conditions sur- rounding, after 1873, 157 et seq.; overdevelopment in, 167-171; Western and Eastern, 160, 161. Farm-lands, increase in value of, 123; speculation in, 167-171. Farms, movement from, to cities, 165-167; rise in prices of products of, 103, 120-126. Farrer, T. H., 227. Federal Reserve Act, 150, 258. Federal Reserve banks, 139, 147, 150. Fisher, Irving, 138. Food prices, rise in, 120-126, 141, 142. Forney, M. N., 53, n. ' Forsell's table of prices, 60. Fowler, 37, «., 45, n.; on English trade, 74, n. France, clearing-houses in, 72; com- petition of, with England, 37; note circulation of, 69; movement of INDEX 3ii prices in, 33, 34; wages m, "5- Franco-German War of 1870, 42. Frewen, 39, «., 55, »., 58, »., 66, n. German bimetallists, 39, n. Germany, 42; clearing-houses in, 73; trade competition of, 37; gold demand by, 32, 61 ; gold standard in, 91; note circulation of, 69, 70, «.; inconvertible paper adopted by, 138; movement of prices in, 33-36, 86, 102; rise of wages in, 76. Giffen, Robert, 32, 39, n., 44, n., 58, 60, «., 6i,n., 63, 67, 68, 71. Gold, annual supply and existing stock of, 94, 95; coinage of, 61, n.; demand for, 61, 90-94; increase of, in circulation, 70; international shipments of, 73; in private insti- tutions, 93, 94; prices, 1850 to 1915, 85-87; annual production of, 62, 66-68; production, 1850 to 1915, 87-89; quantity of, and prices, 7, 14, 15, 80, 81, 97-102, 135,182-185; reserves in banks of the world, 65; in Federal Reserve banks, 139; scarcity of, 32, 61-63, 172; transactions without, 180; value of, and prices, 31, 57, 61, 178-180. "Gold-exchange standard," 198. Goschen, Mr., 32, 39, «., 44, 46, 54, 55. 59> »•> 61, 62, 65, 70. Government notes, cost of issuing, 260-262; "a loan without inter- est," 262; credit injured by, 264; mere presence a menace, 265; whim of government only limit, 266; false doctrines concerning, 267; uniformity of, 272; failure to redeem, 275; value of, not de- pendent on wealth of country, 276; no assets for, 277; and political issues, 278. Great Britain, bank reserves and note circulation of, 65, 69; use of checks in, 71, 72, n., 180, 269; gold circulation in, 62, 67; gold in in- ternational trade, 74, n.; gold value and prices, 101 ; movement of prices in, 33~37, 58, 59, 86; wages in, 115; war-time prices in, 143. Greenbacks, convertible, 259-261. Hadley, Professor Arthur T., 2, «., s . 3 : n ' Haiti, 198, 199. Hamburg table of prices, 33, 35, 36, 57, 59- Hayes, John L., 50, n. Hayes, President, 257. Helfferich, J., 39, «. Heureaux, Gen. Ulisses, 203. Hogs, price of, 1 24. Horton, S. Dana, 67. Hume, price theory of, 96. Huskisson, 39, n. Importations, duties on, 108. Improvements, 44; in iron industry, 47, 48; effect of, on prices, 57, 107. India, monetary conditions in, 208- 210; gold standard in, 91; price readjustment in, 215, 216; limita- tion of silver in, 227; rise of silver prices in, 74, n., 217, 218. Inflation and European War, 137- 151- Interest, changes in rate of, 19, 243. International trade, 24-26, 42, 73. Iron, price of, lowered by improve- ments, 47, 48. Italy, clearing-houses in, 72, 73; gold demand by, 32, 61, n.; note cir- culation of, 69; specie given up by, 41; wage rise in, 76; war of 1859 m, 41. Jacob, 39, n. Japan, tea production in, 45. Jevons, 39, n. Kinley, Prof., 1, n. K.nux, Comptroller, 240, 249. 312 INDEX Labor, efficiency of, 116-118; agri- cultural, 122. Lambach, Carl, 106. Laveleye, 38, 56, 58, »., 61-63, »•> 67- Lawful money, 238, 239, 250, 255. Lead, price of, 49. Lecky, Mr., 280. Legislation and prices, 187-189. Leroy-Beaulieu, 42, «., 45, «., 46, n., 47. 5°. «•» 55> »•» 72, »., 73- Liberty bonds, loans to pay for, 151. Lime, cost of production of, 47, 48. Live stock, prices of, 124. Living, higher standard of, 134. Loans, bank, 83-85, 99-101, 254- 256; on demand, objectionable, 263; profit from discount on, 270; and reserves, 146-149; for liberty bonds, 151; for war munitions, 149-151. Magee, J. D., 87, n. Mahogany, price of, 52. Manufactured goods, 36. Materials, duties upon raw, 109-114. McKay welt-machine, 53, 54, n. Meat, rise in price of, 123-125. Merchants' Petition, 293. Metals, speculation in, 42. Mexican silver dollar, the, 206, 211, 230. Mill, J. S., 2, «.; on the quantity theory, 38-40; on fall of prices, 75, 76. Mineral products, prices of, 36, 42. Mitchell, W. C, 86, n. Mohair, price of, 50. Monetary Commission, the, 286, 289-293. Money, usage of the term, 2; ex- change value of, 1; functions of, 3; demand for, 15-20; demand for cheap, socialistic, 190; legisla- tive control of, 177; quantity theory of, 27, 30, 38-40, 182-186, 189; quantity of, and demand for goods, n-15; as a standard and as medium of exchange, 178-182. Money-orders, international, 74. "Money power," the, 268. Monopolistic combinations, 127-129. Mulhall, 38, 39, «., 60, n. y 61, «., 72, «., 74, n. Nasse, 217. National Bank Act, 1864, 236; Act of 1874, 238. National City Bank of New York, 269. National Debt, Act to Facilitate Refunding of, 247-251. New England farms, 159. New York, banking system in, 235. Nicholson, 2. Nitrate of soda, fall in price of, 51. Note circulation of the world, 64, 65, 69. Ocean transportation rates, 54, 55, 142. O'Conor, J. E., 74, ».; table of prices of, 217, 218. Optimism, American, 284. Ore, reduced cost of production of, 47, 48. Overstone, Lord, 137. Palgrave, 59, 71, ». Panic of 1873, 4i~43, 155-1575 of 1857, 41; of 1881, 254; of 1893, in, 112, 130; of 1907, 274. Paper money, 190; convertible, 137, 138, 258, 259; credit injured by, 264; depreciation of, in Europe, 143, 144; fall in price of, 51, 52; gain in security of, 70, 71; value of, and prices, 179, 180. Payne-Aldrich Act, 108. Penzance, Lord, 50, n. Pepper, price of, 47. Petition, right of, 293. Pig iron, price of, 48. Politics, monetary questions in, 191- 193; and government paper, 278; indifference toward, 280. Populists, 153, 158, 177. INDEX 313 Price, explanation of, 6-S, 178-180. Prices, actual process of determining, 9-1 1 ; demand and supply in mak- ing of, 19, 20; summary of forces determining, 78-85; and credit, 22, 23; effect of media of exchange on, 4, 5; fall of, due to changes in cost of production or to new sup- plies, 44 et seq.; legislation to raise, 187; influence of gold supply on, 8, o, 14, 15, 32, 57-61, 95-102; and international movement of specie, 24-26; three periods in movement of, 3; and rate of in- terest, 19; affected by lowered standard, 184, 185; variations in, 102-106, 186-188; unsettled is- sues in theory of, 27-29. Profits, fall in rate of, 75. Prussia, war of, with Austria, 41. Purchasing power, theory of, 11-15, 81, 82. Quantity theory of money, 27, 30, 38-40, 182-186, 189. Railroad cars, fall in price of, 53. Raymond, R. W., 50, n. Refunding bill of 1881, 236, 239, 247- 251; Carlisle section of, 247, 253, 256; passed by Congress, 251- 253; veto of, 257. Rents, 75. Reserves, cost to maintain, 259-262. Retail prices, 131-135, 141. Ricardian theory, 8, 16, 24, 26, 96. Rich, extravagance of the, 134, 135. Royal Commission, Report of, 59, «., 64, n. Russia, note circulation of, 69. Saltpetre, price of, 51. Santo Domingo, origin of plan for monetary system of, 197; soil and climate of, 198; nature of inhabi- tants of, 199; products of, 199, 201 ; railways and telegraph-lines, 202, 203; public finances of, 203; former monetary system of, 204- 206; compared with India, 208- 210; effects of gold standard in, 211-214; export duties of, 212; fluctuation of revenues in, 213; readjustments of prices in, 215; sudden rise of silver prices, 216, 217; merchants of, and fall of sil- ver, 221; wages in, 219-221; laborers in, favored gold, 220; requirements of new legislation, 222, 223; monetary unit adopted, 223, 224; system of redemption, 225-229; limitation of silver coin- age, 226-228; management of Mexican dollar in, 230; legal ten- der of, 230; means of providing new coinage of, 231; monetary system of, 299. Sauerbeck's table of English prices, 33. 34, 36, 86, »., 101. Scott, W. A., 2, n. Seager, 2, n. Sherman Act, the, 173. Sherman, Secretary, report of, 262, n. Shoes, fall in price of, 53, 54; rise in price, 141-143- Silver, in bank reserves, 65; free coinage of, 158, 172-176, 190-193; demonetization of, 61, 77, 93; in Santo Domingo, 211-232. Socialism, 188-196. Soetbeer's table of prices, 33, 34, 36, «., 39, »., 62, »., 64, «., 76, 88, n. South America, gold standard in, 92; nitrate of soda deposits in, 51; wool production of, 50. Specie, amount of, in circulation, 70, 71; international movements of, 24-26; table of reserves, 64, 65. Speculation, 129-131; in farm-lands, 167-171. Standard commodity, and media of exchange, 3, 4; supply of, 5, 6. Staves, white-oak, price of, 52. Steamships, 55, 161. 314 INDEX Suez Canal, 55. Sugar, production of, in Santo Do- mingo, 201; reasons for fall in price of, 44, 45. Tariffs, effect of, on prices, 108-111, 128, 129; socialism stimulated by, 194. Taxation, effect of, on prices, 108- 112. Tea, price of, 45, 46. Telegraphs, 55. Tin, price of, 49, 50. Tobacco cultivation of Santo Do- mingo, 201. Trade, international, 24-26, 42, 73. Transactions, increased, and demand for money, 15-20. Transportation rates, 46, 47, 54, 55, 142, 161. Treasury, fiscal and monetary func- tions of, 263-265. Turkey, gold standard in, 92. United States, use of checks in, 71, 180, 271; competition of, in for- eign markets, 37; gold demand of, 61, «.; gold standard of, 91, 143, 144; monetary legislation of, 280- 285; demand for monetary re- form in, 285-293; note circulation of, 69; overtrading and extrava- gance, 1867 to 1873,42; price level in, 102; wages in, 76, 114, 115. United States bonds, fluctuations in value of, 242-244. Vienna, bank exchanges in, 72. Wages, rise of, 75, 76, 114-118; and prices, 140. Walker, Amasa, 2, 137. War Finance Corporation, 150. War munitions, 149, 150. War-time prices, 141-144. Wealth, 276. Weeks, Joseph D., 48* Welby, R. E., 227. West, farm-lands of, 160, 161. West Indies, sugar of, 44, 45.' Western farming, overdevelopment; in, 167-171. Wheat, freight rates for, 54; prices 1 of, 45-47, 96, 97; production of, 162-164. Wholesale prices, 120-131. Wilson Act, the, no, 112. Wool, prices of, 50; tax on, 109, no. UNIVERSITY OF CALIFORNIA AT LOS ANGELES THE UNIVERSITY LIBRARY This book is DUE on the last date stamped below j^stW <& V 153 APR 2 7 1955 NOV « 1958 JA N 2 8 RECti ' Form L-9 20ttl-l,*42(S519) UNIVERSITY OF CALIFORNIA AT LOS ANGELES LIBRARY HG .229- L36m Laughlin 192 Mone y and prices J wv ia-> HG 229 L36m 1920 )CSOUM^?iSi^ L iS}^«|^«iTu AA 000 568 087 1