STABILITY OF GOLD AND SILVER VALUES.
_Gold-Standard Prices._
Having considered theoretically the limitations and possible merits
and defects of the money systems now in use, we shall next consider in
how far the money under such systems conforms in practice to the chief
requirement,--stability of value.
Economic writers do not claim that either gold or silver is, or has
been, of invariable value; but many of them do claim that gold is more
nearly invariable than any other commodity, and that it is sufficiently
so for money purposes, the changes in value being slight and covering
long periods of time, so that from year to year they are almost
imperceptible. Other writers claim that silver has been, of recent
years at least, more stable in value than gold, and is therefore a
better measure of value.
The merits of these claims can be tested, in the same way that the
stability of value of any commodity can be tested, by a comparison of
the average purchasing power of each metal at different times.
Prof. F. A. Walker, in the work already cited, observes, regarding
money value under the gold standard as tested by average prices:--
"Not to speak of the enhancement, many fold, of the value of money
through the Silver Famine of the Middle Ages, or of the sudden and
extensive decline which has been referred to as taking place between
1570 and 1640, it is estimated by Professor Jevons that the value of
gold fell 46 per cent. between 1789 and 1809, that from 1809 to 1849 it
rose 145 per cent., while between 1849 and 1874 it fell again at least
20 per cent."
Coming down to more recent times, we have more full and accurate data,
and there have been several careful compilations and averages of prices
made in different countries. The report of the Finance Committee of the
United States Senate, 52d Congress, on "Wholesale Prices, Wages, and
Transportation," known as the "Aldrich Report," is doubtless the most
accurate and complete examination of prices in this country from 1840
to 1892 that has ever been made. This report also gives for comparison
the tables of Soetbeer and Sauerbeck (two of the most distinguished
European statisticians), and the table of the _Economist_ (London) as
to foreign prices, all reduced to the same basis, and to United States
money units in gold.
In order to facilitate comparison of these data, the tables have been
platted as diagrams in Plate 1. All the tables were prepared by taking
the prices of a selected list of commodities for the year 1860 as 100,
and calculating the variations in the price of each commodity from
the price of that year as a percentage of rise or fall. The average of
these percentages for each year represents, therefore, average prices
for that year, as compared with 1860, and it is these averages which
are platted in the diagrams.
The list of commodities selected by the Senate Committee embraces 223
articles for the years subsequent to 1860. Prior to that time the
number was less, varying from 85 to 223, according as data were to be
had.
Dr. Soetbeer's table shows prices in the port of Hamburg, Germany, of
100 commodities, mostly raw materials, joined with the export prices of
14 commodities (manufactures) in England, from 1851 to 1891.
Mr. Sauerbeck's table shows English prices of 56 commodities from 1846
to 1891.
The _Economist_ table also shows English prices of twenty-two
commodities from 1860 to 1892.
The discrepancies between these different authorities, as shown by the
variations in the lines of the four diagrams, call for a few words of
explanation.
It would naturally be expected that some differences in average prices
would exist between different countries, and part of the discrepancies
may be accounted for in this way, since there are included in all the
tables, among other commodities, such as wood and coal, of which the
prices might vary considerably in different countries independently of
one another.
Several changes in the tariff in this country during the last fifty
years would account for some discrepancies between United States prices
and the others. Furthermore, the method by which these tables were in
the main prepared, that of taking simple averages of the percentage of
rise or fall in price, thus giving to each commodity the same weight
in the result, regardless of its importance in commerce, is open to
serious objection, and doubtless accounts for many of the discrepancies
that exist. For example, the great rise in prices during the period
of our civil war, as shown in the _Economist_ and the United States
tables, above those shown in the other two tables, is doubtless due
to the fact that in the _Economist_ table, four out of the twenty-two
commodities in the list are either raw cotton or cotton manufactures,
and the great rise in price of cotton during the war (a rise of from
300 to 400 per cent.) is given an undue importance in the result.
The same cause may affect the United States table, to some extent,
but a more potent factor in this table is the circumstance that this
country, during the period, was using an inconvertible paper money in
which all prices were expressed, while gold was a commodity subject to
speculation, and the price of which was much affected thereby; and,
in reducing currency prices to gold prices, for this table a somewhat
abnormal result is produced.
The _Economist_ list, it must be said, contains too few commodities to
be a reliable index of all.
The United States list is sufficiently large, but the articles selected
may be open to some criticism.
The lists of Mr. Sauerbeck and Dr. Soetbeer are preferable, but all
are open to the objection, above noted, of not giving a weight to
each commodity in proportion to its importance, and none of them can
therefore be regarded as anything but approximations to the truth. They
embrace, however, the best information on the subject extant.
The United States Committee did, in fact, endeavour to balance their
own list in accordance with the relative importance of the articles
in another table, but the result is not wholly satisfactory, as the
weighting of the averages was done by groups of articles instead of
individually for each. It represents, however, probably the most
accurate information as to the purchasing power of gold in this
country from 1840 to 1892 that can be obtained, and as such has been
platted in Plate 2, in a reverse form; that is, assuming that the 223
articles of the list, weighted according to their importance, fairly
represent _all_ commodities, and that therefore their value as a whole
is constant (since the values of all commodities cannot rise or fall
simultaneously). The diagram shows the relative values of gold for the
different years as a percentage on the value of 1860 taken at 100. In
other words, it shows the relative average purchasing power of gold in
this country in the different years.
With these explanations of the diagrams, and the limitations of the
tables from which they were platted, we can proceed to consider their
points of resemblance and what they teach.
It is evident from all of them that a great decline in average prices
has been going on, almost continuously, since 1873, in the various
commercial countries. This is a fact conceded by all students of prices.
What is equally apparent, however, but does not seem to be so generally
appreciated, is the violent fluctuation in prices, or in the value
of gold, from one year to another, amounting in many instances to
from 5 to 10 per cent. in a single year, and, during the war, to much
more. Doubtless if the tables had shown the fluctuation of prices by
months or days, instead of the averages for each year, a much greater
variation in the value of gold would have been apparent at times,
and within a shorter period than a year. Furthermore, the prices of
staple commodities (and most of the commodities in all the tables are
staples), while representing correctly the _character_ of the changes
in price of all commodities, would naturally not vary as much as the
prices of many more speculative articles of commerce. It is probable,
therefore, that gold has varied in value to a greater extent, and
within shorter periods, than is shown by the diagrams.
It would be impossible to trace all the various causes that have
produced these changes in money value, but a few of the more prominent
ones may be indicated as showing their great variety and force.
From 1840 to 1849 a great decline in prices is noticeable, similar to
the decline that we know has been going on in the last twenty years.
This is doubtless due in both cases mainly to increasing demand for
money, caused by growing population and expanding commerce, and which
the supply of gold and silver or substitutes therefor did not keep pace
with. From 1850 to 1857 prices generally rose, owing to the increased
gold production in Australia and California, aided doubtless by the
increased use of credit which rising prices always stimulates. The
collapse of this credit in the panic of 1857 sent prices down again.
The slow recovery from this condition was greatly enhanced by the
breaking out of the Civil War, during which thousands of men were
destroying instead of producing, thus raising the prices of nearly all
commodities by decreasing the supply and increasing the demand relative
to gold, while meantime the demand for gold was lessened by the use of
paper money in this country. The disbanding of the armies at the close
of the war, and the return of labour to productive enterprises, lowered
prices rapidly during 1867, 1868, and 1869. From this depression
they recovered almost as rapidly in the era of development from 1869
to 1872, the large production of silver from the Nevada and other
discoveries during that period assisting greatly in this recovery, and
the usual extension of credit at such times also contributing. This
credit collapsed in the panic of 1873, and the demonetization of silver
by several European nations about the same time prevented any increased
production of silver from affecting the decline which then set in, and
which has with one or two reactions been continuous ever since.
In the light of the facts, shown by these diagrams, any claim for even
approximate stability of value for gold, or for the money as a whole
on the gold basis, under the systems now in use, is preposterous.
Moreover, the change has been, of late years, of the worst kind,--an
increase of money value. If it were steady, its effects could be
calculated and discounted to some extent, but caused, as it is, by a
variety of forces of varying strengths, the increase is at some times
wholly nullified, or even turned to a decrease, by extensions of
credit, while again it is doubled in effect by the withdrawal of such
credit.
The reason for this great decline in prices, or the increased value of
gold, is not far to seek when we consider the relative strengths of
the forces acting on gold value. Population, wealth, and diversity of
occupations have all increased greatly over the whole civilized world,
requiring a much greater amount of money to do the business of the
world. There has been, to be sure, as an offset to this, a considerable
increase of banking facilities and some greater use of credit paper in
its various forms; but all these were in large use prior to 1873, and
their increase can hardly have been so great as to meet the demands of
growing commerce. Furthermore, of the other forces tending to raise
the value of gold, the annual product of that metal has not increased
materially, though the demand for it for other than money purposes has
increased largely, leaving a less increment to neutralize the waste and
to increase the supply of it. And lastly, many countries, as we have
seen, about the year 1873 so changed their monetary laws as to use a
much greater amount of gold, and a less amount of silver or paper. The
United States alone, it is estimated, now uses about $600,000,000 of
gold coin, while in 1873 it used practically none.
The effects of this increase in the value of money have been--as the
effects of falling prices always are--detrimental and disastrous in all
gold-standard countries, to an extent that cannot be measured. Offset
at times by increased use of credit, enterprise and industry have been
able to rise to a success that an honest money would make their normal
condition, only to be dashed down again by the collapse of credit with
nothing to take its place.
_Silver-Standard Prices._
There is a quite prevalent belief that the value of silver has fallen
greatly since 1872. This is a natural sequence to the belief that gold
has been stable in value, as the gold price of silver has declined from
$1.32 per ounce in 1872, to $0.82 per ounce in 1892 (and since then
the decline has been much more). This fall of about 38 per cent. must
be deducted from the rise of from 24 to 41 per cent. (according to
the different authorities) in the value of gold, in order to show the
true change in the value or purchasing power of silver. It is evident,
therefore, that the value of silver has been much more nearly constant
than that of gold.
This is confirmed by the statement of Mr. David A. Wells, in his work
on "Recent Economic Changes," p. 236. There, Mr. Wells remarks:--
"In exclusively silver-using countries, like India and Mexico, the
decline in the value of silver has not appreciably affected its
purchasing power in respect to all domestic products and services; but
the silver of such countries will not exchange for the same amount of
gold as formerly, and it might be supposed that, owing to this change
in the relative value of the two metals, the silver of India, Mexico,
and other like countries would purchase correspondingly less of the
commodities of foreign countries which are produced and sold on a gold
basis. But the people of such countries have not thus far been sensible
of any losses to themselves thereby accruing, for the reason that the
gold prices of such foreign commodities as they are in the habit of
buying have declined in a greater ratio since 1873 than has the silver
which constitutes their standard of prices."
He also says, in an article in _The Forum_ for October, 1893:
"Testimony was given to the recent British Commission on Indian
currency, that within the last twenty years half of the silver prices
of commodities in India have risen and the other half fallen."
In Plate 2, the dotted line shows the variations in the value of silver
since 1872. This diagram is platted from calculations of the percentage
of decline in the gold price of silver, taking the price of 1872 as 100
(this was also practically its price from 1840 to 1872, since the ratio
of 15-1/2 of silver to 1 of gold was maintained within narrow limits
during that time), and deducting these percentages of decline from the
percentage of increase in gold value.
In considering the relative constancy in the value of gold and silver,
the lines representing each should be compared with the level price
line of these metals in 1872. It will be noted that while silver has
kept closer to this line than has gold, and on the average has varied
but little from it, yet the fluctuations in the value of silver from
year to year are quite as marked as in the case of gold.
It will also be noticed that prior to 1872, under a bi-metallic
standard, both metals, while maintaining a constant relation to each
other, fluctuated in value quite as extensively as either alone has
done since.
The facts here shown as to the experience of this and other countries
for the past fifty years, bear out the theoretical conclusions before
stated, that the value of money, under any of the systems that have
been used, is subject to violent fluctuations from year to year, due to
a great variety of causes which are entirely beyond control, and that
neither silver nor gold singly, nor both combined, has ever proved a
reliable standard of value.