% 1906 1905 1904 1896
British Consols 2½ 86½ 89⅛ 88½ 113⅞[1]
Met. Consols 3½ 102 104 104½ 128¾
London County 3 88½ 94½ 93 128¾
Leeds 4 108 109 111½ 130½
Liverpool 3½ 107 109 109 144¼
Manchester 4 123 128¾ 124¾ 159
New South Wales 3½ 100½ 100 96 112¼
Queensland 3½ 99½ 99 96 111½
Canada 3 98½ 100½ 97 107¼
Cape 3½ 97 98 95 120
Lon. & N. Western 3 93 96 95 124¾
Midland 2½ 76 79 78 124¾[2]
Great Western 4 123 127 123½ 164
----- ----- ----- ----- -----
Average 3.3 100.2 101.8 100.9 128.4
[1] Then 2¾%.
[2] Then 3%.
“Thus,” comments the writer, “these 13 British bonds,
supposedly the safest and least speculative of all
securities, have declined an average of over 28
points in ten years. Considering incomes and present
prices, the unfortunate investors in these bonds have
not only received less than 1% on their investments,
during the last ten years, but, should they sell
their bonds, they would find that the proceeds have
lost 30% of the purchasing power of a similar amount
ten years ago. Altogether, they have suffered a net
loss, over incomes, of more than 20%, or over 2% a
year.”
There are other economic influences affecting interest rates through
gold supply, but the one given appears to the writer the most direct
and forcible when applied to readjustment of prices to income.
In weighing the influence of increasing gold production and its effect
upon interest rates through the advancing prices of commodities, the
student is liable to fall into one grave error. He may perhaps jump
to the conclusion that gradually advancing prices of commodities
mean gradually advancing rates of interest. This is not at all the
case. A sustained ratio of advance means sustained high rates of
interest--nothing more. In order to make this clear let us go back to
the original principle.
Increasing prices for commodities mean an impairment of the purchasing
power of money. If the purchasing power of money is impaired 2% per
annum through increasing prices of commodities, and the normal rate
of interest is 4%, we can cover the deficiency by making the interest
rate 6% _and leaving it there as long as this ratio of impairment is
maintained_. In other words the man who loans $1,000 at 6% loses $20.00
per annum in the impairment of capital and receives normal interest of
$40.00 per annum and $20 extra to cover his loss in capital. Strictly
speaking the extra 2% is not interest at all, but an amortization
payment. It matters not how high prices ultimately go, he receives each
year a bonus sufficient to cover his loss in capital, and the interest
rate remains 6%.
Therefore, if prices of commodities advanced for ten years and then
ceased to advance, but were maintained at the highest figures reached,
interest rates would fall because there would be no further impairment
of capital, and what was formerly amortization, would become usury. On
the other hand, if a new ratio of increase should occur in commodity
prices and they should advance 4% per annum, interest rates would, if
fully adjusted, reach 8%-4% for normal interest, and 4% for impairment
of capital.
_2--The effect upon Common Stocks of Railroad Corporations._
Here the effect of high interest rates is, or in time may be, offset
by returns in the form of dividends, undivided profits, improvement of
property, or the fact that income is not limited. But there is another
trouble, and a serious one, for which the gold supply is responsible.
If the increasing supply of gold is responsible for higher commodity
prices it must be at once apparent that the building, equipment
and maintenance of railway properties costs more and more as all
commodities, including labor, advance in price. This would be all
right if the selling commodity, i.e.: transportation, also advanced
proportionately in price; but it is so difficult to override popular
prejudice and widespread misunderstanding on this point, that we find
continued agitation and legislation not only against advancing rates,
but with a view to reducing those which already obtain. There must,
of course, be a limit to this thing, and if the cost of production
continues to increase, the railroads must be permitted to demand
higher prices for transportation. Otherwise a point would finally
be reached where every railroad in the country would be forced into
bankruptcy. The great danger lies in a belated assimilation of
this truth by the masses, and too much demagoguery on the part of
politicians who do understand, but, being politicians, prefer to
reflect the views of a majority of constituents, rather than to enter
a campaign of proselyting. That evils have been fostered and wrongs
committed by eminent railroad financiers is certain; but there is
considerable confusion of ideas on this head. Over-capitalization,
illegal combinations, manipulation of funds for private gain, and the
swelling of dividends for stock-jobbing purposes, when the funds so
distributed should have gone into improvements or surplus, have all
played their part in arousing the wrath and indignation of the great
majority, and they are, as a class, prone to jump to the conclusion
that any and every railroad corporation is charging unduly high rates
for its services, and making exorbitant returns on invested capital.
This has, no doubt, been more or less true in the past in certain cases
where extremely high rates were made, and the apparent returns on
money attenuated by over-capitalization; but this evil is gradually
decreasing, and the real fight is, or should be, against these abuses.
The railroads are suffering for the sins of the past, and may suffer
still further; but the time is not far distant when, unless conditions
change radically, the railroads must be allowed more latitude in the
adjustment of rates.
The prevalent opinion, that needed reforms which strike at the root
of the evils mentioned above is a bear argument, is another popular
fallacy. Such reforms intelligently conceived, and unswervingly carried
out, are all in favor of the small shareholder. If laws can be enacted
which will prevent individual interests from plundering or misusing
the funds of corporations, and which will compel these corporations to
issue reports and statements which are not so involved and complex as
to be beyond the ordinary comprehension, the small holder or investor
will have a better show. But, having cured these evils, no laws can
possibly endure which contemplate curtailing fair returns on money, and
fair profits through natural enhancement in values.
But, however fair or cheering this view may appear, the fact remains
that it will be slow in its acceptance and slower in its operation. We
may therefore summarize the situation thus. Increasing production of
gold brings about increasing cost of operation, and so long as cost of
operation is advanced with no corresponding advance in selling price of
transportation, the ratio of profits will gradually decrease until a
vanishing point is reached.
In the last analysis, a probable tardy and reluctant recognition of the
true status of the case warrants the belief that for the near future,
the railroads have a hard time ahead of them, and that so far as this
single important influence is concerned, it is decidedly a bearish
factor.
_3--The effect upon stocks of industrial corporations._
Here we have a different proposition. Rising prices for commodities
do not interfere with the earning power of corporations which produce
and sell commodities, the prices of which are not limited by law. In
fact these corporations are, in many cases, gainers by this influence
which tends to advance prices, not only of what they buy, but of what
they sell. It may be added, parenthetically, that railroad companies
which own valuable coal lands, etc., find the bad influences already
discussed partially offset by the gain from such holdings. The railroad
company, however, may be considered as pre-eminently a seller of
transportation and has been so regarded herein.
The industrial corporations whose products are subject to regulation
by law, such as gas and electric lighting companies, are subject to
practically the same influences as those which operate against the
prices of railroad stocks. Their cost of production advances easily
and inevitably, and the selling price remains fixed, or advances with
difficulty and under protest.
_4--The effect on speculative commodities--Wheat, Corn, Oats, Cotton,
etc._
This phase of the subject will be dismissed with a few words. If the
contentions already made are accepted, it is apparent that all such
commodities will gradually seek a higher level. A brief examination
of statistics will show that this readjustment has been going on for
years. The gradually ascending pivotal point, or average price, is
particularly marked in the cheaper cereals,--corn and oats, and also in
cotton. This is probably due to the fact that wages have not advanced
as rapidly as have prices of living. It is found that in periods of
hard times consumption of cheaper foodstuffs and textile fabrics
is increased, while the consumption of higher priced commodities
and luxuries are curtailed. The wage-earner, therefore, has been
in reality living in a regime of hard times, although this fact is
easily submerged by steadier employment, by a fictitious appearance
of general prosperity, and the ability to spend a larger number of
dollars, without realizing fully the loss of purchasing power in the
dollars.
It would be out of the question to attempt to enter anything like
a comprehensive study of the question of gold production and its
effects in a single chapter, or even in a single volume; neither is it
necessary to the purposes of this work, for the student who desires
a comprehensive education in this regard will find ample means and
material ready to his hand. From the standpoint of investment and
speculation alone, it is submitted that increasing production of gold
is, to use the phraseology of the street, bearish on long time bonds
and other securities yielding a limited rate of interest or income,
temporarily bearish on railroad stocks, bullish on industrial shares,
except as noted, and bullish on speculative commodities.
At the risk of indulging in undue reiteration, attention will again be
called to the fallacy of considering such subjects as the one of gold
production too remote in concrete effects, or too sluggish in operation
to be of importance to the speculator. A thorough understanding of
cause and effect bears upon the operations of today, in that it
anticipates the results of tomorrow. Through knowledge of influences of
this character, serious error may be avoided. For example, one of the
profound axioms of the speculative world is that bonds advance first
and stocks afterwards. If we understand _why_ bonds have been, and are
at present, declining we may be justified in modifying this view and
considering the axiom more or less obsolete. He who operates an engine
without a clear understanding of its motive power is likely to get into
trouble, or perhaps be blown up.
It may be pointed out also, that a too literal acceptance of the
suggested effects of this or any other great price influence is highly
dangerous. Even while gold production continues to increase rapidly,
prices, not only of shares, but of all things, will overleap themselves
and will also swing backwards to the other extreme. The cycles are
not completed, until both zenith and nadir have been touched. Changes
in gold production will not prevent declines in prices; they will,
however, interfere with the regularity of the cycles.
This chapter may be fittingly closed with the following list of
conclusions reached by Mr. Holt, in the work already mentioned. These
conclusions cover all the points herein presented, and others which are
of interest and value:
“1--That both the output and supply of gold are
likely to increase rapidly for many years.
“2--That, therefore, the value of gold will
depreciate as the quantity increases.
“3--That this depreciation will be measured by the
rise in the average price level.
“4--That a rising price level, if long continued, is
accompanied by rising or high interest rates.
“5--That high interest rates mean lower prices for
bonds and all other long-time obligations drawing
fixed rates of interest, dividends, or income.
“6--Rising prices increase the cost of materials and
of operation and tend to decrease the net profits
of all concerns, the prices of whose products or
services either cannot be advanced at all, or are not
free to advance rapidly.
“7--Rising prices tend to increase the net profits of
all concerns that own their own sources of materials
and supplies.
“8--Rising prices of commodities tend to cause
the prices of all tangible property to rise. This
includes lands, mines, forests, buildings and
improvements.
“9--Rising prices of commodities and property tend to
increase the value of the securities of corporations
holding commodities or property.
“10--Rising prices and cost of living necessitate
higher money wages, though the rise of wages will
follow, at some distance, behind the rise of prices.
“11--As rising prices do not mean increased profits
to all concerns, many employers will not concede
higher wages without strikes.
“12--Rising prices and wages, therefore, mean
dwindling profits and troublous times in many
industries, with complete ruin as the final goal.
“13--Because wages will not rise as fast or as much
as prices and the cost of living, there will be
dissatisfaction and unrest among wage and salary
earners.
“14--Rising prices of commodities and property
encourage speculation in commodities, stocks and real
estate and discourage honest industry.
“15--Thus, rising prices, by diminishing the
incomes of ‘safe’ investments in ‘gilt-edged’
bonds and stocks and by increasing the profits of
speculators encourage extravagance, recklessness and
thriftlessness.
“16--As rising prices decrease the purchasing power
of debts, and thus aid debtors at the expense of
creditors, they discourage saving and thrift.
“17--Rising prices, then, by promoting speculation
and extravagance, increase consumption, especially of
luxuries, and, therefore, stimulate production.
“18--Rising prices, then, result in what is real
prosperity for many industries; but what is for a
nation as a whole, artificial or sham prosperity--the
result of marking up prices rather than of increasing
production.
“19--With prices, wages, rates and industries always
imperfectly adjusted to the ever depreciating value
of gold, and with instability and uncertainty
throughout the financial world, there cannot but be
a great shifting around of values and of titles to
property.
“20--As this shifting is to the advantage of the
debtors--the rich--and to the disadvantage of the
creditors--the great middle class--it results in
rapidly concentrating wealth in the hands of a
comparatively few.
“21--For all of these reasons a prolonged period of
rapidly rising prices is reasonably certain to
become a period of unrest, discontent, agitation,
strikes, riots, rebellions and wars.
“22--A rapidly depreciating standard of value then,
if long continued, not only produces most important
results in the financial, industrial and commercial
world, but is likely to result in changes of great
consequence in the political, social, and religious
world.
“In view of all the facts, results and possible
consequences connected with the increasing output
and supply of gold, The Wall Street Journal was
right when, on December 4, 1906, it said that ‘No
other economic force is at present in operation in
the world of more stupendous power than that of gold
production.’”