APPRECIATION OF GOLD.

Otago Witness, Issue 2104, 21 June 1894, Page 51

APPRECIATION OF GOLD.

The following is the first portion of the paper read before the Ofcago Institute by Professor Gibbons on "The Appreciation of Gold" :—

In speaking of the appreciation of gold we imply by the use of the term that there is some standard which remains invariable over the period of time under consideration, and to which the value of gold is tb be referred. Now, as the ordinary standard of value which we tacitly assume everything to be measured by is gold itself, and as we oannot determine tbe variability or constancy of gold by reference to itself without falling into the fallacy of assuming the' existence of the very thing we wish to prove, we are compelled to seek some other standard of reference. For this purpose there are two things present themselves t we may take either the relation of * gold to other commodities, or we may take as the standard the quantity of human effort. Adam Smith pointed out a century ago that labour and not any particular commodity, or set of commodities, is the real measure by which the value of silver and of all other commodities must be determined. In this context he refers to the change in the value of silver — at that time used as the standard of value— which took place at the end of the sixteenth and the beginning of the seventeenth centuries ; and the statement applies with the same force at tha present day to gold, which holds the place of universal standard among the advanced commercial communities as silver did at that time. Unfortunately he made no attempt to estimate the change in the value of silver as referred to the standard of labour, as the difficulty from the complexity of the question and the scanty nature of the materials would have been almost insuperable, but satisfied himself with discussing the variations of silver with regard to wheat— an important item bo doubt, bat still only one in the commerce and industry of the country. The gold discoveries in Australia and California, and the movement in prices which took place in 1852-60 caused the attention of economists to be directed to the subject, and in 1859 Mr Chevalier published a work on " The Probable Fall in the Value of Gold," in which he depicted the injurious effects of the fall which might be expected to take place, and proposed as a remedy to these evils that gold should be demonetised and a silver standard be resorted to in its place. In 1865 Jevosg published his paper on "A Serious Fall in the Value of Gold," in which the first attempt was made to measure the extent of the fall with regard to commodities. To do this he used the method of index cumbers. In this method some year is fixed upon as % the starting point, and the price at that date is represented by 100 ; the price at any subsequent time is represented by a number which bears the same ratio to 100 that the price at this date does to the prioe in the year chosen as the starting point. Thus if the price of an article in 1782— which was the year from which he started— was £10 a ton, and in 1850 it was £7 108, the index number in 1782 would be 100 and in 1850 it would be 75, thus giving at a glance the rise or fall per cent, in the price of the article at any moment. Now if a number of commodities are taken, and their index numbers added together and the total divided by the number of the articles the result may be looked at as giving the average change in price during the period in question. This is the index number obtained from taking the prices of 45 commodities by A. yon Sauerbeck, where the average prices 'of all the articles from 1867-77 was represented by 100. The Economist index number is obtained by adding together the prices of 22 articles, and the average price of 1845-50 is represented by 2200; so that to reduce these numbers to percentages they must be divided by 22. Jevons, in finding his index number, adopted a slightly different method. Instead of taking the arithmetic mean he takes the geometric mean — i.e., multiplies the index numbers of the 45 commodities he adopted together, and extracts by means of logarithms the forty-fifth root. The fluctuations in the index numbers obtained by this method are less than in the other way, but the general results obtained do not differ essentially. There is also another method by which the relative quantities of the different commodities are taken into account as well as their prices. Theoretically this last method should give more accurate results than either of the others ; but according to Professor Tanssig, of Harvard, by taking the simple arithmetic or geometric mean, it is striking how little the result obtained differs from the result of more elaborate computations. An examination of the diagram obtained

from constructing the carve of index numbers of general prices gives some instructive results. From 1782 to 1791 there is a weU marked fall, which, in the last year, is changed into a rapid rise, and the curve remains at a high level until the end of the great war, when it drops even more rapidly than it has risen. Between 1790 and 1815, the index number rises from 85 to 157, a [change of 80 per cent. At the conclusion of the war prices fell to the level they had before 1790, and the decline was gradual until 1850 when they seem to have touched their lowest point. So that if the period of the great war is struck out, the decline of prices is continuous from 178Q to 1850. The effect of war seems to be to raiie prices generally, as at the time of the Crimean War and the Indian mutiny there is a sensible rise, though not comparable to that at the time of the great war. After 1850 a rise in prices shows itself though even then ib does not bring the curve up to the level of 1826 and 1827, and the level of prices maintained between 1860 and 1870 is not higher than between 1830 and 1840. Jevons's tables have not been carried by him beyond 1869 ; and we have to take for the period subsequent to that date the index number given by the other method, Sauerbeok and the Economist. As, however, between 1850 and 1869 these do not differ to any material extent in their main features from Jevons's carve, so we may conclude they would agree beyond those points. The Economist's curve shows a very great rise in 1867, followed by a-severe fall, and a smaller rise in 1873, while Sauerbeck's shows the rise culminating in 1873. The rise from 1870 to 1873, followed by a rapid fall, is of a similar nature to the curves in 1825-6 and 1846-7, both of which periods were times of intense speculation, followed by financial crises — that in 1827 1 being referred to by Jevons as the most remarkable one in the century. We know that 1872 and 1873 were years of industrial development far outstripping the requirements of the world, and followed by a commercial collapse in Europe and the United States, so that any inquiry which starts from 1873 as a basis, and endeavours to ascertain the appreciation of gold or the fall in prices since that date, is taking as its standard a range of prices which is unduly inflated by excessive speculation and extension of credit. If, however, we take the year 1876, when the rapid fall in prices due to the collapse of credit seems to have stopped, and the level of 1870 is reached, we find for the following 10 years an almost continuous decline until in 1886 the level of prices was 8 per cent, below that of T£|^^^incelßß6 there has been a slight rise, time prices are very slightly and seem to have settled of stability.

There must always be a certain amount of doubt about these figures, as the results obtained by the different methods do not agree very closely. The tables compiled by the late A. Yon Soetbeer from the prices of 114 articles, of which 100 were Hamburg prices and the remaining 14 British prices, make the level of 1886 4 per cent, higher than the average from 1847-50, while the Economist index number and Sauerbeck's make it about 8 per cent. less ; while Mr Giffen estimated that the level in 1856 was about 5 per cent, below that of 1850. While the fall since 1873 — the culminating point of a period of high prices— was from 25 to 30 per cent. ; or, taking the level of 1870 and 1876 as a more normal one, uninfluenced by speculative and exceptional causes, the fall has been from 20 to 25 per cent.

The question then presents itself — To what are these variations in the general level of prices to be attributed — whether to the cheapening of commodities, caused by the changes in the conditions ef production and the increased efficacy of human labours, or to changes in the conditions of production of and in the demand for gold, the standard to which prices are measured. Now, the term " appreciation of gold " seems to imply that the fall in prices is due to causes affecting the conventional standard of value itself ; and though in his evidence before the Gold and Silver Commission Mr H. Hacks Gibbs says that *' appreciation of gold " in one sense is synonymous with "fall in prices," he proceeds to argue as if necessarily it was the result of causes acting on the standard only and not on commodities as well j but in the strict sense of the term it must be taken to mean that residual portion of the relative change in value of commodities and the standard which remains after all that portion of the change which is due to the increased supply of commodities and the increased efficacy of labour has been deducted. Now, though it may be impossible to determine precisely how much of the change is due to the one cause and how much to the other, still by considering the changes in the industrial conditions of the world that have taken place during the period under consideration, it should be possible to form some estimate of the relative weight to be attached to the two causes.

Now, the causes which have operated upon commodities themselves may be classified under three principal heads — (1) An extension of the area of production, by which countries of virgin soil and greater natural fertility have been brought into competition with the older countries ; (2) improvements in the methods and processes of manufacture, enabling commodities to be produced at a less expenditure of human effort, or from a smaller amount of the raw material ; (3) improvements in the means of communication and transport by which commodities are brought to the consumer from places which were formerly excluded by distance.

Though all these causes come into play to a certain extent in the case of every article, included among those from which the index number is formed, yet the extent to which they have operated in lowering the price differs in each case. In the case of the raw products, wheat, wool, and cotton, the first and third causes — namely, the extension of the area of production and the improvement of the means of transport— are those which have principally been at work ; while in the case of the metals, iron, steel, copper, and in sugar, it is chiefly the first and second causes — namely, the extension of the area of production and the improvement of mechanical processes.

The commodity wheat, in which there has been ouch a heavy and apparently permanent fall in price during the past 10 years, is one in which the fall in price can be traced as almost directly connected with the extension of the area of supply. From 1873 to 1882 the average London price fell steadily from 55s a quarter in the former year to 45s in the latter.

Up to 1882 the supply for Europe— the market which takes the surplue wheat of the world, and therefore determines the price — had been obtained principally from Russia and the United States. The Russian export, though varying to some extent from year to year, yet on the whole remained stationary. Bat in the United States the production increased from 250 million bushels in 1872 to 512 millions in 1882 — an increase of 100 per cent in 10 years, — while the increase of population in that period was not more than 37 per cent. ; and as the surplus stock had to find an outlet in England and the Continent, that alone was sufficient to account for a heavy fall in the price. In addition to this largely increased supply, the cost of carriage on the railroads in the United States had been much reduced, the average charge for moving a ton of freight over a mile being 2*5 cents in 1869 and only 1*24 cents in 1883. The reduction in the charges from Chicago to New York, where the freights were lower to start with in consequence of the greater competition on that route, was less, but it amounted to 9-lOtha of a cenb between 1873 and 1885 ; or, since the distance from Chicago to New York is about 1000 miles, the diminution in cast of moving wheat over that distance amounted to a little over 8s a quarter, and this would not represent the full saving, as a large proportion of the wheat comes from districts to the west of Chicago. In 1881-82 the Indian supply first began to assume considerable dimensions, growing rapidly from 18,000,000 bushels in that year to 41,000,000 in 1887, and to 65,000,000 in 1890-91, while simultaneously with the increased supply the price in England fell from 45s in 1882 to 32s in 1890. In addition to the Indian supply, another country has within the last 10 years come into the market as a large wheat exporter. The Argentine Confederation in 1882 exported practically, no wheat, but in 1864, when they first began to export to any appreciable extent, they sent away 4,000,000 bushels, and in 1890 nearly 12,000,000, while in 1893 the export had grown to 43,000,000 bushels— that is, three-fifths of the whole export of wheat from Russia in 1882. Now, in 1890 the average annual deficiency in the wheat crop in Europe to be made up by supplies from other wheat-producing countries was estimated at 144,000,000 bushels, though this is probably an under-estimate, as the English import of wheat last year was 120,000,000 bushels. We see then that the surplus exported from India and the Argentina are very nearly enough to supply the whole English demand, so that the two countries — Russia and the United States — which 15 years ago supplied the English market almost entirely, and whose surplus stock has increased more than 50 per cent, since that period, are driven to find another market for their produce ; and it ia evident that such an enormous oversupply of an article which cannot be stored for an indefinite period, and the demand for which is not highly elastic in the countries of Western Europe, must have an important effect in lowering the price. But, in addition to the general effect in lowering the price during the last 10 years due to an excessive supply, there have been other special causes at work acting in the same direction, in the lowering of freights during.that period. The charge for carrying goods on the trunk lineß from Chicago to New York has been reduced until a ton of wheat is carried a mile for half a cent, at the present time, while on the New York Central railroad in 1885 it was o'6B cent. ; while between New York and Liverpool, between 1880 and 1886,

the freight on grain declined from 9^d to Id a bushel, or to the extent of 5s 4d a quarter. So that these two items of reductions in the cost of carriage from Chicago to Liverpool would account for a fall in the price of over 7s a quarter, without any other causes lowering the price coming into play.

As regards the Indian supply, it has been contended that the competition from that quarter is to be attributed to the fall in the price of Bilver, which enables the importer to pay the same or a larger number of rupees for the wheat to the grower in India, and yet to sell it to the consumer in England for a lower price in gold. Possibly this may have been the case at intervals when a sudden fall in the price of silver took place, and it may have had an effect in developing or giving a stimulus to the export trade of India, but the same process of lowering freights has been at work as in the case of the American wheat supply. It is stated by Mr Comber, in his evidence before the Gold and Silver Commission, that between 1875 and 1887 the cost of railway transit from Cawnpore to Bombay was reduced 2s a quarter, and from Bombay to the United Kingdom the reduction in freight was 7s 3d a quarter. Now as wheat during that period had fallen 12s 6d a quarter there is only the difference 39 3d a quarter, which can possibly be attributed to the fall in silver, and of this 6d is due to a decline in the price of the bags in which the wheat is packed. This, however, assumes that the price of wheat was the same at the two dates ia India — i c., that silver had depreciated as compared with gold but not as compared with food commodities in India. But from the table of the prices of food grains at the 23 selected stations published in the Statistical Abstract of Prices in India, it is seen that if the price of wheat is represented by 100 in 1873 it is represented in 1886 by an index number 114, showing that the silver price of wheat in India had gone up 14 per cent., while between the same two dates the fall in the price of silver was 20 per cent. ; so that of the 2s 9d per quarter which remained unaccounted for, Is 9d is due to the rise in the silver price of wheat in India, leaving only Is a quarter to be distributed among the various remaining causes, such as the fall in silver, economies in agency charges, &c. t ' The reduction in freights, which is so prominent a cause in the fall of prices of bulky commodities like wheat, may be traced to economies in the working of vessels without looking for recondite causes like the scarcity of gold.

In 1872 the average cost of cargo steamers was £18 a ton, in 1880 this had fallen to £12 a ton, and last year ship-building firms were offering to construct first-class screw steamers, with all the modern improvements, at £6 10s. The increased use of steel, which has almost superseded iron for ship-building purposes, enables a lighter frame to be used.

In the consumption of coal between 1872 and 1881 there was an economy estimated at 50 per cent., due to the substitution of triple expansion engines, with high-pressure boilers, for the old low-pressure engines ; and this was accompanied by an increased rate of speed and a greater cargo carrying capacity, due to part of the bunker space being available for cargo. In the working of the vessels, too, the saving in the number of men required ha 3 been very great, as in 1870 47 hands were employed to every thousand tons of British steam mercantile marine, while in 1885 the number was only 28.

At the same time, the increase in the amount of tonnage seeking employment has been so great as to cause excessive competition for freights on the part of shipowners. In 1870 the total amount of tonnage registered in the United Kingdom was 5,700,000 tons. In 1891 it was 8,280,000 tons, an increase of 50 per cent. But this does not at all represent the increase in efficiency, for while the sailing tonnage had decreased 35 per cent., the steam tonnage had grown nearly 400 per cent. Or if we consider that a steamship is two and a-half times as efficient as a sailing vessel of the same tonnage, we find the carrying capacity of the British merchant navy has more than doubled since 1870 ; while that of the navies of Germany, France, and Scandinavia has increased in an even greater ratio.