APPRECIATION OF GOLD.

Otago Witness, Issue 2106, 5 July 1894, Page 51

APPRECIATION OF GOLD.

The following is the conclusion of Professor Gibbons's paper on "The Appreciation of Gold,' read at the last meeting of the Otago Institute —

The last three years there has been a great stride in the world's production of gold, for while between 1881 and 1885 the average product was very little more than 20,000,000, in 1891 it was over 25,000,000, and in 1892 (according to Mr O. Haupt, the Viennese authority upon the precious metals) it amounted to 29,000,000 ; while the year 1893 gave a total of 32,000,000, an output which has been exceeded only once— namely, in 1852, the first year of the Victorian goldfields. At the same time the older fields of Russia, the United States, and Australia are giving a steady yield, while the recently opened field of South Afrioa is rapidly increasing its output, and the description of the

Mashonaland reefs by Mr A. Colquhoun points to a large supply from that quarter ; so that for many years to come there seems to be every probability of a supply of gold even greater than was obtained in the fifties. If at that time an average addition to the world's stock of 27 millions was able to supply France with a gold coinage, and to raise the level of prices some 16 per cent , according to Jevons, and more according to other authorities, it may reasonably be anticipated that an annual addition of over 30 millions will be able to maintain prices at the lower level to which they have fallen when the principal countries of the world are already furnished with a gold coinage and are not likely to make a demand upon the stock for that purpose.

If further, there was a scarcity of gold for the purpose of carrying on the business of the world, that scarcity would be expected to make itself apparent in the great reservoirs of gold in the world, as in the cash reserves of the banks. Now, in 1873 the total amount of gold coin and bullion in the banks of the world was 112 millions, in 1886 this had risen to 226 millions, and in 1892 to 330 millions ; so that all the time the alleged scarcity of gold was continuing, which, according to some alarmist writers, was to result in a scramble for gold ending in a financial cataclysm, the like of which the world has not seen, the supply of gold upon which the transactions of modern commerce are based was growing at a rate far greater than the growth of population, and probably than that of commodities.

The fair inference, then, to be drawn from these various considerations is that the fall in prices of commodities is due very largely to the great increase of production from the opening up of new fields of supply, and the increased efficiency of labour which has taken place in the last 20 years. It cannot, however, be denied that there are strong grounds for the belief that part of the fall in prices from 1872-86 was due to a change in the demand for rather than in the supply of gold ; but it is impossible to say how much of the fall is to be attributed to that cause, and several facts would seem to point to it as having only a minor effect. The separation of the effects due to these causes is of some importance, as according to the admission of the strongest advocates of bimetallism a fall in the level of prices depending upon an increase in production is an advantage to the community of which they ought not to be deprived by monetary legislation. Mr H. H. Gibbs, a leading advocate of bimetallism, sayp, in his evidence before the Gold and Silver Commission, " The effect of a fall in prices due to an increased abundance of commodities is an advantage to the world, and there is no need to interfere." Professor Nicholson, another prominent bimetallist, again says, " I should think it no disadvantage if prices fell away owing to increased production." Now, it is a problem, that has never been attempted, to separate that part of the fall in prices which is due to the increase in production from that which is due to the alleged scarcity of gold, and any appeal to the level of 1873 is to ignore the progress over the powers of Nature that the world has made since then, and to deprive the community in so far as they are consumers of a large part of the advantages of that progress.

It is contended, too, on ethical grounds, by the advocates of bimetallism, that the effect of the general fall in prices has been to impose a burden upon the debtor class to the advantage of the creditor class, which is unfair, on the ground that it was never contemplated at the time that the debt was incurred. If A borrowed from B £1000 at a certain date, to be repaid in 10 years' time, and if in the meantime the general level of prices has fallen 20 per cent., A has to repay to B a sum of money which will purchase a quantity of commodities which at the time the money was borrowed would have cost £1250; so that while B parts with the command over commodities to the amount of £1000 he receives in return the command of commodities to the amount of £1250. No doubt so far as the fall in prices has been due to a .collapse of credit or depression of trade, the complaint that the debtor suffers hardship may be a reasonable one ; but although periods of trade depression have occurred for the past century, the argument has not been made use of until recently, so that presumably those who were affected by the hardship did not consider there was much substance in the argument. If, however, the fall in prices is due to greater efficiency of labour, so that the same amount of labour will produce 25 per cent, more of commodities, then B receives the command over the same amount of labour or human effort that he parted with. And if, as the classical school of economists and some socialists contend, equality of expenditure of human effort is equality of sacrifice, the transaction is a perfectly fair one to both parties.

There is another cause which is referred to as having conduced to the fall in prices since 1873, by intensifying the demand for gold — namely, the so-called demonetisation of silver by the Latin Union in 1874, and the so-called scramble for gold to fill up the void caused by it. Now, there was no demonetisation of silver in the proper sense of the term — i c., a discontinuance by the Governments of the world of the nse of silver coin, and its withdrawal from circulation, a process which recently took place in England with regard to the pre - Victorian coinage. The action of the Latin Union in 1874 was a refusal to coin silver brought to the mints of the different Governments forming the union, a step which was taken to prevent those comntries from being drained of gold, and having its place supplied by silver — the reverse of the movement which took place in France from 1852 to 1860. It was not to withdraw from circulation the silver coin or to lessen the amount remaining in circulation, as at the present time, according to Soetbeer, the amount of silver coin in France is greater per head than the amount of gold coin in England. No doubt if that step had not been taken in 1873 the gold in the Latin Union would have formed a stock to supply the demand of the United States, and possibly to check the fall of prices in England, so far as that was due to the scarcity of gold. At the same time the influx of cheap silver into the States of the Latin Union would take the place of the gold leaving them ; and the two metals together would give a larger volume of currency in the western world, and, according to the quantity theory of money, would produce a higher range of prices. If this increase of the volume of the currency is so desirable an object that in order to obtain it we are asked by the bimetallisfca to revolutionise the monetary system of England, as it has existed for the last 75 years, it is strange that the French Government refused to accept it when it could be obtained, without any action on their part, merely by passing through a phase of monetary change of exactly the same nature as it had passed through within the preceding 20 years. In this argument the assumption is made that the gold displaced by the supply of silver in France would be available for the gold-using countries, and would nob be diverted to some other quarter. There has been since the beginning of the last century a continuous drain of bullion to the East, but it is only within the last 50 years that the export of gold to India has assumed large proportions, and the effect

of keeping up the price of silver in Europe, and therefore lowering the price of gold might have been to cause a larger export of gold to the East, and in this way the effect of keeping open the mints of the Latin Union would have been so far neutralised.

It is sometimes put forward that as a standard of value silver has shown greater stability than gold, and in support of this theory a diagram was exhibited to the Gold and Silver Commission by Sir David Barbour showing the course of prices of commodities as given by the Economist index number end the price of silver in the English market during the 30 years previous to 1885, and it was stated that the purchasing power of silver had not varied. Now, up to the date that the diagram wont there was a remarkable coincidence between the two curves, though, when we consider that the production of silver has been affected by the progress of invention in the arts in the same way as that of other commodities, the coincidence is not to be wondered at. The continued fall in the gold price of silver since 1873 has kept pace with a corresponding increase in the production. In 1873 it was below two million kilograms, having more than doubled since 1860 ; while in 1882 it had grown to 2,770,000, in 1887 it was three millions, and in 1892 it had risen to 5,930,000 — having increased three-fold in 20 years. When, however, the diagram is continued from 1886 to 1892, the coincidence disappears completely ; for, while the index number for commodities is rising or stationary, that of silver continues steadily downwards. This divergence shows the strong probability that the fall of prices of commodities is due to changes in the conditions of production, and not to causes affecting the* standard of value. For from 1873 to 1887 the increase in the production of silver was 50 per cent., and the fall of price kept pace with the fall in commodities. While from 1867-62, when the conditions of such commodities as wheat, sugar, and the metals have not undergone any great change, the level of prices haa remained fairly stationary, while silver, whose production has doubled in that period, has fallen heavily in price.

Again, in India and the East silver is the standard of value, and gold is on the same footing as any other commodity, so that we should expect to find the stability of the purchasing power of silver, if it exists, would show itself in that country. Now for a series of years the prices of seven different kindß of food grains, constituting a large proportion of the food of the population, have been recorded at 23 selected stations in different parts of India, and published by the Government in the Statistical Abstract of British India. From these it appears that, taking the prices of 1873 as the standard, the prices of 1892 were 49 per cent, above that level. Now in 1873 the average price of silver was 59^d per ounce, and in 1892 it was 40d, so that the fall in the price of silver in England has been accompanied by a rise in the price of food in India ; and the purchasing power of silver has no more remained constant in India than it has in England. Further than this, if prices in India have varied so that as the price of silver in England fell, the silver price of food in India had fallen proportionately — i.e. the purchasing power of gold in India had remained constant— the rise in prices in India would have been about 48 per cent., or almost exactly the same as it has been.

So that as regards these food grains in India, which, in a purely agricultural country, would be a better standard to measure general purchasing power by than wheat in England during the seventeenth and eighteenth centuries, it is not silver, but gold that has been the stable standard of value — or there has been not an appreciation of gold but a depreciation of silver.

This effect is visible, too, in the movement which has taken place in wages in India during the same period, for between the average of the period of four years 1876 to 1880 and the year 1892 there has been a rise of wages of artisans, such as masons, carpenters, and blacksmiths, amounting to 25 per cent., and of wages of agricultural labourers amounting to 20 per cent.