CORRESPONDENCE.
THE REMARKABLE DEPRECIATION OF GOLD. [To Too Saner OF TIM -ssse..voa."] Snz,—The correspondence on this subject, begun in a letter signed " Latona " published in the Spectator of February 23rd, raises a question which is obviously interesting, and com- plicated to a degree which is perhaps less obvious.
The complication arises, to some extent, from the apparent simplicity of the matter. "Latona " tells us that the output of gold has doubled in the last decade, and that prices, as measured by Mr. Sauerbeck's index number, have advanced by over 30 per cent. He infers that prices of commodities have risen because gold is more plentiful ; and since he expects, very reasonably, that the supply of gold will continue to increase under the stress of further discoveries and improve- ment of metallurgic methods, he foresees a further rise in prices, and halcyon days for Chancellors of the Exchequer and for "empirical and Socialistic finance."
Thus stated, the proposition has all the simplicity of a rule- of-three sum, and if" Latona's "facts were all as he gives them, it would be impossible to avoid agreement with his conclusion, or with the main part of it, though, as will be shown late, the happy times that he promises for empirical finance are by no means apparent in the symptoms of the money market.
But let us examine the facts. If " Latona " had only given those that have been quoted above, no man could have gainsaid them. But he went further back, and told us also that the sudden adoption of gold currencies all over the world was the interesting feature of the years 1873 to 1896; that it synchronised with a great reduction in the yield of the world's gold mines, and so not merely checked the rise, but resulted in a phenomenal fall of all prices between 1873 and 1896. But in his desire to complete the demonstration of his theory by showing that less gold made prices go down and more gold made them go up, "Latona" has rather strained his facts. For it would be inferred from the statement given above, which is taken almost word for word from his letter, that the reduction in the world's output of gold was fairly and roughly continuous between 1873 and 1896. But this is by no means the case. The output in 1873 was roughly twenty-four millions sterling in value, and it dwindled till it was little over twenty millions in 1882; after that the average was about twenty-one millions until 1887, and then a great recovery set in and the output rose rapidly until in 1896 it reached forty-two millions; so that in the last decade of "Latona's" period of falling prices we find exactly the same phenomenon as in bis period of rising prices,—namely, a doubling of the output of gold. And, curiously enough, as an example of the blindness to inconvenient facts which sometimes besets the most ingenuous and well-intentioned dialecticians when they are hot on the scent of an argument, it is clear that " Latona " knew this quite well. For later in his letter, when he is demonstrating the probability of a further increase in the gold output, he states himself that the world's gold-supplies doubled between 1 6 and 1896, and again doubled between 1896 and 1906, overlooking the fact that this admission disposes of the chief reason that he gave for the fall in prices during the period 1873 to 1896.
As a matter of fact, we see that in the decade 1886 to 1896 the doubling of the output of gold was accompanied by falling prices, while in the decade 1896 to 1906 exactly the same process coincided with a rise in prices; and another correspondent, Mr. Mainprice, whose letter was published on March 2nd, very aptly demonstrated bow great is the bearing on prices of factors other than the mere production of gold, by giving a list of five five-year periods beginning with 1881-85, during which the average output of gold has increased steadily, while the average index number has fallen from 80 to 66, and risen again to 70.
It thus appears that "Latona's" simple proposition, and the conclusions that he derives from it, have been arrived at largely by ignoring a mass of highly important facts. There are also certain other very weighty considerations involved which are left out by " Latona," and were pointed out by sub- sequent correspondents. For example, there is the great durability of gold, and the enormous mass of the existing supplies, which, as shown by Mr. Cameron Corbett. 'M.P., reduce the effect of fluctuations in the yearly output; while Mr. Frank Merriman added another important factor in the problem when he culled attention to the extensive use of promises to pay, which economises the actual employment of the metal, and results in about ninety-eight per cent, of our commercial and financial transactions being carried out by the transfer of banking credits.
The more we probe the subject, the more complicated it thus becomes, and it is unfortunately necessary to question another of the assertions of "Leona," who implied that the period of abundant gold was accompanied by a slackening in the demand for it, because, according to him, the adoption of gold standards, which was a feature of the 1873-96 period, ceased after the latter date. The adoption of the gold standard by Japan was decided on in 1897, and a scheme which marks an endeavour in that direction was carried out last autumn by Brazil, and the .consequent withdrawal of sovereigns from London to Rio was one of the causes which led to the necessity of the 6 per cent. Bank-rate, which lasted into the beginning of this year. In fact, when we begin to consider the phenomena of credit, which is based, to an uncertain extent and in a shadowy and capricious manner, on the available amount of gold, the facts reveal some unexpected effects. For not only did not the adoption of gold, standards cease with 1896, but even those countries which had carried out the change before were still eager com- petitors for any supplies by which they could increase their holding of the yellow metal. And, the last decade, which ought, according to the mere figures of the output, to have been marked by a flood of superabundant gold and easy credit, was in fact a period of growing clamour for gold and credit, culminating in something like famine last autumn, when Bank-rate was raised to a point which is usually associated with war or financial panic.
On the other hand, in the previous decade, 1886 to 1896, the output of gold, as has been already stated, doubled, as in its successor; but in it prices of commodities fell, credit was so abundant that the prices of Consols and other first-class investments rose to a level at which they yielded the buyer less than 2/r per cent., and gold poured into the Bank of England so rapidly that projects for its demonetisation were seriously put forward in the financial Press.
We have thus two decades in which the constant factor was the doubling of the gold output, which happened in each of them. In the former the prices of commodities fell, credit was abnormally abundant, and gold was a drug in the market ; in the other the prices of commodities rose, credit was eagerly sought for, and there was a serious gold famine, of which the end is not yet, though the turn of the year has brought seine relief.
It may be remarked in passing that this scarcity of credit effectually disposes of "Latona's " expectations of halcyon days for empirical and Socialistic finance; Colonial and municipal borrowing has for some time been reduced to the narrowest possible limit, not because Collectivist enterprise bad abated its ambitions by a jot, but because the money market simply could not accommodate it with capital.
But to return to our two periods. It must be acknowledged that it is very unsafe to draw any conclusion with dogmatic confidence from their comparison, owing to the thousand-and- one unseen phenomena which complicate every economic question to the point which makes it safe to mistrust any one. who ventures on cocksure conclusions. But this much may be said. Since in their respective courses the doubling of the gold output was accompanied by entirely different effects on prices of commodities, it is safe to assume that the relation between output of gold and prices is not the simple matter that "Latona" would have us believe. And we may perl3aps venture to hazard a conjecture that the matter is the other way round, and that he has made the tail wag the dog. The fall in prices in the earlier period may bee been due to the extensive opening up of new territories, and the improved methods of transport, which brought their agricultural and industrial products to the world's °markets more rapidly and cheaply.
This cheapening lessened the demand for credit, one of the . . „ most important functions of which is financing trade, Which it accomplishes more easily and cheaply when trade products are at a low price. This theory, or guess, accounts for the cheapness of credit in the first period. In the second the demand for products, owing to the growth of population and destructive wars, overtook, the increased supply, and raised their prices again, so reviving the demand for credit; and as this demand was also stimulated by the destruction' of capital by wars in South Africa and the East, it rapidly outstripped the extra supply which the increased output of gold provided. This theory, which is put forward with all the diffidence which economic inquiry demands, at any rate fits most of the facts.
It is perhaps worth while to add, in conclusion, that the" de- preciation of gold" is not so very " inmarkable," since it only represents a moderate rally in prices after an extremely violent fall. The index number is now 80, after being 61 in 1896; but in 1867-77 it was 100. It is rather a return to normality, for 1867-77 were years of inflation, and 1896 was a
year of extreme cheapness—I am, Sir, &a, H. W.
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