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Author: 
 
 Price, Langford Lovell 
 Frederic Rice 
 
 Title: 
 
 Money and its relations to 
 
 Place: 
 
 London 
 
 1900 
 
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 Prioe, Langford Lovell Frederic Rioe, 1862- 
 
 Money and Its relations to prioesi being an in- 
 quiry into the causes, measurement, and effects of 
 changes in general prices, by L* L. Price... j.2d 
 ed.j London, Sonnenschein, 1900. 
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MONEY 
 AND ITS RELATIONS TO PRICES 
 
MONEY 
 
 AND ITS RELATIONS TO PRICES 
 
 BEING AN INQUIRY INTO THE CAUSES, 
 MEASUREMENT, AND EFFECTS OF CHANGES IN 
 
 GENERAL PRICES 
 
 BY 
 
 L. L. PRICE 
 
 Fellow of Oriel College, Oxford 
 
 LONDON 
 
 SWAN SONNENSCHEIN & CO., Limited 
 
 NEW YORK : CHARLES SCRIBNER'S SONS 
 
 1900 
 
'J- .^jCi^--::"5.^^ S« fi S £B». •3* 
 
 
 rf^^L^vo 
 
 w 
 
 /zVj/ Edition, Marsh 1896; Second Edition, August igoo. 
 
 733:1^ 
 
 Printed by Cowan df Co., Limited, I'etth. 
 
 PREFACE 
 
 The material contained in this Book was collected 
 for a course of lectures delivered by the author last 
 summer as Newmarch Lecturer in Statistics at Uni- 
 versity College, London. The manuscript has since 
 been re-written, some of the reasoning re-cast, and 
 the figures revised. 
 
 The authorities, to whom reference has been made, 
 are severally mentioned in the footnotes ; and it only 
 remains here to express a special debt of gratitude to 
 two writers, to whom every student of the subject 
 must feel that he owes peculiar acknowledgment. The 
 name of Dr. Soetbeer is a household word in modern 
 monetary statistics ; and his fame is placed beyond dis- 
 pute. The present author's obligations to him may be 
 discovered in many passages. To Jevons' Investiga- 
 tions in Currency and Finance he is equally indebted; 
 and a closer study of that book has confirmed his 
 conviction that it may rank with the famous Report 
 of the Bullion Committee among the classic produc- 
 tions of monetary science. If the earlier Report, in 
 which the hand of Ricardo can be clearly traced, 
 supplied the answer to the vexed problem of its day, 
 it is no less indisputable that the intelligent study of 
 the questions suggested by later movements of prices 
 is impossible apart from an acquaintance with the 
 Investigations of Jevons. 
 
VI 
 
 Preface 
 
 In dealing with matters which have been, and are, 
 the subject of embittered controversy, the author can 
 hardly hope that his conclusions will command the 
 approval or assent of all his readers. To claim free- 
 dom from bias would be an assumption, which would 
 disprove itself by its very utterance; but he can 
 honestly declare that he has avoided, rather than 
 sought, debatable assertions, and that such opinions of 
 this nature as he may have expressed are the result 
 of an attempt to study the facts, and of reflection on 
 the various, and sometimes opposite, explanations put 
 forward by different inquirers. 
 
 L. L. P. 
 
 Okiel College, Oxford, 
 February J 1896. 
 
 PREFACE TO SECOND EDITION 
 
 In revising this book for a second edition, opportunity 
 has been taken to correct minor errors of fact or 
 expression, which have been detected. The only sub- 
 stantial alteration, which has been made, has been to 
 put into the past tense some of the matter contained 
 in the final chapter, which, at the time of the first 
 edition, dealt with contemporaneous events. The 
 movement of prices during the years, which have 
 elapsed, has, in the writer's opinion, tended to confirm 
 the conclusions, which he then reached. 
 
 May, 1900. 
 
 CONTENTS 
 
 CHAP. PAGE 
 
 I. THE MEASUREMENT OF CHANGES IN PRICES I 
 
 II, THE ECONOMIC EFFECTS OF CHANGES IN 
 PRICES - 
 
 III. THE RISE OF PRICES CONSEQUENT ON THE 
 
 DISCOVERY OF AMERICA .... 
 
 IV. THE FALL OF PRICES DURING THE EARLIER 
 
 PART OF THE NINETEENTH CENTURY - 
 
 V. THE RISE OF PRICES CONSEQUENT ON THE 
 DISCOVERIES OF GOLD IN CALIFORNIA AND 
 AUSTRALIA 
 
 VI. THE FALL OF PRICES AFTER 1873 - 
 
 37 
 70 
 104 
 
 170 
 
MONEY 
 
 AND 
 
 ITS RELATIONS TO PRICES 
 
 CHAPTER I 
 
 THE MEASUREMENT OF CHANGES IN PEICES 
 
 Scientific circles were recently agitated over the 
 discovery of a new element in the atmosphere ; and 
 the votaries of those moral and political studies, 
 among which Economics claim a place, must have 
 watched with interest, not unmingled with envy, the 
 process by which the existence of that new element 
 was established. For the story of this late addition 
 to our scientific knowledge reads somewhat in this 
 strain. In the course of researches in his laboratory 
 the attention of the distinguished physicist,^ with 
 whose name the discovery was associated, was 
 attracted to the presence of some disturbing influence 
 to which a place could not be assigned in the recog- 
 nised scientific order. When suspicion had been thus 
 aroused, a series of experiments was instituted, with 
 the co-operation of another eminent scientist ; ^ and 
 those experiments were conducted, on the hypothesis 
 
 1 Lord Rayleigh. a Professor Ramsay. 
 
2 Money and its Relations to Prices 
 
 of the possibility of an element hitherto unrecognised, 
 with a view to demonstrating its existence, and 
 ascertaining its character and properties. The aim 
 of these several experiments may be generally 
 described as an attempt to isolate the phenomenon ; 
 and so successful did they prove that opposition 
 was withdrawn, and even distrust was apparently 
 removed. The layman may presumably take the 
 opinions expressed at a meeting of the Royal Society 
 in January, 1895, as a verdict given by a jury of 
 scientific experts in favour of the admission of Argon 
 to a distinct place among the constituents of the 
 
 atmosphere.^ 
 
 The economist can hardly listen to such a story 
 with feelings other than those of jealous admiration ; 
 for he can scarcely hope to discover its analogue in 
 his own department of study. He may, indeed, like 
 the student of natural science, form hypotheses ; and 
 he cannot expect to progress very far without their 
 aid. But when he wishes to bring them to the test 
 of verification, he is practically debarred from the use 
 of that powerful instrument for establishing scientific 
 truth, which the physicist and chemist are able to 
 employ with such admirable results. He can, indeed, 
 observe phenomena, but he can rarely hope to experi- 
 ment on them. Or, if some happy chance should 
 permit an experiment, it will seldom allow of its 
 being conducted in such a manner as to isolate the 
 phenomena. The reason is simple and obvious. The 
 subjects of his inquiry are not " inert " elements, but 
 active men and women. They will not remain un- 
 
 1 Cf. Edinburgh Review for October, 1895, for a succinct account 
 of the discovery. (No. 374.) 
 
 The Measurement of Changes in Prices 3 
 
 moved while he observes them ; and they will most 
 assuredly resent being subjected to a deliberate 
 experiment. Even the biologist encounters obstacles 
 when he wishes to experiment on animal life ; and 
 the statesman, who should introduce a measure, or 
 initiate a policy, not with a view to public utility, but 
 with the single aim of establishing or disproving a 
 scientific hypothesis by means of a carefully conducted 
 experiment, would soon be driven — and not unnaturally 
 — from oflSce, if not from public life. Even if his 
 avowed object were the promotion of general utility, 
 and yet the experiment involved the possibility of a 
 real injury to some one or other portion of the com- 
 munity, it is exceedingly doubtful whether he would 
 be permitted to engage in it, or, once engaged, to carry 
 it through. At any rate, it is certain that he would 
 be debarred from conducting it under scientific con- 
 ditions. The subjects of his inquiry would not remain 
 passive. He would be unable to vary the conditions 
 as the exigencies of the experiment required. He 
 would not possess, or be allowed to exercise freely, the 
 power of isolating some particular cause and observing 
 it produce its effects undisturbed. His methods of 
 inquiry must be subject to such defects as attach to 
 the possibility of a plurality of causes. He is generally, 
 if not always, reduced to a balancing of probabilities. 
 It is impossible to read any considerable portion of 
 the abundant literature on money and kindred topics 
 without being sensible of these difficulties ; and they 
 will confront us throughout the course of the inquiry 
 on which we are entering. If, however, we recognise 
 their existence from the outset, we shall obtain a more 
 useful conception of the kind of evidence we can 
 
Money and its Relations to Prices 
 
 alone hope to secure, and of the character of the con- 
 clusions we must be content to establish. 
 
 Yet, if discouraging reflections like these are sug- 
 gested by a contrast between the moral and political 
 and the physical sciences, there is another character- 
 istic of the situation from which— paradoxical as the 
 inference may appear — we may derive encourage- 
 ment. It is no exaggeration to say that if, on some 
 rare occasions, the economist is permitted to witness, 
 though not to initiate or conduct, an experiment, 
 those occasions generally afford the material for a 
 study in what, borrowing a term from physical 
 science, we may perhaps call morbid pathology. To 
 take examples from the subject before us, some such 
 instance is presented as that of an opulent country, 
 like the United States of America, finding itself, in 
 consequence of monetary legislation, about which an 
 opinion need not be expressed, in the throes of financial 
 diflBculties where its opulence was of no immediate avail. 
 Or— to pass from the Western to the Eastern world — 
 an experiment, viewed with favour by neither of the 
 two parties engaged in internecine controversy on 
 monetary matters, was instituted by the Indian 
 Government, when it suspended the free coinage of 
 silver ; and economic students were able to watch the 
 course, and observe the results of that experiment. 
 They could see whether theories were verified or pre- 
 dictions unfulfilled. In both these instances— and 
 parallels might be supplied from the same as from 
 other departments of economic study — experiments 
 were undoubtedly furnished for the instruction of the 
 student, though even in these cases it was not easy, or 
 indeed possible, to avoid the disturbing influences of 
 
 The Measurement of Changes in Prices 5 
 
 a plurality of causes and an intermixture of eflfects. 
 But the experiments were such that all who concern 
 themselves with the welfare of the community would 
 be glad, if they were able, to dispense with them, 
 whatever be their scientific value or interest. Experi- 
 ments, it is true, of a more beneficent character are 
 sometimes supplied by man or by nature ; but there 
 can be little doubt of the important, if melancholy, 
 circumstance that a morbid condition of the body 
 politic is more calculated to attract notice, and to 
 invite experiments, than a sound and healthy state. 
 The beneficent experiments are not unlikely to escape 
 attention— and, unless there be a disturbance of ordi- 
 nary routine, men are averse to try experiments at all 
 — while desperate or calamitous expedients force them- 
 selves into obvious and unpleasant prominence. It is 
 when the machinery does not work smoothly that the 
 mechanic is compelled to see what is wrong. 
 
 No elaborate argument is needed to support the 
 contention that in recent times the monetary 
 machinery was not working smoothly; nor is it 
 necessary to demonstrate formally the lively interest 
 which has of late been aroused in questions of mone- 
 tary theory and practice.^ The controversy between 
 monometallist and bimetallist has been conducted 
 with great vehemence, if not with great ability ; and, 
 difficult as it may seem to reach and retain the truth 
 amid the din of contending argument, it is not easy to 
 believe that such eager search for evidence, and such 
 
 ; Professor Foxwell (- Transactions of the Political Economy 
 Circle of the National Liberal Club," vol. ii., p. 174) has called 
 attention to the significant fact of the issue between 1871 and 1891 
 
 L'tWrB^ra^h'yV'' "'"'""^ ^"''"" ^"'''^"^ *' ''^• 
 
 i! 
 
 t 
 
11 
 
 6 Money and its Relations to Prices 
 
 persistent and incredulous examination of it, can have 
 failed to result in some enlargement and improve- 
 ment of scientific knowledge. Attention must of 
 necessity have been directed to points hitherto un- 
 noticed, and the weak links of a chain of argument 
 could hardly escape the detection of such a searching 
 scrutiny. Where a motive of so powerful a nature 
 is supplied for research, it rarely fails to elicit new 
 information, and there is scarcely a single point in 
 received monetary theory which has not been called 
 in question at some time or other during the contro- 
 versy. Both on the purely statistical and on the 
 more generally economic problems connected with 
 money the debate has left its mark. 
 
 It is with the former class of problems that we 
 shall be mainly occupied in the present inquiry, 
 though it is impossible to disengage them entirely 
 from general monetary theory. We may notice at 
 the outset that Sir Robert Giffen, who is as competent 
 as anyone to express an opinion, drew special attention, 
 when examined before the Gold and Silver Commis- 
 sion,^ to the "great improvement" which had been 
 recently effected in monetary statistics. No doubt, as 
 Professor Marshall urged before the same Commis- 
 sion,2 there are important points on which we have as 
 yet no statistical information of a reliable or ade- 
 quate character, and there are some on which it is 
 improbable that we can ever hope to obtain it. But, 
 deficient as some of the statistical evidence unfortun- 
 ately is, and doubtful as are some of the theoretical 
 issues involved, certain broad conclusions emerge, and, 
 even when obscured by the assertions and denials of 
 
 1 Cf, Report, qq. 465, etc. » Ihid.y q. 9629. 
 
 > i 
 
 
 The Measurement of Changes in Prices 7 
 
 controversy, appear to have met with virtual admis- 
 sion, if not with open acknowledgment. 
 
 We propose to review the evidence on which those 
 broad conclusions rest ; and the special subject, to 
 which we are going to address ourselves, may be 
 summarily described as that of the causes and effects 
 of changes in general prices, or, in other words, in 
 the purchasing-power of money. In the first place/ 
 we shall inquire into the means that we possess for 
 ascertaining and measuring such changes. We shall 
 then proceed to review ^ their chief economic effects ; 
 and we shall conclude by a separate investigation 
 into the prominent incidents of certain periods in 
 English history when changes of a noteworthy nature 
 occurred. The increase of the precious metals, which 
 followed the discovery of America,^ and that which 
 in the nineteenth century was connected with the 
 new mines of California and Australia,* mark two 
 periods when it is admitted that prices rose, and it is 
 also allowed that the most obvious cause was the 
 augmented production of the precious metals. With 
 these periods we may contrast the somewhat obscure 
 period of the beginning of the nineteenth century,^ and 
 the period,® on the true explanation of which contro- 
 versy is still raging, that, namely, which followed 1873. 
 It will at least be conceded that the main characteristic 
 of both these periods was a fall in prices, although the 
 particular cause of the fall may be stubbornly dis- 
 puted. It will also perhaps be allowed — though this 
 point may scarcely be granted so readily — that, if 
 monetary changes were the cause of the fall, those 
 
 1 In chapter i. 
 4 Chapter v. 
 
 2 In chapter ii. 
 5 Chapter iv. 
 
 3 Chapter iii. 
 •* Chapter vi. 
 
if 
 
 It) 
 
 II 
 
 8 Money and its Relations to Prices 
 
 The Measurement of Changes in Prices 9 
 
 •1* 
 
 changes might be roughly distinguished from the 
 influx of the precious metals, which marked the other 
 two periods, as partly due to artificial influences. A 
 reversion to specie payments, such as that accom- 
 plished in 1819, though it be a reversion to a more 
 healthy condition, and, the longer it is postponed, the 
 more painful it generally becomes, is yet so far arti- 
 ficial that, like the suspension of those payments, and 
 the issue of inconvertible paper, it is the deliberate 
 action of men. The fall in prices after 1873, so far as 
 it was due to the demonetisation of silver and the 
 adoption of a gold standard, must also be attributed 
 to the action of men ; while discoveries of the precious 
 metals seem by contrast to be not improperly regarded 
 as natural and unconscious. At any rate, the distinc- 
 tion, if not unimpeachable, will be convenient. 
 
 In the first place, then, we propose to consider the 
 means in our possession for measuring changes in 
 general prices or alterations in the purchasing-power 
 of money. For an inquiry into these means confronts 
 us on the threshold of any investigation into the 
 causes and effects of the changes. As we must 
 diagnose the disease before we can venture to pre- 
 scribe a remedy, so, to make our diagnosis adequate, 
 we must be able to note the presence or absence of 
 symptoms. In connection with this point of the 
 means available for ascertaining and measuring 
 changes in the purchasing-power of money, it may be 
 confidently affirmed that the remark, which we pre- 
 viously hazarded, on the tendency of controversy to 
 result in the improvement and enlargement of know- 
 ledge, finds abundant confirmation. A comparison of 
 the methods pursued in the earlier and the later 
 
 /■ 
 
 \ 
 
 periods, of which we shall treat, will show, not merely 
 that we are now in possession of an instrument, the 
 capabilities of which were hardly recognised by those 
 who investigated the circumstances of the earlier 
 periods, but that we are sensible of the particular 
 respects in which it is likely to be deficient, that we 
 are able to devise and apply remedies for some of 
 those defects, and that we have satisfied ourselves 
 that, in spite of defects, the instrument is adequate 
 for the purpose in hand. It would, no doubt, be 
 untrue to say that a later generation can claim the 
 credit of discovering the instrument; but it may 
 at least be aflBrmed that earlier investigators did 
 not attain to any adequate recognition of its capa- 
 bilities, or apply it scientifically to the problem 
 before them. 
 
 In economic text-books three functions are gener- 
 ally assigned to money. It is described ^ as (1) a 
 medium of exchange, (2) a measure or common de- 
 nominator of value, and (3) a standard of deferred 
 payments. To these three functions a fourth is some- 
 times added — that of a store of value — with which we 
 need not concern ourselves. With regard to the first 
 of these functions, it is admitted that the essential 
 characteristic of good money is that it should be 
 generally acceptable, and any article, which satisfies 
 this criterion, may serve as a medium of exchange. 
 By acting in this character, and being constantly 
 given and taken in exchange for other articles, money 
 fulfils its second function, and becomes a convenient 
 measure or common denominator of value. But, in 
 the progress of society, as bargains are entered into 
 1 C/. Jevons' " Money " ; F. A. Walker's " Money." 
 
lo Money and its Relations to Prices 
 
 for longer and yet longer periods, the third function 
 acquires additional prominence, and we need a standard 
 of deferred payments. We do not merely require a 
 common measure of articles and services to subserve 
 the exigencies of the immediate moment, but we want 
 a measure which will enable us to compare those 
 articles and services at different and distant times, 
 and will remain valid during the interval To dis- 
 charge this function the paramount quality needed is 
 that of steadiness; and the precious metals have 
 established their claim to be used as money, partly 
 because they have satisfied the criterion of general 
 acceptability, and partly also because they have met, 
 not indeed completely, but more sufficiently than any 
 other article equally acceptable, the demand for sta- 
 bility. They have done so in consequence of their 
 durable nature, as the annual production from the 
 mines has, in ordinary times, been but a fraction of 
 the mass in existence, and, therefore, their value 
 has proved, comparatively speaking, independent of 
 changes in supply. But it is not wholly independent. 
 The conditions of their production are mutable ; and, 
 consequently, great and continued changes in the 
 volume of production cannot, unless counteracted by 
 alterations in demand, fail to produce an effect on 
 their value, and to prejudice that stability which con- 
 stitutes the basis of their fitness for a standard of 
 deferred payments. 
 
 This liability to variation in value over intervals of 
 time has led economic writers, both old and modern, 
 to seek for a more stable measure ; and it is evident 
 that such a measure will at once satisfy more fully 
 the criterion of a just standard of deferred payments, 
 
 \ 
 
 The Measurement of Changes in Prices 1 1 
 
 and, in the degree in which it fulfils this function, 
 will furnish a gauge for testing the imperfections of 
 the monetary standard, or, in other words, for esti- 
 mating the changes in the purchasing-power of money, 
 or the alterations in general prices. 
 
 Adam Smith thought that he had discovered such 
 a measure in labour. " Labour alone," he observed,^ 
 ** never varying in its own value, is alone the ultimate 
 and real standard by which the value of all commodi- 
 ties can at all times and places be estimated and 
 compared." What he meant precisely by "labour 
 never varying in its own value " has been disputed, 
 and is not easv to ascertain ; and we need concern 
 ourselves with it the less, because, admirable and per- 
 fect as he held this standard to be in theory, he con- 
 sidered that, from lack of statistical data, it was not 
 applicable to the practical measurement of changes in 
 prices. ** The current prices of labour at distant times 
 and places can," he remarked, " scarce ever be known 
 with any degree of exactness. Those of corn, though 
 they have in few places been regularly recorded, are 
 in general better known and have been more fre- 
 quently taken notice of by historians and other 
 writers. We must generally, therefore, content our- 
 selves with them, not as being almost exactly in the 
 same proportion as the current prices of labour, but 
 as being the nearest approximation which can com- 
 monly be had to that proportion." Accordingly, in a 
 notable chapter,^ to which we shall again have to 
 refer, Adam Smith measures the alterations in the 
 
 ^ "Wealth of Nations," bk. i., ch. v. 
 ^ Ibid., bk. i., ch. xi. 
 
12 Money and its Relations to Prices 
 
 value of silver by the fluctuations in the price of 
 corn. But throughout the discussion he is careful to 
 remind his readers that labour is the true measure, 
 and that corn is only accurate so far as it corresponds.' 
 "Equal quantities of corn will," he observes, "in every 
 state of society, in every stage of improvement, more 
 nearly represent, or be equivalent to, equal quantities 
 of labour, than equal quantities of any other part of 
 the rude produce of land. Corn, accordingly, it has 
 already been observed, is, in all the diflerenl; stages of 
 wealth and improvement, a more accurate measure 
 of value than any other commodity or set of com- 
 modities." In these remarks there is not a little that 
 is open to dispute, or, at least, inapplicable to the 
 circumstances of the present day; but it cannot be 
 doubted that, over long periods of time, the compari- 
 son, which Adam Smith instituted between corn and 
 silver, did afford some indication— and perhaps the 
 best which was then available— of the changes in the 
 value of money. It is, however, no injustice to add 
 that the improved method substituted in modern 
 times is undoubtedly superior. 
 
 It is curious that this method should have been 
 employed in a crude form by a writer on whom Adam 
 Smith himself relied as an authority for statistical 
 data, although he expressly dissented from his con- 
 clusions regarding the value of silver. " Bishop Fleet- 
 wood and Mr. Dupre de St. Maur are," he observed, 
 "the two authors who seem to have collected, with 
 the greatest diligence and fidelity, the prices of things 
 in ancient times. It is somewhat curious that, thouAi 
 their opinions are so very different, their facts, so far 
 as they relate to the price of corn at least, should 
 
 The Measurement of Changes in Prices 1 3 
 
 coincide so very exactly." Bishop Fleetwood, in 1707, 
 in his anonymous " Chronicon Preciosum," ^ had 
 sought to ascertain the changes in the value of 
 money by comparing the prices at different periods, 
 not of one commodity alone, but of a larger number,^ 
 including the wages of labour. His method was 
 no doubt rough, and his statistical material de- 
 ficient ; but the conception which underlay his cal- 
 culations was identical in principle with that which 
 has since been elaborated in the so-called "index 
 number." 
 
 Various other anticipations of this modem method 
 have been discovered by the historical researches of 
 Jevons and other writers. In the case of Lowe, writ- 
 
 1 The full later title of the book was "Chronicon Preciosum ; or, an 
 Account of English Gold and Silver Money ; the Price of Corn and 
 other Commodities, and of Stipends, Salaries, Wages, Jointures, Por- 
 tions, Day-labour, etc., in England for Six Hundred Years last past, 
 showing from the Decrease of the Value of Money, and from the In- 
 crease of the Value of Corn and other Commodities, etc., that a 
 Fellow, who has an Estate in Land of Inheritance, or a perpetual 
 Pension of Five Pounds per Annum, may conscientiously keep his 
 Fellowship, and ought not to be compelled to leave the same, tho' 
 the statutes of his College (founded between the years 1440 and 1460) 
 did then vacate his Fellowship on such Condition." The name of 
 the author was given in the later edition. 
 
 2 Summarily enumerated as " corn, meat, drink, or cloth." The 
 method is thus described : "You ni;'st neither take a very dear 
 year to your prejudice, nor a very c.i jap one, in your own favour ; 
 nor indeed any single year, to be your rate ; but you must take the 
 price of every particular commodity, for as many years as you can 
 (20, if you have them) and put them all together, and then find out 
 the common price ; and afterwards take the same course with the 
 price of things for these last 20 years, and see what proportion they 
 will bear to one another ; for the proportion is to be your rule and 
 guide." {Cf. chap, vi.) The inquiry into "stipends," etc., is 
 made independently. 
 
 I 
 
14 Money and its Relations to Prices 
 
 ing in 1822,^ and Scrope, some eleven years later, the 
 primary object in view seems to have been that of 
 securing justice in the matter of deferred payments, 
 and ensuring stability in money contracts; and Scrope 
 gave to the pamphlet, in which he first advocated the 
 method, the sub-title of " An Inquiry into the Nature 
 of a Just Standard of Value." Sir George Evelyn, in 
 a paper on " Some Endeavours to ascertain a Standard 
 of Weight and Measure," in the "Philosophical 
 Transactions" for 1798, propounded at the end of his 
 paper a similar plan, and supplied a "general Uble ''^ 
 showing the changes in prices " from the Conquest," 
 and, as became the connection in which the proposal 
 appeared, the scientific object of measuring the changes 
 in the value of money was exclusively predominant. 
 Indeed, he apologised for appearing to "descend below 
 the dignity of philosophy in such economical re- 
 searches " ; and, by the irony of fate, he has been 
 criticised by historians for his " slovenly " treatment 
 of the subject. '^ The exact language used by Scrope 
 may be quoted as a good definition of the nature and 
 end of an index number. "It is proposed," he writes, 
 *' to correct the legal standard of value (or at least to 
 afford to individuals the means of ascertaining its 
 errors) by the periodical publication of an authentic 
 price current, containing a list of a large number of 
 articles in general use, arranged in quantities corre- 
 sponding to their relative consumption, so as to give 
 the rise or fall, from time to time, of the mean of 
 prices, which will indicate, with all the exactness 
 
 iln his ♦♦ Present State of England in regard to Agriculture, 
 Trade, and Finance," pp. 276, etc., and Appendix to chapter ix. 
 
 2 He was, however, commended by^ John Wheatley, m his 
 ** Remarks on Currency and Commerce " (1803). 
 
 The Measurement of Changes in Prices 1 5 
 
 
 desirable for commercial purposes, the variations in 
 the value of money ; and enable individuals, if they 
 shall think fit, to regulate their pecuniary engage- 
 ments by reference to this tabular standard." ^ 
 
 A similar method, with a similar object, was sug- 
 gested in Porter's " Progress of the Nation " ; ^ but 
 not until the occurrence of the Californian and Aus- 
 tralian discoveries had resulted in an output of gold 
 so immense as to be calculated to produce noteworthy 
 changes in prices was the method of an index number 
 applied in a systematic manner by Jevons to establish 
 the fact of " A Serious Fall in the Value of Gold. ' 
 In his hands this instrument for measuring changes 
 in general prices enjoyed the considerable advantage 
 to be derived from the graphic method of statistics. 
 But, great as was the advance in his treatment over 
 the crude anticipations of earlier writers, it was re- 
 served for another period, when changes in prices 
 should again become a burning question— although it 
 was the fall, and not the rise, to which attention was 
 now directed— for a comparison to be made between 
 several forms of index numbers and a critical exam- 
 ination to be instituted into their defects and capa- 
 bilities. The exhaustive Reports* of a Committee 
 of the British Association on the "best methods 
 of ascertaining and measuring variations in the value 
 of the Monetary Standard," together with the elabo- 
 rate memoranda of Professor Edgeworth appended to 
 
 1 Cf, "Principles of Political Economy," pp. 406, 407. 
 
 3 Vol. ii., pp. 235, 236 (edition of 1838), sec. iii., ch. xii. 
 
 3 Gf. ** Investigations in Currency and Fmance," ii., pp. 15, etc. 
 
 * Of. Reports for 1887, 1888, 1889, and 1890. 
 
1 6 Money and its Relations to Prices 
 
 those Reports, enable the student to advance a 
 stage beyond that attained by Jevons in the theory, it 
 not in the practice, of the index number ; and the 
 subject has also received instructive attention m other 
 
 countries.^ . . 
 
 Of these index numbers different varieties exist. 
 Perhaps the simplest, though least scientific, is that of 
 the Economist ; and the method pursued by this news- 
 paper may be briefly described. Twenty-two articles 
 of a representative character were selected for a 
 comparison of the changes in their prices. A period 
 was chosen from which the comparison began; 
 and in the special instance of the Economist, the 
 average prices of the years 1845-50 were taken as 
 the starting-point. The prices of each article on the 
 Ist of January and the 1st of July were noted, and a 
 mean struck, and the prices at the starting-point were 
 regarded in each case as equivalent to 100. In every 
 subsequent year the percentage of the rise or fall 
 of each article was added to, or taken away from, 
 the original 100, and the separate figures were then 
 added together to form a grand total, and, according 
 as that total exceeded or fell short of the original grand 
 total of 2,200 reached in the quinquennial period from 
 which the calculation started, so was the change in the 
 purchasing-power of money shown, whether by way 
 of diminution or increase. Such is the character of 
 the mere numerical calculation ; but it is a common 
 practice to supplement and illustrate the tables of 
 figures by a curve of prices, which rises or falls in 
 relation to a base line as the purchasing-power of 
 1 C/ especially Professor Edgeworth's article in Economic Journal 
 for March, 1894, on ** Recent Writings on Index Numbers. 
 
 The Measurement of Changes in Prices 1 7 
 
 money declines or advances. The aid of the graphic 
 method of statistics may thus be invoked to bring 
 within the range of easy comprehension the meaning 
 of the numerical record ; and no one, who has thus 
 employed it, can have failed to appreciate its value. 
 
 Such is the nature of an indel number as illustrated 
 by perhaps the least scientific example. We may now 
 proceed to inquire into the main respects in which it 
 may possibly prove a defective measurementof changes 
 in prices. In the first place the original data may be 
 inadequate, or even erroneous ; and the earliest possi- 
 bility of error lies in the ascertainment of the prices of 
 the separate commodities. The first question to be 
 asked concerns the trustworthiness of the records of 
 prices on which the calculation is based. The difticulty, 
 if not impossibility, of obtaining reliable data on the 
 prices of labour led Adam Smith to content himself 
 with the substitute of the prices of corn; and for a simi- 
 lar reason the compilers of index numbers have perforce 
 to be satisfied with wholesale prices. This necessity 
 is due to a lack of statistical data, but is not without 
 compensation. It is true that retail transactions are 
 more numerous, and in that sense more representative, 
 of the actions of the mass of the community. But, if 
 comparisons are to be safely instituted, we must be 
 able to reckon with some assurance on the probability 
 that no great change is introduced in the articles 
 forming the basis of the comparison. It is almost 
 inevitable that, over considerable periods of time, the 
 wholesale articles, of which the prices are recorded in 
 an accessible and trustworthy form, will differ to 
 some extent in quality; and so far the comparison 
 will be vitiated, for the articles will in reality not be 
 
 B 
 
1 8 Money and its Relations to Prices 
 
 identical. But in the case of retail, as compared with 
 wholesale prices, such differences of quality are largely 
 
 multiplied. 
 
 The same lack of statistical data renders it neces- 
 sary that the commodities, on the prices of which the 
 calculation is based, should consist of raw materials, 
 or at least of partly rather than of wholly manufac- 
 tured goods; and it is probable that the general 
 course of progress tends to diminish the cost of manu- 
 facture in comparison with the cost of obtaining the 
 raw material. On the hypothesis of such a tendency 
 we should expect that in times of rising prices an 
 index number based to a preponderating or exclusive 
 extent on raw materials, or on partly manufactured 
 goods, would exaggerate the rise, and, in times of fall- 
 ing prices, would fail to indicate the full extent of 
 the fall. But here again the limitations imposed by 
 the statistical data available present insurmountable 
 obstacles. The ideal index number might embrace, 
 not a single article only, as that used by Adam Smith, 
 nor a few, like those comprehended in the rough an- 
 ticipations of earlier writers, such as Bishop Fleetwood, 
 nor even the larger number of the later authorities, 
 but all articles whatever bought and sold in a country. 
 But this is an ideal far beyond the possibilities of 
 realisation. Here, as elsewhere, we must perforce 
 content ourselves with an approximation. Within 
 the limitations of the statistical data we must make 
 our list of commodities as representative as may be 
 possible ; and we must trust to the hypothesis, which 
 careful investigation has shown to be reasonable, that, 
 although our results are admittedly partial, they may 
 be safely treated as typical. For it is a rational 
 
 The Measurement of Changes in Prices 19 
 
 hypothesis that, while friction may delay the process, 
 retail prices are likely in the end to follow the direction 
 of wholesale, and it is even more probable that the 
 prices of manufactured goods sold wholesale should 
 conform with greater rapidity to changes in those of 
 the raw materials of which they are made. 
 
 For the purely statistical purpose of ascertaining 
 the changes in the purchasing-power of money, with- 
 out framing any hypothesis on the cause of those 
 changes, it is important that the material for the cal- 
 culation should be as representative as is consistent 
 with the paramount need of reliability ; and, if it be 
 sought to show that the change is due to some general 
 cause, such as the increase or decline of the output 
 from the mines, or of the available stock of the 
 precious metals, such abundance is even more impor- 
 tant, for it is by comprehensiveness alone that we 
 can hope to eliminate the influence of special causes 
 affecting particular commodities. The more numerous 
 the commodities, the more likely it is that some 
 special cause affecting some one commodity in some 
 particular manner will be counteracted by some other 
 cause affecting another commodity in an opposite 
 manner. But to attain this end the commodities 
 should be independent of one another,^ and manufac- 
 tured goods can scarcely be said to be independent of 
 the raw material of which they are made, or goods 
 sold retail of those same goods exchanged in the 
 wholesale market. Given, therefore, sufficient variety 
 
 1 Of. Professor Edgeworth's Memorandum in the British Associa- 
 tion Report for 1887. It is a principle of statistical inquiry that 
 sample statistics may be as eflfective as complete statistics, and the 
 difficulty turns on the determination of the question whether in the 
 particular investigation the samples are truly representative. 
 
20 
 
 Money and its Relations to Prices 
 
 of commodities, it is not a defect from this pcnnt of 
 view that the prices should be wholesale, and, in the 
 main, those of raw materials. 
 
 The hypothesis that the change is due to some ex- 
 pansion or contraction in the supplies of "^oney has 
 an important bearing on the next particular regard- 
 inc' the construction of an index number, to wh ch 
 ou°r attention will be directed. This concerns the 
 starring-point of the calculation. A consideration of 
 the circumstances, to which allusion was made when 
 the suitability of the precious metals as a standard ot 
 deferred payments was under discussion, leads to the 
 conclusion that any change in the purchasing-power 
 of money, which is due to an increased or diminished 
 supply ff^m the mines, is likely to be evident only 
 over considerable intervals of time. The annual pro- 
 duction is so small in comparison with the stock in 
 existence that its ordinary influence from year to year 
 L unimportant and unnoticeable. But, it some con- 
 siderable change continues to operate for a period of 
 years, its effects will be manifest in an alteration in 
 purchasing-power. . . , . 
 
 On this ground Adam Smith was justified in 
 measuring the fluctuating value of silver by the price 
 STrn He was aware that that price might vary 
 Latly from one year to another in consequence of 
 £ character of the seasons ; but he held that, over a 
 considerable interval of time, the real value o corn 
 did not materially alter, as the »-Pj;°;'«-«"\"i f^ 
 efficiency of human labour counterbalanced the in- 
 cealing price of cattle, the chief agr cultural instru- 
 me't. His explanation may be inadequate or even 
 „us but his conclusion was broadly true; and 
 
 The Measurement of Changes in Prices 2 1 
 
 
 he expressly allowed in part of his calculations for the 
 disturbing effects of a series of bad seasons. 
 
 It is curious to note that investigations into the 
 prices of a hundred years later led Tooke,i taking 
 short periods of year by year, to attribute everything, 
 or almost everything, to the influence of the seasons. 
 To him, perhaps, is largely owing the publicity of 
 Gregory King's classical table exhibiting the enormous 
 and disproportionate effect produced by a scarcity of 
 corn on the price of that article. But there can be 
 little doubt that he failed to detect the influence of a 
 broad cause, because he concentrated attention on the 
 special circumstances of successive single seasons or 
 short periods of years, and on the conditions affecting 
 mainly one article alone. The criticism passed by 
 Jevons2 on predecessors like Tooke, that they seemed 
 to lack the power of extracting from their tables of 
 prices the information which was really contained, is 
 not undeserved. 
 
 One of the most important services, indeed, of that 
 graphic method of statistics, of which Jevons himself 
 made such felicitous use, has consisted in the detec- 
 tion of the broader movements of prices and their 
 separation from minor and more passing disturbances. 
 From Jevons"' Letters "3 we learn that he believed 
 that he had a " capacity of seeing the sameness and 
 difference of things"; and his "Investigations in 
 Currency and Finance " furnish abundant proof of the 
 possession and use of this faculty. Yet it may be 
 questioned whether, without the aid of the graphic 
 
 1 CJ. his " History of Prices." 
 
 2 Cf. " Investigations in Currency and Finance," p. 120. 
 
 3 Q/*! ** Letters and Journal of W. Stanley Jevons," p. 176. 
 
2 2 Money and its Relations to Prices 
 
 method, with its curves of prices, it would be possible 
 to discern clearly in any mere tables the " sameness 
 and difference of things." No one, at least, who has 
 studied with care such a curve of general prices, ex- 
 tending over a sufficient period, can have failed to 
 observe the differing character of the fluctuations. 
 The periods of alternating prosperity and depression, 
 which have been established by statistical research, 
 aided by economic reasoning, as the normal charac- 
 teristic of modern commerce and industry, and have 
 appeared to occupy about decennial intervals, can be 
 distinguished by the eye at once from the minor tem- 
 porary fluctuations, due to some accident of supply 
 or demand, which yet leave their mark on the general 
 curve, and from what Cournot called ^ the " secular »' 
 movement up and down, indicating the fall and rise 
 in the purchasing-power of money. Such a curve 
 may be said to furnish that ocular demonstration 
 which is, perhaps, more convincing than any argu- 
 mentative process ; and for the scientific construction 
 of these curves the student has waited till compara- 
 tively recent times. 
 
 In order, therefore, to arrive at the broad changes 
 in the purchasing-power of money, which extend 
 over considerable intervals of time, and to detect the 
 influence of a common general cause afl'ecting m a 
 similar manner the prices of a number of separate 
 commodities, it is necessary to eliminate not merely 
 the minor temporary fluctuations, which may be 
 traced to some passing accident in the supply or the 
 demand of particular commodities, but the recurring 
 movements of alternating expansion and contraction 
 
 1 "Researches into the Mathematical Principles of the Theory of 
 Wealth," translated by N. T. Bacon, p. 25. 
 
 Tke Measurement of Changes in Prices 2 3 
 
 of credit. For this reason it is held to be more appro- 
 priate that the starting-point of the calculation in an 
 index number should be the prices, not of a single 
 year, but of an average of years. They should not be 
 unduly exalted, or depressed, by transitory circum- 
 stances of the market, or by credit fluctuations. 
 They should represent the average level of commercial 
 activity, and not the fever of speculative excitement 
 or the torpor of stagnation. If the purchasing-power 
 of money is falling, prices should tend to be higher 
 during every point of the succeeding credit cycle 
 than they were at the corresponding points of the 
 preceding. They should be higher when the wave 
 of speculation is at its crest ; they should be higher 
 also in the trough of depression. If, on the other 
 hand, the purchasing-power of money is rising, prices 
 should be lower both during the flow and during 
 the ebb of credit. They should fall with that ebb, 
 but they should fall still lower in consequence of the 
 " secular " change in the value of money. To render 
 valid such comparisons, it is desirable to select as the 
 starting-point of the calculation a set of prices, which 
 may be regarded as independent of the special in- 
 fluence of expanding or contracting credit, and should 
 accordingly be based on an average of years including 
 or neutralising the effects alike of excessive specula- 
 tion and extreme depression. 
 
 A third consideration with regard to an index 
 number, which deserves some notice, is also connected 
 with the sUrting-point of the calculation. The 
 Economist number adopts, as we have observed, a 
 mean between the prices of the articles included in 
 its comparison taken on the 1st of January and the 
 
 
 I 
 
24 Money and its Relations to Prices 
 
 1st of July of every year. But the practice of 
 another index number— that of Mr. Sauerbeck- 
 might be substituted, and a yearly average obtained 
 f ro'm the prices of each month. Or we might content 
 ourselves with a single set of prices taken on some 
 one date in each successive year, or we might pursue 
 some more refined and elaborate method. The ques- 
 tion, however, of the particular method adopted is 
 not, it would seem, of very great importance. The 
 point to which it is essential to attend is that the 
 prices should be taken at the same time, and in the 
 same way, in the subsequent years as in the year, or 
 years, from which the calculation starts. It is an 
 established doctrine of statistics that figures, which 
 are themselves erroneous, may yet be safely employed 
 for purposes of comparison, if it is possible to reckon 
 with sufficient certainty on the uniform recurrence of 
 the error. The importance of this consideration has 
 been already observed when the greater liability of 
 retail than wholesale commodities to changes in 
 quality was noted ; and without neglect of the claims 
 of accuracy, it may be held that, so long as the prices 
 are ascertained in the same manner and at the same 
 time in the successive years of the series, if they fail 
 to be truly representative or perfectly exact at the 
 outset, they will fall short to about the same extent 
 throughout the calculation, and the error will there- 
 fore flil to vitiate the comparison. The aim in view 
 is that of comparison, and for this purpose the error 
 can be eliminated. 
 
 A point of greater subtlety, and not less difficulty, 
 is raised by the consideration of the various methods 
 of arriving at the general average from the particular 
 
 The Measurement of Changes in Prices 25 
 
 prices The method followed by the Econom^st is 
 comparatively easy and simple; and it may be laid 
 down as a broad principle that, tbe simpler and 
 easier the calculation, the less danger will there be of 
 chance mistakes. But to obtain a true measure of 
 the changes in general prices other considerations 
 must be taken into account. Economists of mathe- 
 matical attainments have devoted no small attention 
 to the most exact and appropiiate method of reaching 
 the general average ; but for the purposes of the 
 present inquiry it is perhaps unnecessary to enter on 
 any abstruse or technical mathematical .reasoning. 
 It may be possible to put into ordinary intelligible 
 language the main questions at issue. 
 
 Three chief modes of taking the average have been 
 distinguished in discussions on the question. These 
 are (1) the Arithmetical Mean, (2) the Geometrical 
 Mean, and (3) the Median. The first of these is the 
 method commonly adopted in ordinary hie, and 
 usually intended by the plain man when he speaks 
 of striking an average. It consists simply of adding 
 together the changes in the prices ot the separate 
 commodities, and dividing the total by the number ot 
 commodities. The method, as Professor Kdgeworth 
 remarks in one of the memoranda to which we have 
 referred is recommended by its very simplicity, and 
 by its accordance with the general results of common 
 experience. But its adequacy to the measurement of 
 changes in general prices has been questioned, and, 
 although the tendency of subsequent opinion has 
 inclined in its favour, Jevons himself preferred the 
 more elaborate process of the geometric mean. 
 1 Of. Report of British Association for 1887, pp. 283, etc. 
 
26 Money and its Relations to Prices 
 
 This may be briefly described in his language. 
 "To take the geometric mean of two ratios," he 
 remarks,^ " we must multiply them together and 
 extract the square root of the product." He rests 
 the superiority of this process over the arithmetic 
 mean on the consideration that the easier method 
 "exaggerates" "the prices which have risen at the 
 expense of those which have fallen " ; and Professor 
 Edge worth has shown ^ both on cb priori and d 'pos- 
 teriori grounds that some such defect may conceivably 
 attach. In forming estimates, he remarks, there ap- 
 pears to be a tendency to err by excess more than by 
 defect, and this tendency may influence the demand 
 felt for an article on the ground of its utility. There 
 may be more exaggerations than under-estimates of 
 that utility. Moreover, he adds, it is obvious that 
 while " a price may rise to any amount," it " cannot 
 sink below zero." Prices may therefore " be apt to 
 deviate much more in excess than in defect," And, 
 lastly, " tacit combinations " between dealers " may 
 prevent prices from falling as low as from time to time 
 they otherwise would, according to the law of supply 
 and demand." These db priori considerations Professor 
 Edge worth supports by an examination of certain 
 well-known prices; and, translating his reasoning into 
 the language of curves, he shows that prices may 
 conceivably tend to group themselves, not in the 
 " symmetrical curve," which corresponds to the arith- 
 metic mean, where the extremes range themselves 
 similarly on either side of an intermediate position, but 
 in the " unsymmetrical curve of which the range in 
 
 1 *• Investigations in Currency and Finance," p. 24. 
 ' Cf. Report quoted above. 
 
 The Measurement of Changes in Prices 27 
 
 • 
 
 excess is greater than in defect." To this unsymmetri- 
 cal curve the geometric mean more nearly corresponds. 
 Professor Edgeworth himself, however, is inclined 
 to favour the use of a third method— that of the 
 median^— and he holds that theory and practice com- 
 bine to show that, where the prices are numerous, the 
 symmetrical curve of the arithmetic mean tends to 
 be realised, while the employment by Jevons of the 
 geometric mean, according to his own confession, was 
 inadequate to prevent the undue influence on the 
 general average of the special circumstances afiecting 
 the price of cotton during the American War, and he 
 was compelled to seek and apply a further corrective.^ 
 The median, on the other hand. Professor Edgeworth 
 argues, is adapted both to cases where the curve of 
 prices is symmetrical and to those where it is not. It 
 consists of that quantity which has as many observa- 
 tions above it as below it. It is manifestly easier to 
 reach than the geometric mean, although, as Jevons 
 showed, that method was simplified by the use of 
 tables of logarithms; and it is not more diflacult to 
 handle than the arithmetic mean, while it makes 
 greater allowance for the possibility of error. 
 
 Akin to this question of the appropriate method of 
 striking the general average is the point whether all 
 the commodities included in the calculation should be 
 considered of the same importance. Do they all play 
 the same part in the business of life? Do they 
 
 1 Cf. Report, pp. 284, 288, 291, and also paper on *' Some New 
 Methods of Measuring Variation in General Prices," in Statistical 
 Journal for June, 1888, vol. li., pt. ii. 
 
 2(7/. "Investigations," p. 39. Jevons repeated for the years 
 1861 and 1862 the low prices of 1860. 
 
i1 
 
 
 II 
 
 28 Money and its Relations to Prices 
 
 equally afford, by the changes in their prices, the 
 means of measuring the alterations in the general 
 purchasing-power of money ? The assignment of 
 different degrees of importance to different articles is 
 technically known as " weighting," and may be effected 
 in various ways. More than one place in the list of 
 commodities embraced in the calculation may be 
 allotted to the more important, or the less important 
 may be removed altogether. Each commodity may 
 be multiplied by a figure representing its comparative 
 importance and based upon respective consumption. 
 An attempt may even be made to allow a different 
 weight on this account in different years of the series. 
 A regard for theoretical accuracy undoubtedly sug- 
 gests the employment of some such method of weight- 
 ing, and it is explicitly adopted in the case of some 
 well-known index numbers. For a full discussion of 
 the general considerations, by which this weighting 
 should be regulated, reference may be again made to 
 Professor Edge worth's Memoranda;^ and here it may 
 merely be noted as the outcome of his mathematical 
 reasoning that an error in the weighting seems of far 
 less importance than an error in the prices in its 
 effect on the correctness of the result.^ 
 
 Such are the chief points which appear to deserve 
 attention in the construction of an index number, and 
 such are the main possibilities of error. In passing 
 them in review, we have aimed, not so much at 
 demonstrating the adequacy or insufficiency of the 
 method, as at proving that its conditions and limita- 
 
 1 And to the paper, quoted above, in the Statistical Journal for 
 June, 1888. 
 
 2 Cf. Report of the British Association for 1888, p. 200. 
 
 TAe Measurement of Changes in Prices 29 
 
 tions have formed the subject of systematic inquiry, 
 and that if, as is undoubtedly true, it is allowed a 
 recognised place by economists and statisticians, this 
 position is not conceded from ignorance of its real 
 characteristics, or of its possible defects. It is no 
 exaggeration to say that the index number is now 
 generally regarded, not merely as a useful, but as an 
 indispensable, instrument in any scientific inquiry 
 into changes in the purchasing-power of money. 
 
 Some of the numbers formed and used in recent 
 years may be briefly enumerated. That of the 
 Economist has been already described. The prices, 
 from which the calculation starts, were those of an 
 average based on the prices of the quinquennium 
 extending from 1845 to 1850. The commodities 
 selected were 22 in number, and their prices in each 
 successive year of the series were a mean of those 
 obtained on the 1st of January and the 1st of July. 
 The general average was a simple arithmetic mean. 
 
 In his investigations into the fall in the value of 
 gold in the middle of the nineteenth century, Jevons 
 employed^ much the same prices as those of the 
 Economist index number, which was, indeed, a con- 
 tinuation of his own, except that, by grouping, his 39, 
 articles were reduced to 22. He took a mean between 
 the highest and the lowest prices (indicating different 
 qualitres) of each article recorded in the middle of the 
 month, from which he obtained the yearly average by 
 a simple arithmetic mean, and by the same process he 
 reached the average of the period 1845-50, from which 
 his calculation started. But for his general average he 
 adopted the geometric and not the arithmetic mean. 
 
 ^ Cf. ** Investigations," chapter ii., sec. xiii. 
 
30 Money and its Relations to Prices 
 
 He also calculated ^ the changes in the prices of 79 
 less important commodities— which were in most 
 cases distinct from the original 39— by a method 
 
 generally similar. 
 
 A variation of the Economist index number was 
 employed by Mr. Palgrave in 1886 in a Memorandum 
 prepared for the Depression of Trade Commission.^ 
 The same 22 articles were used, but the period 1865-69 
 was substituted as a starting-point of the calcula- 
 tion, and an endeavour was made to "weight" the 
 measurement by assigning to each article a figure 
 representing its "relative importance." This figure 
 was obtained by calculating the value of the quantity 
 of each article annually consumed in the United 
 Kingdom in the twenty years 1865-85 ; and a similar 
 calculation was applied by Mr. Palgrave to 22 French 
 
 articles. 
 
 A slightly different method of weighting has been 
 used by°Sir Robert Giffen in the construction of index 
 numbers based on the prices of imports and exports.s 
 Taking a particular year (which he stated in evidence 
 before'' the Gold and Silver Commission to be 1875, 
 although he added that the process had been tested 
 by comparison with the results obtained from the 
 selection of some other year), he assigned a propor- 
 tionate number to each article ** according to the pro- 
 portion of its value to the toial value of the imports 
 and exports respectively." "The percentage of rise 
 or fall " was " multiplied " by " the proportionate num- 
 ber " thus assigned, and " divided by the sum of the 
 
 1 " Investigations," ch. ii., sec. xvil ^ Cf. Third Report, p. 329. 
 3 Cy. ** Essays in Finance," first series, xiv. ; second series, i. ; and 
 Report of Gold and Silver Commission, qq. 709, etc. 
 
 
 T^e Measurement of Changes in Prices 3 1 
 
 proportionate numbers." The full index number of 
 100 was not reached because in the case both of the 
 imports and the exports the number of articles was 
 limited, for which it was possible to obtain prices by 
 dividing the values by the quantities (the method by 
 which the prices were ascertained). The aggregate 
 index number, accordingly, for the imports was 8116, 
 and for the exports 65 8 ; and Sir Robert Giffen ex- 
 pressly retained these lesser numbers in order to show 
 that all the imports and exports were not embraced in 
 the calculation. The prices of single years — those of 
 1840 for the exports and of 1854 for the imports — 
 were taken as the starting-point. 
 
 Two other index numbers have attracted especial 
 notice. Of these, that of Mr. Sauerbeck is based on 
 English prices.^ Forty-five articles are comprised, and 
 their representative character may be inferred from 
 the fact that they embrace all the articles in the 
 United Kingdom, of which statistics exist, and the 
 value — whether they are produced in the country or 
 imported from abroad — exceeds a million pounds. 
 Taking monthly prices, Mr. Sauerbeck strikes a simple 
 average for the year ; and he starts with the average 
 prices of the decade extending from 1867 to 1877, 
 which, he states, are in the "aggregate " found to be 
 equivalent to the average of the twenty-five years 
 from 1853 to 1877. A simple arithmetic mean is 
 adopted as the general average, but it is tested in two 
 ways, which are thus described by Mr. Sauerbeck. 
 
 1 C/. paper on " Prices of Commodities during the last Seven 
 Years" in Statistical Journal for June, 1893, vol. Ivi., pt. ii,, evi- 
 dence given before Gold and Silver Commission, qq. 878, etc., and 
 article in Economic Journal for June, 1895, vol. v., no. 18. 
 
 I 
 
32 Money and its Relations to Prices 
 
 a 
 
 One is that of weighting each article according to 
 its importance on the average of three recent years. 
 The other is that of " calculating the quantities in the 
 United Kingdom at their actual value " (" the produc- 
 tion on the basis " of Mr. Sauerbeck's own price tables^ 
 "and the imports at the Board of Trade values ) 
 "and at the nominal values on the basis' ot the 
 average prices of the decade from which the calcula- 
 
 tion starts. , 
 
 The other index number, to which reference may be 
 made, is that of the late Dr. Soetbeer.' As many as 
 114 articles were included in his tables, of which 100 
 were Hamburg prices, and U English. The average 
 of the years 1847-50 was taken as the starting-point 
 of the calculation. The articles were divided into 
 eiffht larce groups, and an index number obtained for 
 e^h gro°up in succession, and then a number was 
 reached for the whole by regarding each of the 
 subordinate groups as equally important, although 
 they did not in each case contain the same number of 
 commodities. This process amounted, Sir Kobert 
 GifFen observed," to a kind of weighting. 
 
 Such are some of the best known varieties of index 
 numbers used in recent years. It will be noticed that 
 they exhibit differences of detail in construction. 
 AH refer to wholesale prices; and those of the 
 Eccynormst, of Mr. Palgrave, and of Mr. Sauerbeck. 
 
 J h ; pLmetall-verhiltnisse und der Wahrung«f.»ge," of which a 
 
 lltlaUon w«tppl"ded to the Final Report of the Gold and Silver 
 tranBlation waa app ^ ^ ^^^ ^^^ ^^^^^ ^.^^ 
 
 ^rRoTer-Giffen i: hl^deseriptioo of the method by which Dr. 
 Soetbcer reached his final number 
 2 Cf. Report of Gold and Silver Commission, q. 733. 
 
 The Measurement of Changes in Prices ^2^ 
 
 vns 
 
 deal speaking broadly, with the same commodities. 
 ^ut m this respect those of Sir Robert Giffen and of 
 JJr. Soetbeer are different; and the starting-points 
 
 h me'r. ''^ '^''^f' °* ^-^-"^ weightl^here 
 such methods are employed-are not identical. Yet 
 
 mk" i".f f ""^^ "^^ ^'^^^ ^'^^ I'^^^d '•e^-'lte are 
 
 is ml'-r? t ^ ""^'^'^ '^"'^^°'=y i° °^^ direction 
 IS manifest. Nor is the technical reasoning of Pro- 
 fessor Edgeworth's Memoranda,' or the authoritative 
 pronouncement of the Gold and Silver Commissioners, 
 and ot the Committee appointed by the British 
 Association, at variance with this conclusion. That 
 errors tend to cancel one another, and that there may 
 whir-f'T r ^/'"^'='»«'°n than in the data from 
 
 It j^^ '' t'^rf' '°*^ '^"*' "^ '^'ff^^^"* "^^-^hods do 
 not differ widely from one another, it is probable that 
 
 seem 'hard sayings " to the plain man, but they are 
 the outcome of scientific inquiry, and they are nS 
 easy to disprove. On the adequacy of the method to 
 
 ?e t b7!nr ^t*^ °' '''^' ''^'" ^^y -deed be 
 telt, but of Its sufficiency as a measure of the broad 
 
 beTir V\T''''f '''' '"^"^'^^^ «*-dard it m^y 
 it ha? h ' ""f °"' ^'" °* '^"°"« contradiction, that 
 
 the test. Indeed, although, as we have noticed it 
 
 rnay seem desirable to weight the prices, which fo'rm 
 
 he basis of the calculation, when we view the mattS 
 
 theoretically, a simple arithmetic mean has been found 
 
 m practice to yield results, which are not only, w" th 
 
 imf' '"*'""^ *'*' " '^' ^^'' "^ '"« B"ti»h Association for 
 
34 Money and its Relations to Prices 
 
 rare exceptions, adequate, but are also generally 
 similar to those obtained by the more elaborate 
 
 ''"k r'index number is intended to be used as a 
 tabular standard ^ for deferred payments and to 
 receive the sanction-permissive or compulsory-ot 
 he Legislature, it should undoubtedly be constructed 
 with a close regard to scientific requirements. Nor is 
 it possible to avoid entirely the danger of some varia- 
 tion in quality, which may vitiate pro tanto the com- 
 parison ; and changes may be gradually and insen^bly 
 fntroduced in market quotations of pnces which, over 
 an interval of years, amount to a real difference^ No 
 doubt a-ain, regarded from the standpoint of the 
 or Jinary"con;um!r. retail prices are the more impor- 
 Zt consideration in his budget, and they may only 
 conform v.ith some delay to wholesale pnees w^, h 
 from the point of view of the producer are of para 
 2 iLortance But that within its limits the 
 X nZberS generally constructed, is a useful. 
 Fnot indispensable, instrument of economic and 
 statistical inquiry, and that, within its limits also, it 
 an inttrum'ent sufficient for its purpose, may be re- 
 larded as a fact established after close investigation 
 ^ In conclusion, a further question may now be raised 
 but must be answered more fully when we investigate 
 the special circumstances of particular periods The 
 Sefnumber affords themeansof solving a statistical 
 ;t^m It reg.^s ^^^.^^J^Z 
 "iLSr^S^^ the further proHem 
 at once arises of determining the cause to which those 
 
 iC/". below, p. 37. 
 
 ■ 
 
 The Measurement of Changes in Prices 35 
 
 changes are due ; and here the answer of the index 
 number must, from the conditions of the case, be by 
 itself inconclusive. But it may be used to corroborate 
 other evidence. Does the cause, it may be asked, lie 
 with the commodities or with the money ? There is 
 undoubtedly a change in the relation between them, 
 but to which is the alteration due ? To this knotty 
 question we shall have to return, and at the present 
 stage of our inquiry we must be content with very 
 general considerations. If by other evidence we can 
 establish the probability that the cause lies mainly on 
 the side of the money, we can then look for confirma- 
 tion or the reverse to the index number. We must 
 remember that the cause will, in all probability, pro- 
 duce its full results only after an interval of time, and 
 that it will exercise its influence by gradual and 
 partial stages. To the extent, no doubt, that it is 
 operative its effects will in reality be uniform, but it 
 will probably produce some counteraction, and there- 
 fore they will not seem to be uniform. We may at 
 once pronounce in a sense true, and yet misleading, 
 the common assertion that, if a change of prices be 
 due to an expansion or contraction of the supplies of 
 money, the rise or fall must be universal and im- 
 mediate. To corroborate other evidence of the presence 
 of such a cause, the index number need only indicate 
 a general and a gradual change. 
 
 Again, the larger and more representative the basis 
 of construction, the more likely it is that the change 
 indicated by the index number in the relation between 
 commodities and money is due, not to the commodities, 
 each of which may be specially affected by some one 
 cause, probably different from, or opposed to, that 
 
 
36 Money and its Relations to Prices 
 
 M 
 
 iV 
 
 i 
 
 'I 
 
 which is operating on some other commodity, but to 
 the money given and taken in exchange. The par- 
 ticular influences are thus likely to be eliminated, and 
 the result, as shown by the index number, to be due 
 to some common cause. It is possible that this common 
 cause may lie on the side of the commodities ; but the 
 index number tends to lessen the importance to be 
 ascribed to a separate investigation into the circum- 
 stances of each individual commodity. It diminishes 
 the confidence sometimes manifested that such an 
 investigation alone furnishes an adequate explanation 
 of changes in general prices, and that it is needless 
 to look beyond for a common cause. These narrow 
 observations are perhaps more often an obstacle than 
 an aid to the attainment of correct perspective ; for 
 particular causes are not difficult to discover if we set 
 ourselves to find them, but the search is often pre- 
 judicial to a general view. It must, however, be ad- 
 mitted that the difficulty of a plurality of causes and 
 an intermixture of efi-ects is one from which the 
 economist is rarely, if ever, freed ; and he is generally 
 compelled to be content with a balancing of proba- 
 bilities. Such appear to be the broad conclusions on 
 the evidence furnished by index numbers of the causes 
 of alterations in the purchasing-power of money. 
 
 CHAPTER II 
 
 THE ECONOMIC EFFECTS OF CHANGES IN PRICES 
 
 In the last chapter we were occupied with the sta- 
 tistical measurement of changes in general prices. 
 We noted the characteristics and failings of index 
 numbers, and the chief points of difference in their 
 construction. They may be designed to fulfil two 
 purposes — the one scientific, and the other practical. 
 The scientific end is the measurement of changes in 
 the value of money, and the practical object is the 
 correction of its defects as a standard. To the conse- 
 quences of those imperfections we shall now turn our 
 attention. 
 
 That changes occur from time to time in the 
 purchasing- power of money, that such an instrument 
 as an index number may be usefully employed to 
 register those changes, and that in certain cases its 
 substitution for the more imperfect monetary standard 
 may be desirable, are conclusions which are naturally 
 suggested ; and in this application to practical ends 
 the index number has sometimes received the name of 
 a "multiple legal tender" or a "tabular standard." ^ 
 Objections may be raised to the employment of such 
 a standard on the ground of unfamiliarity, or per- 
 haps of a certain refinement of calculation, which is 
 likely to confuse or alarm the plain man, and it may 
 
 ' Of. Jevons : *' Money and the Mechanism of Exchange," eh. xxv. 
 
 37 
 
38 Money and its Relations to Prices 
 
 
 
 easily prove to be cumbrous or even impossible. But 
 it can hardly be doubted that its use might prevent 
 injustice, because it would correct the imperfections of 
 the monetary standard. Into the nature of those 
 imperfections we may now inquire. 
 
 They arise in connection, not with the use of money 
 as a medium of exchange, or as a common denominator 
 or measure of value, in the senses distinguished in the 
 text-books, but with its employment as a standard of 
 deferred payments. It is important to lay stress on 
 this point at the outset, because in some dis- 
 cussions it seems to be neglected or forgotten. It 
 is unnecessary that money in each of its uses should 
 be identical in form or material. A good medium of 
 exchange may not prove an excellent standard of 
 deferred payments. The paramount quality demanded 
 for the one is general acceptability, and the most im- 
 portant requisite needed for the other is stability. It 
 is not impossible that commodities may be found 
 possessing the one quality, which are yet deficient in 
 the other, and we may reject them for the one use 
 without dismissing them from the other. Innovators, 
 anxious to improve the standard of deferred payments, 
 may fairly claim that they are not answered by the 
 assertion timt the substitute, which they propose, would 
 be an inconvenient medium of exchange, while re- 
 formers, intent on the introduction of a new coinage, 
 or the reformation of the old, may conceivably neglect 
 the requirements of a stable standard of deferred 
 payments. The instructed economist would seek, if 
 it be possible, to combine both advantages in a sound 
 monetary system — that of a convenient medium of 
 exchange and that of a stable standard of deferred 
 
 Economic Effects of Changes in Prices 39 
 
 I ' 
 
 payments-but he would be ready to recognise that 
 to satisfy this dual criterion it is not necessary, it is 
 even unlikely, that the medium and the standard 
 should be identical. 
 
 It is then as a standard of deferred payments that 
 imperfections have been discovered in the precious 
 metals. From the consideration that the conditions 
 of their production are mutable it is evident that such 
 imperfections cannot be avoided ; but, owing to the 
 fact that in ordinary circumstances the annual out- 
 put is small compared with the stock in existence, 
 these imperfections cannot usually be detected until 
 after an interval, and it requires a considerable and 
 continued change to bring them into noticeable pro- 
 minence. For the purposes, therefore, of a measure 
 of value over short intervals, the precious metals are 
 more suited than other commodities, and they are by 
 comparison stable. But for a standard of deferred 
 payments their fitness is less evident; for their 
 stability no longer remains unimpeachable. In 
 ordinary circumstances they may be more stable than 
 any single commodity ; but at times of considerable 
 change In the volume of production they may be com- 
 pelled to yield the prerogative, and in any event they 
 are less stable than a standard expressly designed, 
 like an index number, to register and counterbalance 
 their imperfections. The example quoted by Adam 
 Smith ^ of Colleges, a proportion of whose rents was 
 by the wisdom and equity of the Elizabethan states- 
 man fixed in corn and not in money, and thus secured 
 from the loss consequent on the fall in the value of 
 silver, which followed the discovery of America, has 
 1 " Wealth of Nations," bk. i., ch. v. 
 
 A 
 
40 Money and its Relations to Prices 
 
 Economic Effects of Changes in Prices 41 
 
 
 |i 
 
 
 become classical ; and constructors of index numbers, 
 from Lowe and Scrope onwards, have generally been 
 no less concerned with the practical end of ensuring 
 justice in monetary contracts than with the purely 
 scientific object of discovering and measuring the 
 alterations in the purchasing-power of money. 
 
 For in any but a primitive society the number and 
 importance of deferred payments are at once consider- 
 able and progressive. If debtor is not to benefit at 
 the expense of creditor, or creditor to inflict an injury 
 on debtor, the purchasing-power of money should 
 remain unaltered during the time that the loan is 
 current. The monetary expression, in which the debt 
 is contracted or repaid, should correspond with the 
 real amount of commodities which the money can 
 command. Nor is it conducive to the security and 
 advance of society that constant changes should be 
 made in a number of payments, which are conveniently 
 treated as fixed ; and yet, if the purchasing-power of 
 money alters, a strict regard for equity would dictate 
 such a change. The fact is, that the ordinary busi- 
 ness of society proceeds on the assumption that the 
 purchasing-power of money continues unchanged, and 
 on such an assumption alone can permanence be given 
 to social arrangements. So imbued, indeed, with the 
 spirit of this assumption is the average man that it 
 requires an effort of reasoning, and a disturbance of 
 ingrained habit, to realise the unquestionable fact that 
 the money of ordinary use is not thus perfectly stable. 
 The liability noted by Adam Smith ^ in writers aware 
 of the errors of the Mercantile System, to allow in- 
 sensibly the " lands, houses, and consumable goods," 
 1 "Wealth of Nations," bk. iv., ch. i. 
 
 f 
 
 (■ 
 
 i 
 
 with which they started in their reasoning to " slip 
 out of their memory," and to continue the argument 
 as if gold and silver were the only form of wealth, 
 finds its analogy in the conception of the stability of 
 money entertained in the mind of the plain man ; 
 and hence partly, no doubt, his aversion to the refine- 
 ments of the tabular standard. But his reluctance or 
 inability to form any clear or abiding recognition of 
 the fact does not make the fact itself untrue or un- 
 important, and he is rudely awakened from his 
 slumbers if some sudden change occurs. 
 
 On the injurious effects of such sudden change no 
 dispute is raised. It is generally agreed that rapid 
 and extreme fluctuations in the purchasing-power of 
 money are purely mischievous, if they are not 
 calamitous. The lesson taught by excessive issues of 
 inconvertible paper is written deeply on the memory 
 of nations of advanced civilisation. There are 
 countries, it is true, where the lesson is not fully 
 learnt, and there may be times among progressive 
 nations when for the moment it is forgotten. Yet 
 the skill and discretion shown ^ by the Bank of France 
 during the war with Germany, when specie payments 
 were suspended, and the paper currency became for 
 the time inconvertible, may be justly regarded as con- 
 stituting an advance upon the management of our 
 own Bank of England in similar circumstances dur- 
 ing the Napoleonic war, and that management itself is 
 in marked contrast with many an epoch of calamitous 
 disaster occasioned in other countries by excessive 
 issues before and since. For the dislocation of con- 
 tracts produced, and the fever of speculation en- 
 1 Cf. Dunbar : '* Theory and History of Banking," p. 125. 
 

 42 Money and its Relations to Prices 
 
 gendered, are acknowledged to be unmistakable 
 evils; and so great is the mischief occasioned that, 
 when the inevitable period of contraction ensues, it 
 seems almost better, in spite of the severity of the 
 suflfering, that it should be eftected with as little delay 
 as possible, and that the necessary pain should not be 
 mitigated by gradually increasing application of the 
 remedy. The disease has made such inroads that the 
 knife or the cautery is kinder than bandage or oint- 
 ment ; and the significant feature of a period of ex- 
 cessive issues, thus rapidly terminated, is that the 
 rise of prices advances with a speed which allows of 
 no interval for the readjustment of bargains, and the 
 quick-witted rascal profits at the expense of the honest 
 
 citizen. 
 
 It is then no more and no less than an economic 
 truism that sudden and excessive fluctuations are un- 
 mitigated ills ; and the only reason why rapid con- 
 traction of inconvertible paper may be preferable to a 
 more gradual process is that the malady to be 
 overcome has passed beyond the reach of mere 
 alleviatory remedies. It may, no doubt, be described 
 as a case of " kill or cure " ; and the death-rate is 
 high and the survivors are few. In itself the process 
 of sudden contraction, like that of sudden expansion, 
 is evil, but it is demanded by the conditions of the 
 
 situation. 
 
 If, however, it be admitted on the one hand that 
 sudden and excessive fluctuations are mischievous or 
 calamitous, it must on the other be remembered that 
 perfect stability is unattainable. The recurrence of 
 alternating periods of activity and depression—of 
 expanding and contracting credit— is an established 
 
 \ 
 
 Economic Effects of Changes in Prices 43 
 
 fact in the modern economy of commerce; and the 
 precious metals themselves are constantly undergoing 
 change, whether in the direction of a rise or a fall of 
 value. To look for complete stability is to listen to 
 " counsels of perfection " rather than the lessons of 
 universal experience. As we saw, the instinctive 
 habit of regarding the standard as itself immutable, 
 while changes take place in the objects, the value of 
 which it is employed to measure, prevents the quick 
 recognition of alterations in the general purchasing- 
 power of money ; and in ordinary cases those changes, 
 unlike the issues of inconvertible paper, are actually 
 so gradual as to seem insensible. Even when new 
 discoveries of the precious metals are made, and the 
 annual output is largely increased, it has to exert its 
 influence on the stock in existence, and to find its way 
 into the channels of business ; and this process is not 
 accomplished in a day, or a week, or a year. Nor are 
 the effects of contraction less gradually felt or imper- 
 ceptibly manifested. An alteration in prices, due to 
 an increase or diminution in the available supplies of 
 the precious metals, when contrasted with the de- 
 mands made upon them, is not, as common opinion 
 often apparently believes, and sometimes noisily 
 asserts, immediate or uniform or universal. 
 
 For the mode in which the new supplies find their 
 way into the business of the world is thus conceived 
 by economic writers.^ In the countries of the mines 
 themselves the result of an increased output is to 
 
 1 a/.'Ricardo on "The High Price of Bullion " ; Senior on " The 
 Transmission of the Precious Metals from Country to Country " ; 
 J. S. Mill : "Principles of Political Economy," bk. iii., ch. xix. ; 
 F. A. Walker : " Money," ch. iii. 
 
44 Money and its Relations to Prices 
 
 lower the value of the precious metals by reason of 
 their relative abundance, and to increase the prices of 
 the commodities for which they are given and taken in 
 exchange. The monetary value of the commodities is 
 therefore hiofher in the countries of the mines than it is 
 elsewhere, and the value of the precious metals them- 
 selves is relatively lower. A tendency is accordingly 
 set in motion to increase the imports into the coun- 
 tries of the mines in order to realise by their sale 
 these higher prices, and to send the precious metals 
 elsewhere to places where they will command a 
 greater purchasing-power by reason of their relative 
 scarcity. Together with the increase of imports into 
 the countries of the mines, there will also be a ten- 
 dency to a diminution of exports of commodities apart 
 from the precious metals ; for other countries will be 
 disinclined to pay the increased prices which they 
 command. The imports of commodities will thus 
 exceed the exports, and the exchange, in language 
 which has survived from the days of the Mercantile 
 System, will become " unfavourable " to the countries 
 of the mines, and " favourable " to those which have 
 sent the increased imports. On this account, there- 
 fore, there will be a tendency for the precious metals 
 to leave the countries of the mines and to flow to the 
 countries from which the increased imports have 
 come. The same process will take place in the 
 countries to which the precious metals go. There, 
 too, prices will rise, and the value of the metals fall. 
 There, too, a tendency to an increase of imports, and 
 a diminution of exports, will set the balance of trade 
 against the countries and in favour of those from 
 which the increased imports come. There, too, this 
 
 Economic Effects of Changes in Prices 45 
 
 tendency will result in an efflux of the precious 
 metals. And so gradually, from country to country 
 the new supplies will pass until they have raised the 
 general level of prices ; but the rise will not be im- 
 mediate, or uniform, or universal. 
 
 Such is the general economic theory of the interna- 
 tional distribution of money. The effects of expan- 
 sion, or, in the reverse circumstances, of contraction, 
 are gradually propagated from country to country. 
 An analogous process takes place within the limits of 
 each separate country. District by district and trade 
 by trade the rise or fall of prices may be traced. 
 The change is not immediate, or uniform, or uni- 
 versal. Just as the new supplies pass in the first 
 instance into those countries which have the largest 
 commercial dealings with the countries of the mines, 
 so they affect primarily the prices of those com- 
 modities for which the countries of the mines feel a 
 demand, and they raise the profits of those who trade 
 in them. These traders, being encouraged by the 
 rise, are eager to extend their business, and are ready 
 to buy more largely of other trades. They therefore 
 offer higher wages to their workmen, and higher 
 prices to those who furnish them with machinery or 
 with materials, or supply the commodities on which 
 they, or their workmen, spend their incomes. And so 
 from' trade to trade the influence of the increase in 
 the precious metals passes on. Of particular phases, 
 which this movement may present, we shall have 
 more to say later ; we may now be content to show 
 its general' character, and to emphasise the fact that 
 it is not immediate, or uniform, or universal. 
 
 The question, however, presents itself whether a 
 
111 
 
 
 I' t 
 
 I ! 
 
 i" t : 
 
 46 Money and its Relations to Prices 
 
 rise or a fall of prices, operating in this manner, is 
 the more conducive to general progress and prosperity. 
 In considering this debated problem, we must keep 
 constantly before our minds two facts in particular to 
 which recent inquiry has tended to give an added 
 prominence. One is the powerful influence of the 
 imagination as an economic factor. The older econo- 
 mists have been often blamed for reasoning about 
 men and women as if they were bales of cloth, or 
 bushels of wheat, and destitute of feeling. This has, 
 for example, it is argued, led them to exaggerate in 
 their speculative theories the mobility of labour, and 
 to under-estimate the strength of the objections to a 
 practical policy of laissez-faire. But, while a failure 
 to accord due recognition to the varying sympathies 
 and antipathies of men and women is thought to have 
 exercised a prejudicial influence on their theory of 
 wages, it has generally been held that no such defect 
 attaches to their theory of money. Indeed, it has 
 been aptly argued that it was the familiar, but 
 narrow, experience of the dealings transacted in the 
 money market, which betrayed Ricardo and his 
 disciples into the errors and omissions of their treat- 
 ment of the human factors of production.^ No doubt 
 the mobility of money has often bafiled the efforts of 
 legislators, who have tried to detain it by main force 
 in a particular country. No doubt it does persistently 
 — we may almost say instinctively — seek the best 
 market, the place, that is, where it will command the 
 highest purchasing-power. No doubt it might seem 
 as if such a human weakness as the imagination 
 
 ^ Cf. Marshall : ** Present Position of Economics," sees. 4, 5 
 "Principles of Economics," 3rd ed., bk. i., ch. iv., sees. 5, 6. 
 
 Economic Effects of Changes in Prices 47 
 
 might be safely disregarded in any discussion of in- 
 animate money. Yet, as we have noticed, the move- 
 ment of money is effected, not immediately or 
 uniformly, but only after successive intervals of time, 
 and through successive areas of space. A rise or fall 
 of prices is neither instantaneous nor universal. 
 Hence an opportunity is offered for the imagination 
 to exercise its appropriate influence ; and he must be 
 a dull or blind observer w^ho does not realise how a 
 succession of rising prices may kindle the imagina- 
 tion, and encourage enterprise, and how a series of 
 falling prices may produce despondency, if not inertia 
 and despair. 
 
 In this connection it seems idle to contend that, 
 when prices have found their level again, the change 
 only means that there are more or less counters in 
 employment than before, and that the real wealth, 
 which consists of the commodities exchanged, is 
 not altered by an increase or diminution in the 
 number of the counters in which it finds its nominal 
 expression. Nor is it really opportune to suggest 
 that, if one party to a bargain gains, another loses. 
 It may be sound sense to argue that the imagination 
 outruns the reality ; but the argument is not unlikely 
 to fall on unresponsive ears. If the influence of the 
 imagination be once granted — and it is diflScult to 
 dispute the fact or potency of such an influence — 
 then it would seem to follow in logical sequence that, 
 if economists of the older type were wrong in ignor- 
 ing the feelings of men and women as affecting their 
 action in the production and distribution of wealth, 
 modern economists may also go astray, if they do not 
 allow the possibility that a stimulus to energy and 
 
48 Money and its Relations to Prices 
 
 enterprise in the conduct of business, and to the 
 extension of commercial and industrial activity, may- 
 be given by that spur to the imagination, which is 
 applied by rising prices. 
 
 This influence is at once illustrated, and intensified, 
 by the presence in modern industry of an agency 
 marvellously delicate and extraordinarily effective. 
 This is the agency of credit. Such importance has 
 been given to it by some writers^ that they have 
 regarded its fluctuations as incomparably more signifi- 
 cant in their eflects on prices than any change in the 
 supplies of the precious metals. To this point we 
 shall return later. Here we are only concerned to 
 argue that credit may be said, in figarative language, 
 to furnish wings to the imagination, and to allow of 
 a higher rise in prices, and a more extreme fall, than 
 would be possible otherwise. 
 
 In his forecast of the course of events, which was 
 likely to follow on the gold discoveries of the middle 
 of the nineteenth century — a forecast, which was re- 
 markable because, proceeding from reasoning of an 
 abstract deductive type, it was substantially confirmed 
 by the independent statistical studies of Jevons,^ thus 
 affording a happy instance of the verification of specu- 
 lative prediction by the record of observed fact — 
 Cairnes ^ gave such prominence to the expansive force 
 of credit that he held that in England, where credit 
 was more fully developed, the rise of prices consequent 
 on the influx of the precious metals would be far more 
 rapid than in those Eastern countries, where credit 
 
 ^E.g.', Lord Farrer* 
 
 ^Gf. *' Investigations in Currency and Finance," pp. 56, 133. 
 
 8 ** Essays in Political Economy," p. 66. 
 
 Economic Effects of Changes in Prices 49 
 was sluggish, if it could really be said t,7ZZ 
 
 out furlJ '^ '^'■^''' ^'^'^"'°"'*> q^-i'ities with 
 
 out furnishing any manifest evidence of change The 
 
 Setrof """*' " ''^ "P^"'""- --eased the seLi! 
 metals and we may agree with him so far as to affirm 
 that not only does credit illustrate by its very fluctT 
 atons the powerful influence of the imagination on 
 he conduct of business, but that, when the o "ina" 
 stimulus has been supplied by some other cause the 
 imagination is furnished by credit with the means of 
 prosecufng its flights beyond what sobe "Zal 
 mative sense may countenance. Again, we repelT he 
 must be a dull observer of the motives which affect 
 he actions of men, who does not see how potent a 
 factor may be the imagination kindled bj a' rise or 
 enfeebled by a fall, of prices. It is impossible fo men 
 at all times to emancipate themselves from the subtle 
 mflue f ..^r.s.,on., and whether it 
 
 or be not, a mischievous delusion to forget the com 
 
 Mh cb their value is appraised, it is a delusion, which 
 still exercises unquestioned influence on the ima' 
 
 con,iuct of their commercial and industrial ventures 
 
 theTnetrrnVtt'^"-^ ^'^ ^^"^- ^°^ ^ '^'^^^^^ 
 ine energy , and the causes are not the less nof Pnf 
 
 because they work insensibly, and often nerh! 
 generally, are not consciously present to th^' J ^ ^^ 
 which they operate. ^ *^^ ™'"'^' °" 
 
 The ima,gination, then, is a factor for which allow 
 ance must be made in any comprehensive view oJ tL 
 
 D 
 
II 
 
 50 Money and its Relations to Prices 
 
 kH 
 
 Economic Effects of Changes in Prices 5 
 
 effects of changes in prices in the modern world. The 
 other fact, which should be borne in mind in such 
 discussions, is the new importance accorded to the 
 functions of the employer. It is not necessary to do 
 more here than recall the bare outlines of this modem 
 addition to economic analysis.^ The distinction drawn 
 between the employer and the capitalist, the emphasis 
 laid upon the position of the former in the centre, so 
 to say, of the industrial world, and the enumeration of 
 the qualities required for a successful discharge of his 
 important functions, are commonplaces familiar to all 
 who have acquainted themselves with recent develop- 
 ments of economic teaching. It is to the employer 
 that the capitalist resorts to lend his capital, and to 
 the employer the labourer goes to offer for hire his 
 labour. He is the pivot on which the industrial order 
 turns. He is the buffer which has to bear the first 
 brunt of industrial disaster. He is the pioneer who 
 has to point the way to industrial success. No doubt 
 it may be easy to magnify his virtues, and neglect his 
 defects: and his qualities may often be such as to 
 repel rather than attract. All that we are concerned 
 to recognise is the undeniable fact that he is credited 
 in recent economic writing with a position and 
 functions of paramount importance in the industrial 
 world. But the very qualities of energy and enter- 
 prise, which are calculated to promote the effective 
 discharge of his functions as the director of industry, 
 are specially liable to be influenced by the imagination 
 —to be stimulated by rising and depressed by fallmg 
 prices. Moreover, he is generally, if not invariably, a 
 la/. Bagehot: " Economic Studiea," pp. 52, etc.; Walker: ^« Wages 
 Question," ch. xiv. 
 
 ^* 
 
 
 1 
 
 i 
 
 debtor; for under the modern organisation of credit he 
 trades with borrowed money. Thus we find combined 
 in modern commerce the powerful influence of the 
 imagination, the elastic force of credit, and the central 
 importance of the employer, as testimony to the 
 beneficial effects of rising, and the enervating and 
 enfeebling consequences of falling, prices. 
 
 As a debtor, the employer reaps a real benefit from 
 a rise, and sustains a genuine loss by a fall, of prices ; 
 and it may be established as the first broad distinction 
 between classes, which experience advantage, or injury, 
 from changes in prices, that debtors are benefited, and 
 creditors lose, when prices rise, and that the opposite 
 consequences ensue when prices fall. The reasons are 
 obvious. The purchasing-power of money is, in the 
 first case, less when the debt is repaid than when it 
 was contracted, while, in the second, the purchasing- 
 power has increased during the existence of the 
 obligation. The repayment, although nominally un- 
 altered, has in reality undergone material chano^e • 
 and, if prices rise, the burden of the obligation dimin- 
 ishes, while it increases, if prices fall. It is partly 
 for this reason that an over-issue of inconvertible 
 paper is generally popular, and is often pressed on 
 a willing or unwilling Government, and that the de- 
 basement of a currency is sometimes not resented 
 seriously. Both these cases must, however, be dis- 
 tinguished from a rise in prices caused 'by new 
 supplies of the precious metals ; for not only does 
 that rest on a more substantial foundation, but it is 
 also produced by a natural agency. The issue of in- 
 convertible paper is probably destined to be followed 
 by contraction, and, the higher the rise produced, the 
 
R 
 
 52 Money and its Relations to Prices 
 
 more painful and calamitous must be the fall when a 
 return is made to s})ecie payments. The debasement 
 of the currency is a deliberate act with dishonest 
 intent. But the rise of prices caused by increased 
 supplies of the precious metals is pjenerally gradual 
 in its operation, is not of itself calculated to produce 
 a corresponding fall, and is free from the reproach of 
 being the conscious act of a fraudulent debtor. It 
 does, however, undoubtedly reduce the burden of debt, 
 public or private, while a fall of prices as unquestion- 
 ably adds to that burden. In a modern state the 
 nation, by its representative, the Government, benefits 
 by the insensible reduction of the public debt, and, so 
 far as the security for it is held by foreigners, the 
 nation as a whole shares in the advantage without 
 detracting loss, while, to the extent to which it is held 
 within the country itself, the State gains, and the 
 individual holders lose. Similar considerations apply 
 to private indebtedness, and we are therefore led to 
 consider of what classes in a community the main 
 body of debtors and of creditors respectively consists. 
 On the one hand, there can be no doubt that among 
 the creditors are some, such as widows and orphans, 
 the physically disabled or the sick, who cannot work 
 for themselves, and depend on the provision made in 
 the form of interest on investments. But among 
 their number, also, are those who will not work, and 
 prefer to live on wealth inherited from a past genera- 
 tion. In the other class — that of the debtors— we 
 find the employers of industry ; and, if their functions 
 be in reality as important as we have seen that 
 modern economists consider, if in truth they supply 
 the motive force and the directing guidance to the in- 
 
 \{ 
 
 I 
 
 Economic Effects of Changes in Prices 53 
 
 dustrial machine, then a benefit to them is likely to 
 result in general advantage, and a loss will probably 
 occasion general injury. It is true that they may be 
 unduly encouraged, and a burst of speculation may 
 follow on a rise of prices, while a fall may accompany 
 the return of trade to a sounder condition. But, in 
 spite of such considerations, on a broad view of the 
 case, the debtors may not inaccurately be said to re- 
 present the active enterprising classes engaged in the 
 production of fresh wealth, and the creditors to com- 
 prise the inactive, unindustrious classes living on the 
 wealth created in the past. If a progressive con.- 
 munity be one where industry is prospering, and ac- 
 cumulation of fresh wealth is continuous and rapid, 
 then a rise of prices would seem to be beneficial, and 
 a fall injurious, though it must not be forgotton that 
 it is conceivable that a larger quantity of wealth may 
 be wasted in a period of speculative fever than that 
 which is slowly, but steadily, saved in a period of 
 quiescence, if not of depression. On the whole, how- 
 ever, the balance of advantage would appear to in- 
 cline in favour of a gentle rise of prices. 
 
 It is in connection with the use of money as a 
 standard of deferred payments that changes in prices 
 exercise these effects on debtors and creditors respec- 
 tively. But in a civilised society there are also a 
 number of fixed payments, which are yet not of the 
 nature of a debt ; and fluctuations in prices must of 
 necessity afl?ect the real position of the persons making 
 or receiving these payments. Even where they un- 
 dergo adjustment, the process may occupy a longer 
 or shorter period, and during the interval one or the 
 other party, as the case may be, will experience gain 
 or loss. 
 
' I 
 
 54 Money and its Relations to Prices 
 
 HI 
 
 In considering, therefore, the comparative effects on 
 the general welfare of a rise or fall of prices, caused 
 by an expansion or contraction of the supplies of the 
 precious metals, it is needful to frame some conception^ 
 of the number and importance of those classes, whose 
 receipts and payments are variable, and will adjust 
 themselves with ease and rapidity to the altered value 
 of money, and of the classes, whose incomes and ex- 
 penditure are fixed, and will only submit to adjust- 
 ment with delay and friction. So far as fixed re- 
 ceipts are balanced by fixed payments, the loss or 
 gain, as the case may be, will be balanced by a corre- 
 sponding gain or loss. If the value of money rises, 
 and prices fall, the receipts will be more valuable, but 
 so also will be the payments. If, on the other hand, 
 prices rise, the purchasing-power of the fixed receipts 
 will be less, but that of the fixed payments will 
 undergo an equivalent reduction. Again, where both 
 the receipts and the payments are variable, and are 
 easily adjusted, the result of an alteration in the value 
 of money will merely be an increase or diminution in 
 the number of the counters used, and the real position 
 of the parties will be left unafiected, if we set aside 
 the possible influence of the imagination. But in 
 those cases where we find rigidity on the one side, 
 and adjustability on the other, the result of changes 
 in prices may be important for loss or for gain. 
 Those persons, whose incomes are fixed, and whose 
 expenditure is variable, will profit by a fall, and lose 
 by a rise of prices ; and those whose expenditure is 
 rigid, and income flexible, will reap advantage from a 
 rise, and sustain loss by a fall in prices. In the end, 
 
 iFor such an estimate, cf. Jevons' ** Investigations," pp. 80, etc. 
 
 Economic Effects of Changes in Prices 55 
 
 no doubt, a readjustment to altered circumstances may 
 be eflfected, but during the interval the gains and 
 losses will assuredly be real, and may easily prove to 
 be substantial ; while, before the new settlement is 
 reached, a fresh change may have already begun to 
 operate. In fact, as we have noticed, from the con- 
 ditions of the case it seems practically impossible to 
 attain complete stability. 
 
 One great class affected by the opposition of fixed 
 payments to variable receipts, and of variable pay- 
 ments to fixed receipts, consists of those debtors and 
 creditors whom we previously considered. The debtor 
 may be regarded as bound to make a fixed payment 
 to his creditor out of a varying income, and the 
 creditor may be treated as enjoying a fixed receipt, 
 from which he has to meet a varying expenditure. 
 Hence it is that debtors gain, and creditors lose, by a 
 rise of prices, and that a fall reverses the position. 
 Hence, too, it is that the employers, who trade on 
 borrowed money, apart entirely from the powerful 
 stimulus to the imagination afforded by a rise of 
 prices, and from the benumbing and dispiriting in- 
 fluence exercised by a fall, do sustain a real loss, and 
 reap a substantial benefit, in the two cases respectively. 
 Their profits represent a margin of varying receipts 
 over expenditure, which is by comparison fixed for 
 the time at least, and this margin is swept away by a 
 fall, and enlarged by a rise, of prices. Hence, too, 
 the agricultural landlord, whose rents, as Sir Robert 
 Giffen pointed out in evidence before the Com- 
 mission on Agriculture,^ are in a sense a " margin of a 
 margin," and under the system of yearly tenancies, 
 
 1 Cf, Report, q. 18, 160. 
 
! 
 
 [I 
 
 \<s ■ ii 
 
 ! 
 
 56 Money and its Relations to Prices 
 
 which is prevalent in English agriculture, are 
 altered with comparative rapidity, while the various 
 obligations on the estate, for interest on mortgage 
 debt, or for the provision of dowers for widows or 
 allowances for younger children, are only changed 
 with difficulty after an interval of time, suffers, per- 
 haps, more severely from a fall of prices than the 
 employer, who is constantly paying off old debt and 
 contracting new, and is able, though not without 
 friction and delay, to procure a change in the terms 
 on which he borrows, and, with longer delay and more 
 considerable friction, an alteration in the rate of wages 
 that he pays. A " margin of a margin " is more pre- 
 carious, and liable to disappear before an increase in 
 the value of money ; and historical evidence certainly 
 goes some way to show that the agricultural interest 
 is specially likely to prosper when prices are rising, 
 and to be depressed when they are falling. It is true 
 that both landlord and farmer may, like employers, 
 experience a gain so far as their expenditure is vari- 
 able, and their receipts are fixed, and they may find it 
 difficult to take due account of this compensating 
 advantage, as the effects may not be so obvious and 
 immediate. But, so far as their receipts are variable 
 and their expenditure is fixed, they cannot rid them- 
 selves of loss ; and the subtle and powerful influence 
 exerted by the imagination will increase their sensi- 
 bility to injury, which is more manifest and more 
 immediate. In the contrary supposition of a rise of 
 prices, their feelings, as their real position, will be 
 reversed. 
 
 In partial opposition to the classes, which we have 
 been considering, and may roughly describe as the 
 
 Economic Effects of Changes in Prices 57 
 
 directors of agricultural and industrial production, we 
 may set the earners of wages. Here readjustment 
 will, no doubt, be effected in time, and receipts and 
 expenditure may both be regarded as variable in the 
 long run ; but the alteration in the receipts may follow 
 after, and lag behind, that in the payments. To all 
 such readjustment of incomes the vis inertice of 
 custom opposes delay and hindrance, and it is a well- 
 attested fact of economic experience that prices change 
 with more rapidity than wages. It is, then, broadly 
 true that wage-earners are for an interval in the 
 position of those, whose receipts are fixed, and whose 
 expenditure is variable, and therefore they are advan- 
 taged, by a fall, and injured by a rise, in prices. No 
 doubt if, as prices rise, they become sensible that their 
 wages are losing part of their purchasing-power when 
 exchanged for commodities, they will demand and 
 insist on an advance of wagres. No doubt also, if 
 prices fall, employers will in the end be compelled to 
 claim a reduction. But in either case the adjustment 
 is not likely to be immediate ; and|it may engender 
 friction and beget discontent on the one side or the 
 other. This delay and uncertainty it is which sweeps 
 away the margin of profit from the*employer, and the 
 " margin of a margin " from the landlord in times 
 when the value of money is increasing ; and, were it 
 not for the vis inertice thus resisting readjustment, 
 the prejudicial influence of a fall of prices would be 
 robbed of much of its injurious effects on the con- 
 tinued and extended production of wealth. 
 
 The nice question, however, arises whether, granting 
 the existence of this vis inerticB, a rise or a fall of 
 prices is likely in the long run to result in greater loss 
 
58 Money and its Relations to Prices 
 
 M 
 
 or gain to the wage-earner ; and it may be plausibly 
 contended that in the case of a rise, although his 
 wages may not respond at once to changes in prices, 
 and for the time he may lose, yet the general air of 
 prosperity which accompanies the rise, and the en- 
 couragement which it affords to the employer, are not 
 unlikely to enable the workmen to insist more easily 
 on better terms, and to make the employer more ready 
 to respond to a demand for an advance in wages ; and 
 that with more rapidity than in the opposite case of 
 a fall of prices the readjustment will be effected. In 
 short, the accompanying friction and irritation are 
 likely, it may be argued, to be less protracted and 
 extensive in the case of a rise than in that of a fall of 
 prices. When prices rise the workmen are more quick 
 to recognise the change, and the circumstances of the 
 times allow them more easily to obtain their object. 
 When prices fall, the change itself is less manifest, 
 the workmen are less sensible of the alteration, and 
 more inclined to oppose a readjustment. Certain 
 cogent considerations may, it is true, be held to favour 
 the view that the wage-earner stands to lose by a rise 
 and to gain by a fall in prices ; but such a conclusion 
 is on the surface, and it is possible that deeper con- 
 siderations lie beneath. 
 
 If the readjustment takes a longer time, and is 
 accomplished at a greater expense of friction and 
 irritation, it is likely to impose a more injurious check 
 on production ; and on the amount of production the 
 remuneration of the wage-earner must in the long run 
 depend. The temporary advantage, which he secures 
 in the distribution of wealth, is likely, if economic 
 speculation be correct, to be dearly purchased by the 
 
 1' 
 
 Economic Effects of Changes in Prices 59 
 
 prejudicial influence exerted on production, and he 
 will lose eventually in curtailed production, even if 
 he avoids a decline of wages for the time. 
 
 The cogency of this argument derives additional 
 strength from a consideration of some tendencies of 
 recent economic progress. Competent observers^ have 
 agreed in the opinion that the direction of economic 
 forces inclines in favour of the workman rather than 
 the employer. The trend of public opinion, the removal 
 of legal hindrance, and the support of legal protec- 
 tion, and the power obtained by combination, tend to 
 secure for the workman an increasing share in the 
 distribution of wealth. If the inclination of economic 
 forces be thus correctly indicated, we should expect 
 the real remuneration of the workman to advance; 
 and such an expectation carries with it the conclusion 
 that, when the purchasing-power of money is steady, 
 and prices are unaltered, wages should increase ; that, 
 when prices are falling, and the purchasing-power of 
 money is rising, wages should remain steady ; and that, 
 when the purchasing-power of money is falling, and 
 prices are rising, wages should advance to a greater 
 extent than the rise of prices. If, then, we allow 
 any place for the imagination, it seems scarcely pos- 
 sible to doubt that the workmen will be less sensible 
 of an improvement in their position when prices are 
 falling than when they are rising, and that employers 
 will feel more gradually the burden of the altered 
 distribution when prices are rising, and that when 
 prices are falling they will deem the burden heavier. 
 
 1(7/*. Giffen: "Essays in Finance," second series, x., xi. ; P. Leroy- 
 Beaulieu : " Essai sur la Repartition des Richesses," chapters xiv., 
 etc.; E. Atkinson : " Distribution of Products." 
 
 4 
 
M! I 
 
 60 Money and its Relations to Prices 
 
 They will do so because the surrounding atmosphere 
 is depressing, while the invigorating influence of ris- 
 ing prices stimulates to new exertions ; and it seems 
 not improbable that the concealment of the real ad- 
 vance of wages by a fall of prices may prevent them 
 from recognising the change as soon as they otherwise 
 would, and making their arrangements accordingly. 
 These feelings may contain an ingredient of unreason- 
 ing fancy, but they do not on that account cease to be 
 potent ; and, whether we look at the effects on the 
 conduct and attitude of masters or of men, the con- 
 clusion seems inevitable that the beneficial results of 
 such a real change in distribution are lessened, and 
 the injurious consequences heightened, by a fall in 
 prices, which, obscuring the facts to the vision of both 
 parties, minimises the advantage to the men and 
 intensifies the apparent disadvantage to the masters. 
 In other words, the friction, which can hardly be 
 avoided, is increased ; and some prejudicial influence 
 cannot fail to be exerted on the production of wealth, 
 which is the only ultimate source, and final means, of 
 an improved distribution. The energies and efibrts 
 of employers are relaxed, and the stimulus to fresh 
 exertion on the part of the men, which, furnished by 
 rising wages, might produce some compensatory effect 
 on the total production, runs a risk of never being 
 applied or felt. On a broad general view of tlie cir- 
 cumstances, here again, economic inquiry leads to the 
 conclusion that a rise of prices is more likely than 
 a fall to result in a balance of benefit to the whole 
 community. That prices should remain absolutely 
 stable is a fond vision rather than a practical possi- 
 bility ; and, if some movement be inevitable, expedi- 
 
 \ 
 
 Economic Effects of Changes in Prices 61 
 
 ency appears to dictate that it should, if possible, be 
 that of a rise and not of a fall. 
 
 There are, however, other classes of the community 
 besides employers and wage-earners, of whose position 
 account must be taken in any estimate of comparative 
 loss and gain. Employers and workmen deserve the 
 most prominent place in such an estimate because 
 they constitute so large a proportion of the whole 
 community ; and, their receipts and expenditure being 
 neither rigidly fixed, nor yet entirely variable, the 
 effects of an alteration in prices upon their position 
 are not obvious or easy to appraise. But there are 
 other classes whose incomes are fixed more rigidly. 
 Attention has already been directed to the claims of 
 debtors and creditors generally; and the conclusion 
 has been reached that, in spite of the loss occasioned 
 by rising prices to widow or orphan, or to crippled or 
 sick, and in spite of the comparative absence of specu- 
 lation, and the more steady, if more gradual, accumula- 
 tion of wealth in periods of falling prices, yet, on a 
 broad view, creditors would seem to represent those 
 who are living on the results of past accumulation, 
 and debtors those who, by their active exertions, are 
 contributing to the production of fresh wealth, and 
 that therefore a period of rising prices seems to be 
 more calculated than a period of falling prices to 
 advance the general prosperity of the whole com- 
 munity. 
 
 This conclusion may not meet with universal ac- 
 ceptance, and it cannot be denied that some cogent 
 arguments may be advanced against it; but it rests 
 on the support of high economic authority. We may 
 now inquire with more detail into the particular 
 
 I 
 
J 
 
 I 
 
 ! 
 
 62 Money and its Relations to Prices 
 
 classes embraced under the respective designations of 
 debtors and creditors. 
 
 An exhaustive enumeration of these classes is con- 
 tained in Jevons' pamphlet on " A Serious Fall in the 
 Value of Gold";^ and from his list we may select 
 some illustrative types. The debtors may possibly 
 be governments, or public companies, or private 
 individuals. The creditors may have money in the 
 funds. They may hold bonds or shares in some 
 public company, or they may have advanced capital 
 to private individuals by way of mortgage or by some 
 other form of loan. They may be bankers or money- 
 lenders, or they may themselves have deposits in 
 banks, or friendly, or building, or insurance societies. 
 They will suffer by a rise of prices and benefit by a 
 fall, if the interest which they receive is a fixed pay- 
 ment. If they be holders of the funds, the Govern- 
 ment, which may be said to represent the mass of the 
 community, will secure a gain broadly corresponding 
 to their loss, or bear the burden of a loss broadly 
 corresponding to their gain. If they be bondholders, 
 their loss may result in an increased dividend for the 
 ordinary shareholders. If they be mortgagees, the 
 property, on which they hold a lien, will reap an 
 advantage, or sustain a disadvantage, which will be in 
 general accordance with their loss or gain. 
 
 To these classes of creditors, in the enjoyment of 
 fixed interest, must be added, as the recipients of 
 fixed incomes, public servants and officials, whose 
 stipends are invariable ; and their loss by rising, and 
 gain by falling, prices cannot be denied, although it is 
 conceivable that their apparent interest at the moment 
 1 Cf. ••Investigations," ii., ch. iv., sees, xxvii., xxviii. 
 
 ^ 
 
 Economic Effects of Changes in Prices 63 
 
 may conflict with what might, if they only knew, 
 be their real interest in the future. For their re- 
 muneration ultimately depends on the general 
 prosperity of the community, and is therefore finally 
 affected by whatever tends to advance or hinder 
 general progress. Yet it cannot be doubted that the 
 immediate interest of the moment is likely to out- 
 weigh in their estimation any such problematic 
 consequences of the future; and that a reasonable 
 regard for their own advantage would lead them to 
 approve of falling, and to suspect the influence of 
 rising prices. 
 
 Another class is distinguished by Jevons as com- 
 prising those who " are dependent on fixed charges 
 established by law, custom, or convention " ; and here 
 it is conceivable that any loss or gain ensuing on a 
 change in the purchasing-power of money may be 
 followed by augmented or diminished business, which 
 may exercise some counteracting influence on the 
 total income. Barristers and solicitors, doctors and 
 dentists, the proprietors of theatres and the organisers 
 of other forms of public entertainment, the recipients 
 of subscriptions, fees, and pew rents, will, Jevons 
 thinks, gain by a fall, and lose by a rise, in prices 
 without much compensating counterbalance. But 
 tolls on roads and bridges, gas and water charges, 
 fares and rates on railways, payments to porters, 
 carriers, and the post-oflSce, are fixed by law, by 
 custom or convention, and will, no doubt, tend to 
 remain unaltered in their nominal expression, and 
 yet their liability to a real increase or diminu- 
 tion in command over commodities will be largely 
 neutralised by diminished or augmented custom. The 
 
 I 
 
64 Money and its Relations to Prices 
 
 i 
 
 I, 
 
 loss resulting from a rise of prices to these forms of 
 income is likely to be partial ; and the general public, 
 spending more of its income on such items of ex- 
 penditure as conveyance and amusement, gains in 
 comfort and in recreation , while in the opposite case 
 of falling prices the general public practises a 
 necessary but disagreeable economy, and diminishes 
 the gain, which might otherwise accrue to these 
 special forms of income. In the case of these pay- 
 ments the balance of general advantage seems to lie 
 on the side of rising prices. 
 
 Nor in that of public servants and officials, of 
 annuitants and pensioners, is the rise of prices with- 
 out compensation of a more immediate character than 
 that which was previously indicated. For the re- 
 sultant hardship is mitigated by the general tendency 
 of economic progress ; and this tendency is likely to 
 be accelerated rather than retarded by a rise of prices. 
 There is a general tendency to diminution in the 
 cost of manufacture ; and we may perhaps go farther 
 and affirm that a tendency is manifest to a diminution 
 in the general cost of production of commodities. 
 Man is ever gaining greater control over the forces 
 of nature. He is continually winning more fruitful 
 results at a less expenditure of labour. Economists 
 now generally conceive the law of diminishing returns 
 as yielding in predominance to that of increasing 
 returns,^ though each may have its special sphere 
 of operation, in which it is more conspicuously pro- 
 minent ; and economic history is usually interpreted 
 
 1 Cf. Nicholson's *• Principles of Political Economy," bk. i., ch. x.; 
 Marshall's "Principles," bk. iv., ch. xiii.; Beam's " Plutology," 
 ch. vi. 
 
 Economic Effects of Changes in Prices 65 
 
 
 as a record of progress, not of retrogression. For 
 these reasons, at a time of rising prices occasioned 
 by some increase in the supplies of the precious 
 metals, the pressure of the rise upon unvarying in- 
 comes is partly counterbalanced by the general 
 tendency of the cost of manufacture, if not of produc- 
 tion as a whole, to diminish, and the recipients of 
 such incomes participate in this general benefit. 
 
 Nor does the very rise of prices fail to stimu- 
 late increased production, which in its turn, unless 
 a fresh rise previously ensues, will ultimately tend to 
 cause a fall. For this reason Cairnes contended ^ that 
 the gold discoveries of California and Australia, in 
 the middle of the nineteenth century, would be fol- 
 lowed by an immediate rise in the price of those manu- 
 factures, for which the new gold was exchanged but 
 that the reaction of increased production would in 
 this case speedily bring about some compensating fall, 
 while in that of raw materials, which would not so 
 readily respond by augmented production to the 
 stimulus of the rise, the rise itself would continue 
 longer, and more especially with animal than with 
 vegetable produce, as the difficulties of increasing 
 production were greater, and required a longer in- 
 terval of time to overcome. As we have noticed, this 
 prediction, based on abstract reasoning, was substan- 
 tially confirmed by concrete fact ; and it is owino- to 
 the corrective stimulus, thus shown in varying de- 
 grees, that anticipations of the efiects of new 
 discoveries of the precious metals on the general 
 level of prices have more often erred by excess than 
 by defect. 
 
 * "Essays in Political Economy," ii. 
 
 E 
 
I 
 
 66 Money and its Relations to Prices 
 
 A point of greater subtlety, and of far less certainty, 
 is suggested by some speculations. It is doubtful 
 whether the general tendency to a diminution in the 
 cost of production, to which we have drawn attention, 
 can be affirmed to the same extent of the precious 
 metals as of other commodities. On the one hand, 
 they belong to a class to which the law of diminish- 
 ing returns peculiarly applies, and the cost of their 
 manufacture into money, as compared with that of 
 obtaining the raw material, is unimportant. On the 
 other hand, they are less liable to destruction, the 
 stock in existence is considerable,^ and the annual 
 production exerts an influence, which in ordinary 
 times, and as a general rule, may appear by contrast 
 insignificant. Setting these considerations against 
 one another, it might still seem that, unless the total 
 supplies of the precious metals outstripped, or, if that 
 were beyond " the dreams of avarice," kept pace with 
 the improvements in the production of commodities, 
 prices would tend to fall, and the value of the metals 
 themselves to increase. And yet, in the past history 
 of metallic mining, chance, rather than any regular 
 law which can be ascertained, appears to have exer- 
 cised predominant influence ; and metallurgical pro- 
 gress renders all prediction doubtful. ^ The known 
 
 1 In estimating the effect of changes in the supply of the metals on 
 the value of money, it must not be forgotten that the metals are also 
 used in the arts ; and that it has been calculated in the case of gold 
 that this use may have absorbed no small part of the annual addition 
 made in recent years to the supplies. 
 
 "^ E.g., the discovery of the cyanide process by which the amount 
 of gold obtained from the ore was largely increased. Cf. 
 Walker: f* Money, Trade, and Industry," p. 64, for the part played 
 by chance. 
 
 Economic Effects of Changes in Prices 67 
 
 \ 
 
 I 
 
 world is, it is true, more accurately surveyed, and the 
 area of unknown regions is rapidly shrinking. Fresh 
 discoveries of the metals become daily more impro- 
 bable, at any rate on any considerable extent ; and 
 the direction of existing mines is more completely 
 subject to the sway of ordinary business motives,^ oq 
 which prediction is less impossible and untrustworthy. 
 Yet the future seems as hard to forecast as the past is 
 to interpret, and the most careful estimate cannot 
 pretend to more than slippery conjecture. It is 
 possible to regard the history of the production of the 
 metals as one of advance and increase, or as one in 
 which new discoveries have formed interludes of more 
 or less brief duration in a steady diminution of supply, 
 when compared with a constant growth in demand.' 
 It may even be that the future points to a gradual 
 fall of prices, in which any rise will be temporary and 
 exceptional. If this be the true interpretation of the 
 economic movement, it would seem to strengthen the 
 force of the opinion, which regards the effects of such 
 interludes as more beneficial than injurious to the 
 general community, and considers that the consequent 
 sufferings of particular classes find sufficient com- 
 pensation in the broad tendencies of history. But, if 
 the interpretation rest on no firm foundation, the 
 opinion does not fall to the ground ; for it is sup- 
 ported by other considerations, which are independent 
 of this particular conception of the economic move- 
 ment. Those considerations we have endeavoured to 
 
 » One characteristic of mining in the Transvaal has been the 
 certamty of the output ; and the cyanide process, by making it 
 possible to treat poorer ores successfully, has conduced to this 
 certamty, together with the regularity of the actual deposits. 
 
h t 
 
 I . 
 
 68 Money and its Relations to Prices 
 
 review, and we have seen that, although in some 
 instances they have allowed and received different 
 interpretations, yet they appear to converge to the 
 broad conclusion that the balance of general advan- 
 tage lies on the side of rising rather than of falling 
 prices. In support of this conclusion, the deliberate 
 and emphatic opinion of some weighty authorities ' 
 might be cited ; and perhaps no opinion is more de- 
 serving of confidence than that of Jevons, who, in his 
 " Invet^tigations in Currency and Finance," after care- 
 fully considering what classes were likely to be 
 advantageously, and what injuriously, affected by the 
 '* Serious Fall in the Value of Gold" consequent on 
 the discoveries in California and Australia, arrived at 
 this conclusion : — ^ 
 
 " I cannot but agree with MaccuUoch that, putting 
 out of sight individual cases of hardship, if such 
 exist, a fall in the value of gold must have, and, as I 
 should say, has already a most powerfully beneficial 
 effect. It loosens the country, as nothing else could, 
 from its old bonds of debt and habit. It throws in- 
 creased rewards before all who are making and 
 acquiring wealth,, somewhat at the expense of those 
 who are enjoying acquired wealth. It excites the 
 active and skilful classes of the community to new 
 exertions, and is, to some extent, like a discharge 
 from his debts is to the bankrupt long struggling 
 against his burdens. All this is effected without a 
 breach of national good faith, which nothing could 
 compensate." Such is the deliberate judgment of a 
 sober and competent observer, and the converse of his 
 
 1 Cj. some of those quoted in Walker's " Money," ch. iv. 
 a " Investigations," p. 96. 
 
 Economic Effects of Changes in Prices 69 
 
 language appears to be true about an increase in the 
 value of money occasioned by a contraction in the 
 supplies of the precious metals. To some notable 
 periods of expansion and contraction in those supplies, 
 and of rising and of falling prices, our attention will 
 be directed in the following chapters. 
 
 M 
 

 S3 
 
 * i 
 
 CHAPTER III 
 
 THE RISE OF PRICES CONSEQUENT ON THE DISCOVERY 
 
 OF AMERICA 
 
 Towards the conclusion of his long chapter upon 
 colonies Adam Smith remarks ' that "the discovery of 
 America, and that of a passage to the East Indies by 
 the Cape of Good Hope, are the two greatest and most 
 important events recorded in the history of mankind." 
 It would certainly not be easy to overrate their im- 
 portance in connection with the present inquiry. For 
 the discovery of America was speedily followed by an 
 increase in the supplies of the precious metals of 
 extraordinary proportions, and the trade with the 
 East has, by its absorbent capacities, mitigated more 
 than once the revolution of prices naturally con- 
 sequent on large discoveries of gold and silver. It is 
 true, as Adam Smith urges in the earlier part of the 
 chapter, that Columbus, expecting to find by sailing 
 west a shorter route to those East Indies, the rich 
 products of which had found their way through 
 Egypt to Europe, was disappointed with the apparent 
 natural poverty of those countries which he dis- 
 covered, and which have been misnamed the West 
 Indies, and, for lack of advantageous animal or vege- 
 table product, turned his attention to their mineral 
 wealth, and brought back to the sovereigns of Castile 
 and Ara^^on an exaggerated account of its abundance. 
 
 ^ Bk. iv., ch. Aii. 
 70 
 
 I^ise of Prices in the X VI tk Century 7 1 
 
 But this exaggeration produced the effect that was 
 intended ; and the Spaniards took possession of the 
 West Indies, nominally with the "pious purpose of 
 converting them to Christianity," but really with the 
 "hope of finding treasures of gold." "All" their "other 
 enterprises in the New World subsequent to those 
 of Columbus," Adam Smith continues, " seem to have 
 been prompted by the same motive. It was the 
 sacred thirst for gold that carried Oieda, Nicuessa, and 
 Vasco Nugnes de Balboa to the Isthmus of Darien, 
 that carried Cortez to Mexico, and Almagro and 
 Pizarro to Chili and Peru." "Every Spaniard who 
 sailed to America expected to find an Eldorado. For- 
 tune, too, did upon this what she had done upon very 
 few other occasions ; she realised ixi some measure the 
 extravagant hopes of her votaries, and in the discovery 
 and conquest of Mexico and Peru (of which the one 
 happened about thirty, the other about forty, years 
 after the first expedition of Columbus), she presented 
 them with something not very unlike that profusion 
 of the precious metals which they sought for." 
 
 Of these remarkable discoveries, and of their effects 
 upon prices and the welfare of the community, we are 
 now about to treat; and we may begin by noting 
 that in comparison with those later periods, with 
 which we shall deal in subsequent chapters, our task 
 is in some respects simplified, while in others its 
 difficulties are greatly increased. 
 
 On the one hand there is no doubt that the augmen- 
 tation in the supplies of the precious metals, which 
 followed the discovery of the mines of America, was 
 adequate to produce an important change in prices; 
 and the fact that it operated in this manner cannot be 
 
"J 2 Money and its Relations to Prices 
 
 % 
 
 
 'i t 
 
 said to be seriously questioned. Adam Smith himself, 
 in his digression^ on the variations in the value of 
 silver, notes about one of the three periods, into which 
 he divides his treatment, that "how various soever 
 may be the opinions of the learned concerning the 
 progress of the value of silver during the first period, 
 they are unanimous concerning it during the second." 
 "The discovery of the abundant mines of America 
 seems to have been the sole cause of" the "diminution 
 in the value of silver in proportion to that of corn," 
 which occurred during this period, covering the years 
 from "about 1570 to about 1640." "It is accounted 
 for accordingly in the same manner by everybody; 
 and there never has been any dispute either about the 
 fact or about the cause of it." It would be unduly 
 sanguine to say that no writer has since been found 
 to question ^ Adam Smith's assertion ; but it is safe to 
 affirm that the consensus of economic opinion would 
 broadly endorse his statement. 
 
 The relation, too, of the cause to its effect has not, 
 in this early period, to be slowly, painfully, and un- 
 certainly disentangled from the mass of overlying and 
 surrounding facts. The channels of trade, through 
 which the new supplies would find their way, were 
 comparatively few in number, and easily traced. The 
 organisation of commerce and industry was simple, 
 and elaborate systems of credit were generally un- 
 known. We have not, therefore, to strain our vision 
 to detect the "secular" movement of prices due to varia- 
 tions in the supplies of the precious metals beneath 
 the fluctuations occasioned at more frequent intervals 
 
 ' Bk. i., ch. xi., pt. iii. 
 
 "^Cf. for such questioning, Schcenhof, "History of Money and 
 Prices." 
 
 Rise of Prices in the XVIth Century 73 
 
 by expanding and contracting credit. We have 
 merely to separate this secular movement from passing 
 accidents, such as good and bad seasons affecting corn, 
 and the like. We are not liable to meet on the 
 threshold of our inquiry with the response which, if 
 true, is enough to throw all such investigations into 
 confusion, that the influence of varying credit is so 
 predominant as to allow nothing, or comparatively 
 nothing, for the influence of the precious metals. 
 Nor have we occasion to trouble ourselves seriously 
 about the possibility that paper or credit substitutes 
 for the metals may, by their increase or diminution, 
 meet any change due to diminished or increased pro- 
 duction from the mines. The theory of the action of 
 the precious metals upon prices is, in short, immensely 
 simplified when we contrast the circumstances of the 
 earlier with those of the later periods. 
 
 On the other hand, we are confronted at almost 
 every turn by a dearth of reliable statistical data. 
 It is only within recent years that the statistics of the 
 annual production from the mines have been brought 
 into satisfactory shape ; and for the early period, of 
 which we are treating, we have to be content with 
 more or less tolerable conjectures. Even now the 
 total amount of the precious metals existing in the 
 form of coin, or in that of articles of use or ornament, 
 cannot be other than a guess more or less accurately 
 founded. The annual consumption in the arts and 
 for industrial purposes can be ascertained by more 
 authoritative estimates, and of the annual coinage 
 the most important mints are careful to preserve 
 accounts. But of the import and export of coin and 
 of bullion, of the relative parts played in the conduct 
 
 i\ 
 

 74 Money and its Relations to Prices 
 
 of exchange at any particular time by metallic and 
 paper money and credit-instruments, we can at the 
 best obtain but a rough idea ; and of the rapidity of 
 circulation, or, in economic phraseology, of the 
 " efficiency " of the money, no reliable conjecture has 
 been, or perhaps can be, formed.^ With, therefore, 
 the elaborate system of modern credit, and the ex- 
 tensive developments of modern banking, it may be 
 declared impossible to observe the precise modus 
 operandi by which the variations in the supplies of 
 the precious metals come into contact with prices, 
 and the theory of the exact connection is not easy 
 to demonstrate. Although such difficulties do not 
 prevent the establishment of conclusions of sufficient 
 probability and exactitude, they serve to restrain any 
 undue expectation of the information within our 
 reach. But we can carefully observe, and scientifically 
 estimate, the results of our observation, at either end, 
 so to say, of the process. We can obtain statistics of 
 the supplies from the mines, and we have access to 
 reliable measurements of prices. 
 
 For the early period, it is true that, even if they 
 were attainable, we do not require statistics on the 
 nice problems of the relation of credit to the precious 
 metals on the one side, and, on the other, to prices ; 
 but our statistics of the production from the mines 
 are far less reliable, and far more scanty, and we are 
 unable to apply, except in a crude form, that mode of 
 
 1 Cf. Dr. Soetbeer's ** Materialien," the evidence before the Gold 
 and Silver Commission, and Report of a Committee of the British 
 Association (1888) on "Statistical Data available for determining 
 the Amount of the Precious Metals in use as Money in the Principal 
 Countries, the Chief Forms in whicli the Money is employed, and 
 the Amount annually used in the Arts." (Report, 1888, p. 219.) 
 
 I 
 
 Rise of Prices in the XVIth Century 75 
 
 measuring changes in prices by index numbers, which 
 has recently been subjected, as we have seen, to 
 thorough examination, and has not issued from the 
 process without improvement The relation, there- 
 fore, between the precious mefcals and prices is in the 
 early period comparatively simple and direct; but 
 statistics of the metals present more frequent and 
 extensive gaps, and the ascertainment of the meaning 
 and measure of prices is less exact. Yet, in spite of 
 the serious deficiency of statistical data, and of the 
 rough character of the calculations made by the 
 writers, on whom we have in the main to rely, the 
 evidence seems adequate to establish the broad 
 characteristics and eflfects of that great increase in 
 the supplies of the precious metals, which followed 
 the discovery of America. 
 
 The authority, who has been most generally quoted 
 for the statistics of the supplies in this early period, 
 is William Jacob, who, at the impulse of Huskisson, 
 undertook an investigation into monetary history, 
 and published his results some half -century ago.^ 
 His researches extend from the earliest times to those 
 at which he was writing. It is impossible to read his 
 book without being impressed by the zeal with which 
 he accumulated his material, by the evident wish, 
 which animated him, not to exaggerate, and by the 
 apparent soundness of his critical judgment. He 
 certainly produces the impression of a reliable witness 
 so far as the conditions of the times permitted ; and, 
 although he attempts to give the value, and not, as a 
 
 1 The full title of the book is "An Historical Inquiry into the 
 Production and Consumption of the Precious Metals," by William 
 Jacob, Esq., F.R.S., 1831. 
 
 II 
 
fi 
 
 ii 
 
 rt|. 
 
 76 Money and its Relations to Prices 
 
 rule, the volume of production, and his figures are 
 exceeded by those of the most prominent modern 
 authority, Dr. Soetbeer,^ yet his method of handling 
 the question is still deserving of study, and his 
 results, if doubt be felt of their exactitude, are, in 
 many respects, within the limits of probable truth. 
 The consilience, which he reaches by different pro- 
 cesses, may perhaps be held to detract from, as much 
 as to add to, the likelihood of his accuracy. 
 
 He estimates ^ the annual production of Spanish 
 America during the tjuarter of a century between its 
 first discovery and the conquest of Mexico and Peru 
 at something like £52,000 ; and this amount, which, 
 it may be noted, consisted almost entirely of gold, 
 was, he considered, " very small, even if compared with 
 the diminished quantity which then existed in the 
 ancient world." In 1519 Cortez invaded Mexico, and 
 twenty years later Pizarro conquered Peru. Before 
 their conquests mineral wealth had been made to yield 
 its treasures in the two countries, but they improved 
 the production. For the period from 1521 to 1546 
 Jacob adopts the estimate of Hurabolt,^ whose author- 
 ity he kept continually before him in framing his own 
 calculations, of an annual production of both gold and 
 silver of £630,000. Thus the total addition to the 
 existing supplies in the fifty-four* years since the 
 discovery of America amounted, according to his cal- 
 culation, to £17,258,000.^ This sum, contrasted with 
 
 ^ In his *' Materialien." ^ Chapter xvii. 
 
 8 In his " Political Essay on New Spain," especially bk. iv., 
 ch. xi. He examined the registers of the mints in Spanish America. 
 
 * Jacob gives sixty-three years. 
 
 5 Jacob gives £17,058,000, by a clerical error in the calculation of 
 the earlier period. 
 
 Rise of Prices in the XVIth Century jy 
 
 1 1 
 
 the existing stock anterior to the discovery, which he 
 estimated at thirty-three or thirty-four millions, re- 
 presented an increase of fifty per cent. The annual 
 production of the European mines at the same time, 
 which he put at about £100,000, was, he considered, 
 nearly counterbalanced by loss occasioned every year 
 by wear and tear to the existing stock. Allowing for 
 similar wear and tear of the American supplies, he 
 put the total quantity in existence in 1546 at about 
 fifty millions. Part of the fresh supplies, he allowed, 
 would be diverted by religious piety to the decoration 
 of churches and images, and part might take the form 
 of gold and silver utensils ; but both ecclesiastical 
 treasures and the private possessions of rich nobles 
 were liable to plunder and to conversion into coin to 
 meet the payment of armies. 
 
 It was not, however, until 1546, with the discovery 
 of the mines of Potosi, followed in 1557 by the impor- 
 tant metallurgical invention of the process of extract- 
 ing silver by amalgamation produced by the use of 
 mercury,^ that the mineral wealth of the New World 
 assumed large proportions. The discovery of Potosi, 
 like so much else in the history of the precious metals, 
 which has accordingly been regarded as a lottery, with 
 many blanks and few prizes, was accidentally made ; 
 for an Indian hunter, pulling up a shrub, noticed 
 silver hanging about the roots. For the output in the 
 earlier years of this fabulously pro<luctive region the 
 evidence was rendered doubtful by the absence of 
 books of account ; but the total annual supply from 
 
 : 1 The process was not applied on a large scale until the supply of 
 mercury was increased in 1571 by the working of quicksilver mines 
 in Peru. 
 
 • ii 
 
78 Money ana its Relations to Prices 
 
 111 
 
 America was put by Jacob ' at £2,10(),0()0 for the fifty- 
 four years from 1546 to the close of the century, and 
 the annual supply of Europe, stimulated to fresh efforts 
 in mining enterprise by rumours of the discoveries 
 across the sea, at £150,000. The aggregate production 
 of the period would thus amount to some £121,000,000; 
 and, by adding this to the fifty millions already in 
 existence in 1546, and deducting for wear and tear, 
 the final result was reached that by the close of the 
 sixteenth century the total stock of gold and silver 
 amounted to some £155,000,000, or nearly five times 
 as much as existed before the discovery of America. 
 From this a deduction was required for consumption in 
 the arts ; and the intensity of religious devotion of the 
 Romanist type prevailing in that Spanish peninsula, 
 to which the new supplies would first find their way, 
 would divert a considerable portion to the decoration 
 of churches; while in the Northern countries of Europe, 
 whither the trend of commerce would carry on the 
 precious metals, the progress of the Reformation 
 would tend indeed to check such religious expenditure, 
 but the increase of plate, easily convertible, if expedi- 
 ency demanded, into coin, was attested by trustworthy 
 evidence. 
 
 A fresh deduction was due to the trade with the 
 East, which centred at Antwerp. The discovery of 
 the passage round the Cape, which was coupled in 
 importance by Adam Smith ^ with the discovery of 
 America itself, facilitated that trade, and the drain to 
 the East, which afterwards became so familiar and 
 
 1 Cy, ch. xviii. 
 
 * Cf. the passage quoted above, p. 70. 
 
 Rise of Prices in the X Vlth Century 79 
 
 influential a factor in the history of the precious 
 metals and their effects upon prices, had now begun. 
 Europe was buying from India and China, from 
 Turkey, Persia, and Arabia, and the new silver would 
 be given in exchange for Eastern merchandise. As 
 yet, however, the trade was limited and the drain 
 comparatively small. Jacob estimated the deduction 
 under this head at a tenth of the total output, but he 
 was careful to note that precise data were lacking, and 
 that, as no direct trade was as yet established between 
 America and the East, the precious metals, which were 
 finally taken there, would exercise on their way an 
 influence on European prices. 
 
 For the consumption in the arts he allowed, by the 
 same rough conjecture, a fifth of the total production ; 
 and these deductions brought out the calculation for 
 the total stock in existence in the form of money at 
 the close of the sixteenth century to some £113,000,000. 
 Jacob himself arrived at £130,000,000 ; but he seems 
 to reach this figure by omitting in his final calculation 
 to make the allowance for wear and tear, which he 
 had previously put at some sixteen or seventeen 
 millions. It would therefore seem, if his calculations 
 were correct, to be within the truth to affirm that the 
 quantity of coin in Europe had certainly been trebled, 
 and perhaps quadrupled, since the discovery of 
 America. 
 
 Such is the nature of the method pursued by 
 Jacob; and we may content ourselves with a sum- 
 mary statement of the results, which he reached for 
 the two succeeding centuries. Summarising, there- 
 fore, his conclusions for the three periods distinguished 
 in his inquiries, which correspond roughly to the 
 
8o Money and its Relations to Prices 
 
 li 
 
 ii' 
 
 5 t 
 
 sixteenth, seventeenth, and eighteenth centuries, the 
 production of the first would appear to be £138,000,000; 
 of the second, £337,000,000 ; and of the third, some 
 £880,000,000. In the first period an increase would 
 be shown in the coin in Europe of some three hun- 
 dred per cent., in the second of some hundred and 
 thirty, and in the last of some thirty per cent. As 
 we noticed before, he gives throughout the vahae, and 
 does not supply particulars of the volume, of produc- 
 tion ; and there is no apparent means of ascertaining 
 the basis on which he converted the latter to the 
 former, or of the relative value, which he accorded in 
 the process to the two metals respectively. The 
 figures of the most prominent modern authority, Dr. 
 Soetbeer, for the value of the production in the cor- 
 responding periods ^ are considerably in excess. 
 
 The difference may be partly due to the fact that 
 Dr. Soetbeer in his later edition calculates the relative 
 value of silver to gold according to the estimated — or, 
 for the period subsequent to 16^7, the ascertained— 
 ratio ; and it is possible, or even probable, that Jacob 
 may have taken throughout the ratio of 15 J to 1, which 
 was true for the close of the period. But, when Dr. 
 Soetbeer's figures are treated on this supposition, to 
 compare them with those of Jacob, they still show a 
 considerable divergence for the earlier periods. Dr. 
 Soetbeer himself admits^" a discrepancy between his cal- 
 culations and those of Professor Lexis for the volume 
 of production from South America and Mexico, which 
 amounts for the whole period, from the discovery of 
 
 1 More exactly (1) from 1492 to 1599 ; (2) from 1599 to 1700 ; (3) 
 from 1700 to 1809. 
 » Cf. " Materialien," part i. 
 
 Rise of Prices in the XVIth Century 8 
 
 . 
 
 America to the close of the eighteenth century, to 
 some ten million kilograms of silver; and the dis- 
 crepancy arises, he states, from the circumstance that 
 he allows a higher figure for the output of the 
 Peruvian mines. He points out instructively that in 
 all these earlier estimates, which must, he urges, be 
 taken and not rejected, for want of more accurate 
 data, a tendency to exaggerate is manifest on the one 
 hand, but that, on the other, the wish to evade the 
 tax imposed by the Spanish Government would lead 
 to under-statement. He himself attempts no estimate 
 of the stock in existence before the discovery of 
 America, or of the consumption in the arts during 
 the three centuries, or of the drain to the East at that 
 time ; and we are compelled to have recourse to Jacob, 
 and to the authorities from whom he derives his 
 information, on these particular points. Dr. Soetbeer, 
 indeed, considers that Jacob over-estimates the loss by 
 wear and tear, and this would affect his calculation 
 of the stock existing in the world before the discovery 
 of America ; for he reaches this sum by dismissing as 
 unimportant the annual additions since the fall oflbhe 
 Roman Empire, and setting them off against the wear 
 and tear of the existing stock. On the whole, we may 
 say that, as a type of the method to be followed in 
 such inquiries, Jacob's investigations have not ceased 
 to deserve attentive study ; and, if his figures cannot 
 be safely employed for exact conclusions, it is because 
 they are liable to the common failing of all statistics 
 for the period. They seem generally to be within the 
 mark; but, by underrating the production of the 
 sixteenth, they may lead to exaggeration of the in- 
 crease in the seventeenth ; and, again, by underrating 
 
 
 .,1 
 
p . 
 
 82 Money and its Relations to Prices 
 
 t'H 
 
 i 
 
 11 
 
 ;i 
 
 I 
 I 
 
 ■ \ 
 
 that, to an excessive estimate of the additions made 
 in the eiorhteenth century. Dr. Soetbeer's figures^ 
 certainly indicate a lower rate of increase. 
 
 These are, for the period from the discovery of 
 America to the close of the sixteenth century, some 
 two thousand million marks of gold, and some five 
 thousand million marks of silver, or a total in 
 English pounds (reckoning twenty marks to the 
 pound) of some £H50,000,000, as compared with 
 Jacob's figure of £138,000.000. For the seventeenth 
 century, the figuies of Dr. Soetbeer are for both 
 metals, £498,617.000, as compared with Jacob's 
 £337,000,000. For the subsequent period to the close 
 of the first decade of the nineteenth century, Dr. 
 Soetbeer's figures are some hundred and twenty-six 
 millions in excess of those given by Jacob. 
 
 If we turn to Dr. Soetbeer's figures of the volume 
 of production, we shall be able to gauge by additional 
 and more certain tests the increase, which resulted 
 from the discovery of America. Estimated in kilo- 
 grams of pure metal, the average annual product for 
 the period from the discovery to the conquest of 
 Mexico and Peru is put by him at 5,800 kilograms of 
 gold and 47,000 kilograms of silver. For the subse- 
 quent period, which intervened before the mines of 
 Potosi were worked, the annual product of gold 
 apparently increased to 7,160 kilograms, while the 
 annual product of silver was nearly doubled, and 
 amounted to 90,200 kilograms. But this increase was 
 as nothing to that in the output of silver during the 
 sixteen years following the discovery of the mineral 
 
 I (7/. " Materialien," part i. 
 
 Rise of Prices in the XVItk Century 83 
 
 
 \ 
 
 I 
 
 wealth of Potosi. The annual product of silver be- 
 came 811,600 kilograms, while that of gold was 8,510. 
 From that time onwards the increase, with some 
 fluctuations, was steadily maintained in both metals. 
 But the silver, which had outstripped the gold, pre- 
 served its lead, and by the beginning of the seven- 
 teenth century the average annual product had reached 
 422,900 kilograms, while that of gold was 8,520. At 
 the time of the discovery of America, Dr. Soetbeer 
 estimates that the gold amounted to 11 and the silver 
 to 89 per cent, of the total production. From the 
 conquest of Mexico the proportions were altered to 
 7*4 and 926. But by the beginning of the seven- 
 teenth century the relative proportions had become 
 2 and 98. During the course of that century the 
 volume of production of silver diminished, and that of 
 gold increased, until at the close the annual average 
 for the silver amounted to 341,900, and for the gold 
 to 10,765 kilograms, and the respective proportions to 
 96-9 and 31. The new gold produced in Brazil was 
 beginning to exert an eflfect; and for the period 
 between 1741 and 1760 the annual production of 
 that metal increased to 24,610 kilograms — a maximum 
 from which it fell to 17,778 kilograms for the period 
 between 1801 and 1810. This large increase in the 
 production of gold altered the proportion between the 
 two metals in 1741-60 to 4-4 of gold as compared 
 with 95-6 of silver, although the production of the 
 latter metal had risen to 533,145 kilograms. In the 
 next twenty years there was a further rise to 652,740 
 kilograms, in the succeeding twenty to 879,060 kilo- 
 grams, and in the following ten (the period between 
 1801 and 1810) to 894,1 50 kilograms. The proportion 
 
84 Money and its Relations to Prices 
 
 n 
 
 " 
 
 of the production of gold to that of silver for these 
 three periods was respectively 31 to 96*9, 2 to 98, and 
 1-9 to 981. 
 
 Summing up, therefore, the results of the whole 
 period from the discovery of America to the first 
 decade of the nineteenth century, we find that at the 
 outset the production of gold was 5,800 kilograms, 
 and of silver 47,000, and that at the close the respec- 
 tive production amounted to 17,778 kilograms of gold 
 and 894,150 kilograms of silver, and that the propor- 
 tions occupied by the two metals in the total volume 
 had altered from 11 to 89 to 1-9 to 981. For the first 
 fifty years, until the discovery of Potosi, the increase, 
 although important, was, by comparison with what 
 was to follow, inconsiderable ; nor was the alteration 
 in the proportionate production of the two metals 
 very great. But the output from Potosi produced 
 an effect in both respects which can only be called 
 revolutionary. The total production increased by a 
 sudden and enormous advance ; and the silver shot 
 ahead of the gold, and maintained its superiority until 
 the close of the seventeenth century. Then the sup- 
 plies of gold from Brazil produced a change in the 
 proportion, and until the middle of the eighteenth 
 century an inclination in this direction continued to 
 be iDanifest. But after 1760 silver again secured the 
 advantage. The most notable change, however, oc- 
 curred in the sixteenth century, and the great increase 
 in the output of silver, which marked that period, can 
 only be paralleled by the Californian and Australian 
 discoveries of gold in the nineteenth century. 
 
 We may now proceed to inquire into the effects 
 upon prices of this enormous increase. That a notable 
 
 Rise of Prices in the XVIth Century 85 
 
 I 
 
 change was manifest is generally admitted ; but, as in 
 the nineteenth century, men were slow to recognise 
 the cause, and, as in the nineteenth century also, the 
 effects were not so speedily or extensively evident as 
 superficial reasoning might have led the uninstructed 
 to expect. The mineral wealth issuing from the mines 
 of Potosi, and the other parts of America, had to find 
 its way into the channels of trade before it could 
 exercise its appropiiate influence, and during the pro- 
 cess it set in motion neutralising forces. Money is 
 unquestionably mobile— more mobile, perhaps, than 
 any other commodity which forms the subject of 
 economic treatment — but it moves along the high- 
 ways of business, and the agents, on whose actions it 
 operates, are not merely receptive and passive. Ac- 
 cordingly, some time may elapse before the effects of 
 an alteration in the supplies are generally felt, even 
 when the change itself is great, and, after no long 
 interval, those effects themselves may be merged in 
 the new forces called into activity. For this reason 
 broad conclusions are alone possible in such an inquiry 
 as that in which we are engaged ; and, to discern the 
 operation of the cause, we must form a comprehensive 
 view of the effects. The cause works in most cases 
 so subtly, so gradually, and so insensibly, that men, 
 accustomed from force of habit and imagination to 
 regard that by which they measure the value of other 
 commodities as itself immutable, find a difficulty in 
 detecting and gauging the changes which from time 
 to time undoubtedly occur. It is only when they look 
 back over an interval that they can discern what has 
 happened, and, before they can place themselves at a 
 sufficient distance from the phenomena, it is not un- 
 
 r 
 
! 
 
 86 Money and its Relations to Prices 
 
 likely that the increased commercial activity, which 
 may follow on an augmented su[>ply of the precious 
 metals, may conceal, and neutralise, the real influence 
 exerted on prices.^ To these considerations must be 
 added the circumstance that a previous increase in 
 the supplies itself diminishes the relative effects of a 
 subsequent increase. The percentage of the increase 
 declines; and few more treacherous pitfalls await the 
 tyro in statistics than those which lie beneath argu- 
 ments from percentages, for he should always take 
 account of the amount on which the percentage is 
 reckoned.^ 
 
 It might seem as if many of these considerations 
 would not apply to the period following the discovery 
 of America. The modern world was then compara- 
 tively young and unsophisticated. The organisation 
 of trade was simple. The relation of the precious 
 metals to prices was, by contrast with later elabora- 
 tions of credit and banking, direct. The addition to 
 the supplies was at once enormous and rapid. The 
 stock of the precious metals existing in the world 
 was admittedly small. Apparently it had not materi- 
 ally increased since the fall of the Roman Empire, 
 and, among the many rival explanations of that fall, 
 all of which probably contributed their quota, and 
 none can, on a sober view, be treated as exclusive, the 
 neglect into which the mines formerly worked had been 
 allowed to fall, and the consequent decrease of money 
 and decline of prices, have sometimes been assigned a 
 prominent place.^ The extraordinarily abundant out- 
 
 1 Of. Newmarch in Tooke and Newmarch's '' History of Prices," 
 vol. vi., app. ii. 
 
 ^ Ibid., vol. vi., pt. vii., sec. 3, pp. 151, 152. 
 ^By historians like Sir Archibald Alison. 
 
 ill 
 
 Rise of Prices in the XVIth Century 87 
 
 put from Potosi consisted of silver, which occupied at 
 that time the predominant position in the currencies 
 of Europe ; for it was at once the standard and the 
 chief medium of exchange. Nor was the volume of 
 trade, on which the new supplies would exert their 
 influence, of large extent when measured by later 
 figures. The drain to the East undoubtedly became 
 before long a potent factor, but it was as yet at the 
 very commencement of its future greatness ; and the 
 consumption in the arts, which was, no doubt, rapidly 
 stimulated by the growing cheapness of the metals at 
 the time of the discovery of America, was compara- 
 tively inconsiderable. 
 
 Yet "in England" Adam Smith considered^ that 
 the new supplies did not produce " any very sensible 
 effect upon the prices of things'' "till after 1570"; 
 and he held the opinion that "between 1630 and 
 1640, or about 1636, the effect of the discovery of 
 the mines of America in reducing the value of silver 
 appears to have been completed." The reasons, on 
 which he founded this opinion, still deserve study ; 
 and his whole " digression concerning the variations 
 in the value of silver" is marked by that saving 
 commonsense, that natural acuteness, and that mar- 
 vellous anticipation of points considered essential by 
 later inquirers, which are, perhaps, his prevailing 
 characteristics. His conclusions on particular points 
 have indeed been questioned by subsequent writers ; 
 but the broad outlines of his inquiry have been 
 generally confirmed ; and, as an example of the 
 method to be pursued, his treatment may be said to 
 be unchallenged. Taking the variations in the price 
 1 " Wealth of Nations," bk. i., ch. xi., pt. iii. 
 
 t?i:t1 
 
88 Money and its Relations to Prices 
 
 of corn as a standard by whicli to measure the changes 
 in the value of silver, he concluded that during the 
 first of the three periods of which he treats — that 
 before 1570 — the value of silver was rising and the 
 price of corn was falling ; that during the second 
 period — that extending from 1570 to 1630 or 1640 — 
 there was no " dispute either about the fact or about 
 the cause " of the diminution in the value of silver in 
 proportion to that of corn ; and that during the third 
 period — that between the middle of the seventeenth 
 century and the time at which he was writing — 
 although the "best opinion" which he could *4'orm 
 upon" the subject "scarce, perhaps," deserved "the 
 name of belief," yet the value of silver seemed to have 
 risen in proportion to that of corn. Such is his general 
 conclusion ; and later inquirers may derive instruction 
 from the reasons, which he adduces for selecting his 
 standard of comparison, from the motives, which led 
 him to reject certain prices as evidence and to accept 
 others, and from his criticism of the theories put 
 forward by the writers with whom he conflicts. 
 
 That the value of corn might be taken as approxi- 
 mating to the value of labour, which was in his 
 opinion the real measure of value, because, whatever 
 the stage of improvement, the increase in the produc- 
 tive powers of labour would be counterbalanced by 
 the increase in the price of cattle, " the principal 
 instruments of agriculture," and, unlike other forms of 
 rude produce, corn constituted in civilised countries the 
 chief part of the labourer's subsistence, and its supply, 
 being the product of human industry, could be more 
 exactly adapted to the demand than that of those 
 other forms of rude produce — this argument may 
 
 Rise of Prices in the XVIth Century 89 
 
 
 not resist hostile criticism, although it contains 
 elements of truth ; and it may be dismissed as part 
 of the peculiar apparatus of Adam Smith's reasoning. 
 The preference, however, of the prices of corn to those 
 of labour, because the latter "can scarce ever be 
 known with any degree of exactness," and the selec- 
 tion of prices mentioned accidentally, or in statutes of 
 the realm, rather than those which historians have 
 recorded on account of " their extraordinary dearness 
 or cheapness," ^ are lessons in the method of statistics. 
 Nor are the answers uninstructive, which are returned 
 to the upholders of views opposed to his own on the 
 interpretation of the first and the last of his three 
 periods. 
 
 In the first period he charges them with error due 
 to misleading facts and mistaken theory. In ascer- 
 taining their prices they had adopted for the begin- 
 ning of the period lower prices than those which 
 represented the real condition, and hence they thought 
 that the value of silver was falling, and that prices 
 were rising. For instance, they — and Bishop Fleet- 
 wood among them — had taken the " conversion price," 
 which was the price in Scotland at which a landlord, 
 receiving his rent in kind, might stipulate that he 
 should be at liberty to substitute a money-payment, 
 and therefore, before the average price of grain was 
 fixed at the annual fiars according to the actual market 
 
 1 It may be noticed that Bishop Fleetwood regarded the accounts 
 of Colleges as the "most sure guides," because in contrast with 
 "general histories," " which do mostly give us the prices of things, 
 which are extraordinary either for cheapness or for dearness," they 
 '* delivered faithfully the ordinary and common price of most com- 
 modities and provision," and he thought that the " gentlemen of 
 each university" might, if they would, mend or add to his own 
 statements. {Of. Preface to " Chronicon Prociosum.") 
 
 <i 
 
I 
 
 90 Money and its Relations to Prices 
 
 price,^ was generally, in the interests of the tenants, 
 below that price. Or, again, the statutes of assize 
 fixing the price of bread and ale, on which they 
 relied in some cases, generally began with the lowest, 
 and worked up to the higher, prices of wheat and 
 barley, and lazy or careless copyists might content 
 themselves with transcribing only the first three or 
 four prices. Or, once more, owing to the turbulent 
 nature of the times, and the difiiculty of communica- 
 tion, the price of corn might vary widely from one 
 district to another, and very low prices might be re- 
 corded, which might lead the inquirer to infer that 
 the ordinary price then was as much below what it 
 was later as the lowest price of the earlier was below 
 the lowest price of the later period. In all these 
 ways error might creep in to vitiate statistical com- 
 parison. 
 
 The erroneous theory, which Adam Smith rejected, 
 held that, as with the growth of the country the 
 quantity of silver in it increased, its value would fall. 
 To this he replied that such an increase in any par- 
 ticular country, apart from augmented {)roduction 
 from the mines, merely implied, in later economic 
 phraseology, a change in the " territorial distribution " 
 of money. As the wealth of the country became 
 greater, and the volume of its trade increased, more 
 money would be needed for the work of exchange, 
 and, under a system of "natural liberty," without 
 
 ^ Adam Smith notices that "Fleetwood acknowledges, upon one 
 occasion, that he had made this mistake." *'As," he continues, 
 " he wrote his book, however, for a particular purpose, he does not 
 think proper to make this acknowledgment till after transcribing 
 this conversion price fifteen times." 
 
 C 
 
 Rise of Prices in the X Vlth Century 9 1 
 
 lowering its value by becoming relatively abundant, 
 silver would "naturally seek the market" where it 
 would obtain the *' best price "—the largest quantity, 
 that is, of commodities in exchange. 
 
 The same theory was used as an explanation of the 
 course of events in Adam Smith's third period ; and 
 he met it with the same object. He allowed, how- 
 ever, that during the earlier portion of this period 
 the price of corn was slightly dearer ; but he accounted 
 for this by circumstances affecting the corn and not 
 the silver, and by the difference caused by debasement 
 of the silver coin due to "clipping and wearing." 
 To the difference, indeed, between nominal and real 
 value, occasioned by deliberate changes in the coinage, 
 he pays close attention throughout ; and it is a point 
 which no such inquiry can neglect without serious 
 risk of error. The other possibility suggested by 
 him of the change being on the side of the corn, and 
 not of the silver, has occupied no small space in later 
 controversy ; but Adam Smith's method of selecting 
 the prices of a single commodity for comparison, de- 
 fective as it might be on other grounds, simplified 
 the problem here, for it was easy to detect any un- 
 usual variation in the supply of such a single com- 
 modity as corn. He himself was inclined to attribute 
 crreat importance to the bounty granted in 1688, and 
 his arguments have been severely, and not unduly, 
 criticised.^ But of the influence of the civil war in 
 causing scarcity, and of the series of successive un- 
 favourable seasons, which occurred during the last 
 twelve years of his third period, little doubt can be 
 
 ^ B.g.y by Ricardo : '• Principles," ch. xxii. 
 
 
 iSff I' 
 
 ill 
 
92 Money and its Relations to Prices 
 
 entertained ; and that he was right in making allow- 
 ance for these circumstances no candid inquirer will 
 dispute. 
 
 Nor has later investigation done more than elaborate 
 his account of the causes to which he considers it 
 probable that an increase in the value of silver would 
 be due. The extension of the market for silver in 
 Europe, owing to the general advance in agriculture 
 and manufacture, the growth of population and in- 
 dustry in America itself, which thus presented a new 
 and enlarging market, the drain to the East Indies, 
 and the consumption in the arts, are all taken into 
 account; and by such considerations he reaches his 
 conclusions that until 1570 the value of silver was 
 rising, because the price of a quarter of corn had 
 fallen from four ounces of silver in 1350, or about 
 twenty shillings in the money of this day, to two 
 ounces, or about ten shillings; that in the second 
 period the price of corn rose from two to six or eight 
 ounces, or from ten to thirty or forty shillings, and 
 that therefore the value of silver had fallen, and that 
 in the third and final period the price of corn declined 
 again, and the quarter of wheat, which had averaged 
 thirty-nine shillings between 1621 and 1626 for the 
 best price in the Windsor market, averaged during 
 the first sixty-four years of the eighteenth century 
 about thirty-two shillings. 
 
 Compared, therefore, with the price of corn before 
 the time when the new supplies consequent on the 
 discovery of America had begun to exert an influence, 
 the rise, after amounting to 200 or 300 per cent., 
 finally settled about the former percentage. It is 
 curious to note that Sir George Evelyn, in the paper 
 
 ^ 
 
 Rise of Prices in the XVIth Century 93 
 
 contributed to the Royal Society in 1798,^ in which 
 he employed for comparison not one commodity only, 
 like Adam Smith, but an index number based on the 
 prices of a few chief articles of agricultural produce, 
 such as butter, cheese, ale, beer, mutton, and wheat, 
 together with horses, oxen, cows, sheep, hogs, geese, 
 hens, and cocks, and on labourer's wages, reached a rise 
 of 400 to 500 per cent, between 1550 and 1795, and of 
 110 between 1550 and 1670; but he has been severely 
 criticised by Hallam and other writers. 
 
 A rise of prices in England amounting to 200 
 per cent, may, with tolerable certainty, be taken as 
 within the truth, and the greater part at least of the 
 increase occurred within a hundred years of the dis- 
 covery of Potosi.^ At first the new supplies would 
 find their way to Spain ; and the ardent pursuit of 
 conquest combined with insatiable lust for the precious 
 metals would divert the attention of the inhabitants of 
 that country from trade and industry. Nor were 
 those " sanguinary laws " prohibiting the exportation 
 of gold and silver, of which Adam Smith speaks ^ in 
 his own day, without their counterpart in earlier 
 times, and the Spanish Government would be anxious 
 to prevent any large share of the new treasure from 
 passing into the hands of other countries. " In the 
 
 iCy. "Philosophical Transactions for 1798," pp. 175, etc. His 
 prices were "derived from respectable authorities." Vioomte 
 d'Avenel, in his recently published investigations, shows a rise of 
 about 200 per cent, between 1500 and 1675 in France. 
 
 ^ Cf. Cunningham: "Growth of English Industry and Commerce," 
 vol. ii., pp. 13 and 14. Prof. Rogers (" History of Agriculture and 
 Prices," vol. v., Preface) says that by the middle of the seventeenth 
 century general prices reached the level, which they retained to the 
 beginning of the last quarter of the eighteenth. 
 
 3Bk. iv., eh. i. 
 
 r 
 
 i I 
 
94 Money and its Relations to Prices 
 
 chief towns of Spain," accordingly, as Cliffe Leslie 
 pointed out,^ " prices seem to have risen even before 
 the fifteenth century had closed." 
 
 But, in spite of "sanguinary laws," the metals 
 would be smuggled abroad, and, if Spain herself did 
 not manufacture, and yet desired the product of the 
 skill and industry of other countries, she would be 
 compelled to procure it by the exchange of the new 
 silver. Her coinage, too, appears to have been excel- 
 lent,2 and the Spanish coins, with their full weight of 
 bullion, would be eagerly sought by men accustomed 
 to a worn currency, whether debased of deliberate 
 purpose by governments, or clipped by continual 
 transfer from hand to hand, or by the action of 
 bullion "sweaters." The fact that the Netherlands, 
 by reason of the wide variety and diffusion of their 
 trade, occupied a supremacy which passed at a later 
 age to England, would attract to them in the first 
 instance the new supplies of the precious metal, and 
 it was through Antwerp that the drain to the East 
 passed on its way. The preponderance of trade 
 brought to the Netherlands perhaps the bulk of the 
 overflow from Spain; and Clitfe Leslie observes ^ that 
 the " ascent " of prices was " much earlier " there than 
 in England.* 
 
 England, indeed, was suffering from the evils of a 
 debased currency ; and this circumstance, coupled 
 with the large expenditure of the Government on 
 
 1 •• Essays in Political Economy," 2nd edition, no. xix. 
 
 « Cf. W. A. Shaw's '* History of Currency," pp. 107 and 108. 
 
 ' In the essay quoted above. 
 
 * The ascent of prices in France seems to have been contemporane- 
 ous with that in England. {Cf. Newmarch in '• History of Prices," 
 vol. vi., app. ii., p. 410, and d'Avenel.) 
 
 \ 
 
 Rise of Prices in the XVIth Century 95 
 
 foreign war, would serve to divert the current of the 
 new metal. With the conclusion of peace, however, 
 and the reformation of the coinage under Elizabeth, 
 the new supplies made their entrance, and the natural 
 consequence followed of a rise in prices. Even then, 
 however, as Cliffe Leslie has instructively argued,^ 
 the rise does not seem to have penetrated to country 
 districts remote from the centres of business. The 
 prices recorded by Adam Smith and others are in the 
 main, if not exclusively, those ruling in commercial 
 resorts, and in the wilds of the country two centuries 
 afterwards ^ prices were still remarkably low. 
 
 It is necessary to bear in mind these circumstances 
 when we attempt to gauge the effects of the rise of 
 prices on the general welfare of the English com- 
 munity. The new supplies were of great abundance, 
 and, when once they came into contact with prices, 
 the rise was calculated to bewilder by its comparative 
 rapidity and extent. The effects were apparently 
 circumscribed, and, within the sphere of their opera- 
 tion, the necessary readjustment, it would seem, was 
 painfully accomplished. The rise was not so much 
 a slow imperceptible movement, spreading by steady 
 intervals over an extensive area, where its effects 
 would be merged, and obscured, in the flowing tide 
 of business activity ; but its presence seems, by con- 
 trast with later times, rather to have been manifested 
 by a series of jumps so spasmodic as to prevent 
 
 * In the same essay. 
 
 ' Cliffe Leslie quotes on this point a table compiled by Arthur 
 Young of the comparative prices of provisions at different distances 
 north of London, in which the price of a pound of meat appeared 
 within fifty miles of the capital to be only fourpence or twopence. 
 
 \ 
 
96 Money and its Relations to Prices 
 
 instinctive accommodation, and so sudden as to alarm 
 and confound. For these reasons it is at once difficult 
 and hazardous to ar^ue from records of what occurred 
 in the sixteenth century to the probability of what 
 might happen in the nineteenth or twentieth as the 
 result of changes in prices due to an increase in the 
 monetary supplies. 
 
 The former period, however, does so far resemble 
 the latter that in discussing the effects of the new 
 supplies we are beset by difficulties arising from the 
 plurality of causes ; and, among the different causes 
 in operation, the increase of money occupied an im- 
 portant, but not an exclusive, place. On the one hand, 
 the period was undoubtedly a time of unexampled 
 activity and enterprise. The long sleep of ages was 
 yielding to awakening influences. The discovery of 
 the New World stirred the imaginations of men. The 
 opening of the passage to India round the Cape 
 quiciiened their speculative impulses. They were 
 ready, and even anxious, for adventures in commerce 
 and industry. Yet it is difficult to dissent from 
 Hume's opinion ^ that " it is certain that, since the 
 discovery of the mines in America, industry has in- 
 creased in all the nations of Europe, except in the 
 possessors of those mines ; and this may be justly 
 ascribed, among other reasons, to the increase in gold 
 and silver." Nor is it easy to deny the force of 
 Petty's comparison 2 of money to the "fat of the body 
 politic," or of Hume's image^ of it as the "oil which 
 renders the motion of the wheels " of trade " more 
 
 ^ Essays, pt. ii. , no. iii. 
 
 ^ In his tract *' Verbum Sapienti." 
 
 * In the essay qaoted above. 
 
 i 
 
 ; 
 
 
 Rise of Prices in the XVIth Century 97 
 
 smooth and easy." If the " remarkable expansion " 
 of Oriental trade, declared ^ by Cairnes, who was by 
 no means disposed to over-rate the advantages of 
 rising prices, to be " the most striking commercial 
 fact of the age that followed," was due in part to the 
 discovery of the passage round the Cape, it was also 
 facilitated by the new supplies of money; for the 
 nations of the East were willing to give their produce 
 and merchandise in exchange for the precious metals. 
 The mineral wealth of America, in short, furnished 
 the traders of Europe with a commodity which the 
 East was ready to take in unlimited quantities. If 
 the lethargy of ages was already giving way before 
 the influence of a variety of causes, and the old order 
 was breaking up of itself, it can hardly be doubted 
 that the fresh supplies of the precious metals, partly 
 by firing the ambitions of men with rumours of the 
 wealth of the newly-discovered world, partly by 
 encouraging and developing the trade to the East, 
 partly by assisting and stimulating the legitimate 
 growth of commerce, contributed no insignificant 
 element to the movement of affairs. 
 
 On the other hand, the revolution — for it amounted 
 to nothing less — which was occasioned in prices, was 
 unquestionably attended by considerable suffering. 
 The change seems to have operated, in the areas over 
 which it extended, with a rapidity that did not 
 permit of gradual and insensible adjustment. It dis- 
 located the mutual relations of men ; and, if merchants 
 and traders were benefited, labourers experienced an 
 injury, at least for the time. On this point there does 
 not seem to be any serious dispute ; but we must 
 \ " Essays in Political Economy," no. iv. 
 
 G 
 
I 
 
 I 
 
 t 
 
 98 Money and its Relations to Prices 
 
 beware of attributing the evil, just as we must be 
 careful to avoid assigning the good, exclusively to the 
 influence of the new supplies of the precious metals. 
 They are only one of several causes. We must re- 
 member that the old economy seems to have been 
 dissolving for some while before the new supplies 
 began to exert an appreciable influence, and that 
 perhaps they can only be said to have hastened 
 inevitable change. We must remember, in particular, 
 that the debasement of the currency had already 
 produced injurious effects. 
 
 In a well-known dialogue by W. S., entitled ''A 
 Discourse of the Common Weal of this Realme of 
 Englande," emphatic expression was given to the 
 complaints of the times, and, among these, to the 
 serious rise of prices, with its disturbing influence 
 on the relations of various members of society, repre- 
 sented by the personages of the dialogue. The 
 dialogue has been frequently quoted ^ as evidence of 
 the injurious eflects of the rise of prices ; and it was 
 at one time supposed to have been written in 1581, 
 and to have referred to the suflering consequent on 
 the influx of the new metal from Spanish America. 
 But recent research has carried back the date of the 
 original edition to 1549, and the rise of prices at that 
 time could not have been due to the supposed cause, 
 if Adam Smith was correct in his opinion — and sub- 
 sequent investigations have tended to conflrm his 
 general accuracy — that the first evident traces of 
 the influence of the new supplies could be detected 
 no earlier than 1570. At any rate, it is curiously 
 
 1 E.g.f by Cairnes in the essay quoted above. 
 
 / 
 
 
 Rise of Prices m the XVIth Century 99 
 
 significant that the special references to the "great 
 plenty of treasure which is walking in these parts 
 of the world," and the "infinite sums of gold and 
 silver which are gathered from the Indies and other 
 countries, and so yearly transferred into these coasts," 
 are contained in the later edition of the dialogue, 
 and do not appear in the earlier. This discovery* 
 which is duel to the zeal and industry of Miss 
 Elizabeth Lamond, may serve as an instructive 
 warning of the possible reversal of accepted opinions; 
 and in the case before us, if the dialogue is taken 
 as testimony to the prevalence of trouble and con- 
 fusion, the cause, to which these must be ascribed, 
 is, not the discovery of America and the rise of 
 prices that followed on the influx of the precious 
 metals, but the deliberate debasement of the currency 
 by the Tudor monarchs. 
 
 It may be noted that Professor Thorold Rogers, in 
 his "History of Agriculture and Prices," 2 expressly 
 distinguishes between the comparative rapidity of the 
 rise of prices caused by debasement of the currency 
 and the relatively gradual advance, which might have 
 been expected, in the absence of this provocative 
 influence, to have attended the entrance of the new 
 treasure into English trade.^ The debasement of the 
 currency served to postpone that entrance ; and the 
 
 ' Cf. a notice of Miss Lamond by Dr. Cunningham in the Economic 
 Journcd for December, 1893, vol. iii., no. 12, p. 669. 
 
 2 Vol. iv., p. 736 ; vol. v., p. 780. He does not think that during 
 the greater part, or perhaps the whole, of the sixteenth century 
 there was any change in general prices beyond that due to debase- 
 ment of the coinage. [Cf. also '* Six Centuries," pp. 343, etc.) 
 
 « He would apparently put the rise (not due to debasements at 
 about 200 per cent. ' 
 
 i 
 

 I 
 
 lOo Money and its Relations to Prices 
 
 reformation of the coinage under Elizabeth raised a 
 hope, destined to be disappointed, that the evils occa- 
 sioned by artificial increase of the currency would 
 be removed when the proper corrective had been 
 applied. But the debasement had already produced 
 disorder, which rendered any immediate recovery im- 
 possible, and the new supplies of the metals poured 
 in with greater abundance because they had been 
 excluded before, and the influence of the American 
 output was concentrated instead of difi*used. The 
 suffering necessarily occasioned seemed the more 
 alarming and hard to endure because it disappointed 
 hopes which had been confidently formed, and dis- 
 pelled expectations which seemed reasonable. It 
 can scarcely be doubted that the debasement of the 
 currency accentuated the inevitable consequences of 
 
 the influx. 
 
 Bishop Latimer, again, who has been identified 
 with one of the characters of the dialogue of W. S., 
 spoke not unfrequently in his sermons of the rise 
 of rents, and assailed ^ in one common denunciation 
 " graziers, inclosers, and rent - raisers." There can 
 be no question that the rearing of sheep, and their 
 substitution for tillage, with the consequent dimi- 
 nution in the demand for labour, and the in- 
 cisures of the open fields, with the injury which 
 appears to have been wrought to the previous 
 occupants, were stimulated by the high price of wool. 
 But we must not forget that Latimer himself did not 
 live to witness the Elizabethan recoinage, when the 
 
 1 Latimer, in referring to the rise of prices, was evidently dealing 
 with that caused by the debasement. {Cf, Tooke and Newmarch's 
 ••History of Prices," vol. vi., p. 371.) 
 
 Rise of Prices in the XVIth Century loi 
 
 new supplies found an entrance into the circulation ; 
 and that the development of the woollen industry, and 
 the practice of inclosure, had attracted the attention 
 of the Legislature before the conquest of Mexico and 
 Peru. The Elizabethan Poor Law, once more, has 
 been plausibly ascribed ^ to the influence of the new 
 supplies in dislocating industrial relations, and causing 
 distress to the labourer, whose remuneration did not 
 rise correspondingly to the advance in prices. But 
 the previous dissolution of the monasteries under 
 Henry the Eighth seems at least to have borne some 
 part in producing this result, although the magnitude 
 of its influence may have been exaggerated.^ That 
 dissolution itself was but the accompaniment of a 
 general change, b}" which the labourer, unable, like his 
 modern descendant, to assert his claims to increased 
 remuneration, unless he was ready to put in motion 
 the costly and cumbrous engine of revolt, was only 
 too likely to suffer.^ 
 
 The evil then, like the good of the times, seems to 
 have been due to a number of causes, among which 
 we may give to the new supplies of the precious 
 metals an important, but not an exclusive, position. 
 Their connection, on the one hand, with the growth of 
 the trade to the East is as obvious as is the fact that 
 they were largely responsible for the splendour of the 
 
 1 By Jacob and Cairnes. 
 
 2 Cf. Ashley : " Economic History," bk. ii., ch. v. 
 
 » The Statute of Apprentices of 1563 was apparently designed to 
 secure an adjustmeutof wages to prices. (Cy. Cunningham: ''Growth 
 of English Industry," ii., 39, 195. ) It is doubtful how far the clause 
 empowering the justices to fix wages was actually operative ; and 
 the rise of prices, it must be remembered, seems to have been 
 bewildering. 
 
 f^Ili 
 
 ill 
 
102 Money and its Relations to Prices 
 
 Spanish monarchy. Nor can there be serious doubt 
 that the rise of prices occasioned by their influx 
 injured for the time, at least, the English labourer, 
 whose earnings failed to increase accordingly. Nor is 
 it improbable that the diflSculties of Charles the First, 
 and the eventful quarrel which followed, were partly 
 due to the increased expenditure of the Court neces- 
 sarily occasioned by the rise of prices ; for Elizabeth, 
 unwilling to burden the nation unduly, had aimed at 
 limiting the revenue demanded from her subjects, and, 
 while the nominal expression of this might remain 
 unchanged, its purchasing-power would, with the rise, 
 undergo serious diminution.^ On the other hand, the 
 impulse given to extended trade remained when the 
 dislocation to wages had been reduced ; and there are 
 certainly grounds for believing with Tooke and New- 
 march that " we have the fullest warrant for conclud- 
 ing that any partial inconvenience that might arise 
 from the effect of the American Supplies of the 
 Sixteenth Century in raising prices was compensated 
 and repaid a hundredfold by the activity, the expan- 
 sion, and vigour which they impressed for more than 
 one generation upon every enterprise, and every act 
 which dignifies human life or increases human happi- 
 
 ness." 2 
 
 One other effect, which they produced, must here be 
 briefly noticed. They caused an alteration in the 
 relative value of silver and gold. We have observed 
 before the change in the respective volume of produc- 
 tion. At the beginning of the period,^ when America 
 
 ^ Cf. Cairnes in essay quoted above. 
 
 2 *• History of Prices," vol. vi., app. ii., p. 414. 
 
 3 Cf, Dr. Soetbeer's " Materialien," pt. i. 
 
 Rise of Prices in the XVIth Century 103 
 
 was discovered, the proportion of the gold to the 
 silver in the total output was as 11 to 89. By the 
 close of the sixteenth century it was as 1 to 98. By 
 the close of the succeeding century it had risen to 3 
 to 96, and by the beginning of the nineteenth century 
 it was aojain as 1 to 98. Turning from these estimates 
 of the volume to Dr. Soetbeer's calculations of the re- 
 spective total values of the annual production, we find 
 that at the time of the discovery of America the pro- 
 portion of the gold to the silver was as 57 to 43, that 
 by the close of the sixteenth century it had sunk to 
 17 to 82, that by the close of the seventeenth century 
 it was again restored to 32 to 67, and that by the end 
 of the whole period it had fallen once more to 23 to 
 76. In framing these estimates of the respective 
 values. Dr. Soetbeer converts the volume of silver 
 into its value by taking the estimated, and, for the 
 period since 1687, the recorded, ratio of silver to gold 
 of the time. And yet, in spite of the great changes 
 in total volume and value which we have noted, the 
 ratio only altered ^ from 1 to 10'45 at the commence- 
 ment to 1 to 11 80 at the close of the sixteenth century, 
 to 1 to 15 at the close of the seventeenth, and 1 to 15*63 
 at the end of the whole period. The change in the 
 relative volume of supply undoubtedly exercised an 
 influence on the market ratio, but the amount of that 
 influence seems to have been by comparison incon- 
 siderable, and the steadiness of the ratio, when con- 
 trasted with the extent of the change, is at least a 
 significant fact. On its precise significance we do not 
 propose at this stage of the inquiry to offer an opinion. ^ 
 
 ' Ihxd.^ pt. ii. 
 Of, below, chapters v., vi. 
 
 ' lih- 
 
'1 I 
 
 ^1 ■ 
 
 CHAPTER IV 
 
 THE FALL OF PRICES DURING THE EARLIER PART OF 
 THE NINETEENTH CENTURY 
 
 In attempting to gauge the effects upon prices of the 
 American discoveries of the sixteenth century, the in- 
 quirer is confronted by a lack of statistical data ; but 
 his investigations are rendered more easy by the com- 
 parative simplicity and directness of the connection 
 between the cause and the effect. As he approaches 
 to recent times, he can avail himself of fuller and 
 more reliable statistics, but he finds greater uncertainty 
 on the mode of that connection. The facts of the 
 production from the mines are, in spite of some doubt, 
 more exactly ascertained; that scientific instrument 
 for the measurement of changes in general prices, 
 which is known by the name of an index number, 
 can be used ; and the records of prices themselves are 
 more abundant and reliable^ But, if the statistical 
 material be more copious and trustworthy, the relation 
 of the metals to prices is complicated and obscured. 
 The din of controversy fills the air. The fluctuations 
 
 1 Newmarch (" History of Prices," vol. vi., app. ii.) distinguishes 
 thus between different periods in the records of prices : — 
 
 (1.) From 1401 to 1580, when there are only ♦* Casual Quotations " 
 
 by historians and other writers, such as Eden in England. 
 (2.) From 1581 to 1770, when there are "several independent 
 
 series of Annual Quotations," e.g., the Eton Tables used by 
 
 Adam Smith. 
 (3.) From 1771 to the "present time" (1857), when there are 
 
 ** Official Series of Annual Average Prices, obtained under 
 
 Legislative Authority," e.gr.,the official averages in England 
 
 obtained under the Corn Acts. 
 
 104 
 
 TAe Fall of Prices after 1810 105 
 
 of prices are attributed by one party to one cause and 
 by a second to another. Nor is the controversy 
 gratuitous; for the facts are difficult and intricate. 
 The causes are hard to reach, and the effects are not 
 easily traced. We have, no doubt, to take account on 
 the one hand of changes in the supplies of the metals, 
 and on the other, to measure the alterations of 
 general prices. But the links connecting cause 
 and effect are not obvious or readily fitted together. 
 The growth of industry and commerce, and the in- 
 terruptions of that growth, the consumption of the 
 metals in the arts, and the drain to the East, are facts 
 of importance, and admit of rough approximate 
 measurement. But the war with France is a factor 
 in the movement of prices during the period of which 
 we are treating, which cannot be neglected ; and the 
 suspension of specie payments is an element of the 
 situation, on the precise character and consequences 
 of which an interminable dispute has raged. Such is 
 the atmosphere of doubt and uncertainty into which 
 we are entering. 
 
 From this obscurity, however, some conclusions 
 emerge possessing some amount of certainty; and 
 with these we may begin. In the first place, the 
 broad significance of the facts of the supplies of the 
 metals is unmistakable. That the production of 
 America declined in consequence of revolutionary dis- 
 turbance is notorious; and from the mines of this 
 part of the world the new supplies of the sixteenth 
 century had come, and the large proportion continued 
 to be furnished at the close of the eighteenth. 
 
 Jacob estimated ^ the annual production of Spanish 
 and Portuguese America between 1700 and 1810 at 
 
 1 Chapter xxii. 
 
 i 
 
I '.. 
 
 r I '1 
 
 I Hi 
 
 ijii 
 
 1 06 Money and its Relations to Prices 
 
 seven millions, while he put the output from Europe 
 and Africa at £853,233. The total output from 
 Spanish America and Brazil in the succeeding twenty- 
 years amounted, according to his estimate,' to 
 £80,736,768, or a yearly average of some four instead of 
 some seven millions. The population of Potosi alone 
 diminished from 130,000 at the beginning of the re- 
 volution to 9,000 in 1826, and the number of stamping- 
 mills at work decreased from 132 to 12. Nor, when 
 once the mines had been disordered, could they readily 
 be restored to their former condition ; for machinery 
 was damaged, and adits were choked. To set against 
 this diminution of more than forty per cent, in the 
 annual American supply, there was an increase in the 
 output from the Russian mines of the Ural Mountains, 
 although in parts of Europe, such as Hungary, a decline 
 was evident. The value of the total annual supply 
 of Europe and Asiatic Russia is put by Jacob at 
 £1,250,000 ; and, adding these figures to the American 
 supply, he reaches the grand total of some five millions 
 as compared with an average for tiie previous hundred 
 years of eight, thus establishing a decrease of some 
 thirty-seven per cent. The consumption in the arts 
 he estimates 2 to amount to more than five millions, 
 and the drain to the East, which, he states, had dimin- 
 ished, to two; and, allowing for wear and tear, he 
 arrives at the final result tha at the end of 1829 the 
 total stock of coin existing in the world was sixty -six 
 millions less than it was at the end of 1809 and 
 amounted to £313,388,560. In this estimate the out- 
 put from Asia, which he placed^ at £1,400,000, was 
 not included ; but, as he points out, there was gener- 
 I Chapter xxv, 2 Chapter xxvi. 3 Chapter xxvii. 
 
 The Fall of Prices after 18 10 107 
 
 ally on balance an excess of import over export of 
 bullion in the Indian and Chinese trade.^ 
 
 Jacob's figures end with 1829; and are stated in 
 values and not in quantities. If we turn to Dr. 
 Soetbeer,2 we find that for the first four decades of 
 the nineteenth century the value of the annual produc- 
 tion of the gold and silver together (converting marks 
 into pounds at twenty marks to the pound) was 
 £10,482,650, £6,463,550, £6,059,100, and £8,108,900. 
 With the following decade, in which the Californian 
 discoveries first began to exert an influence, the total 
 increased to £14,506,500, and with the next decade, in 
 which the new wealth of Australia added its forces 
 to those of California, to £35,834,750. The decline 
 between 1810 and 1830 is obvious, and amounts to a 
 percentage of forty as compared with Jacob's thirty- 
 seven. Passing to the separate figures for the gold 
 and the silver respectively, we find that the volume 
 of the gold falls from 17,778 kilograms in 1801-10 
 to 11,445 in the next decade, and then increases to 
 14,216 in 1821-30, and to 20,289 in 1831-40. With the 
 next decade it rises to 54,759, and with the succeeding 
 to 199,388. The volume of the silver falls from 
 894,150 kilograms in 1801-10 to 540,770in 1811-20,and 
 460,560 in 1821-30, and then rises to 596,450 in 1831- 
 40. The fall between 1810 and 1830 in the volume 
 of the silver amounts to little less than fifty, and 
 between the first and second decade of the century 
 to little less than forty per cent. The increased 
 
 1 Jacob thought, however, that the diminution in the supplies, 
 owing to the operation of counteracting causes, had exercised very 
 little discernible influence on prices. [Cf. his concluding chapter.) 
 
 ^ ". Materialien," pt. i. 
 
 \ if 
 
io8 Money and its Relations to Pmces 
 
 production of gold for the years from 1821 to 1840 
 seems to be due to augmented supplies from Russia, 
 where, according to Dr. Soetbeer's separate figures, 
 the annual output grew from 165 kilograms in the 
 first decade of the century to 315 in the second, to 
 3,375 in the third, and 7,050 in the fourth. But the 
 decline in the total production of gold and silver from 
 1810 to 1830 is incontestable ; and it was not incon- 
 siderable, for it amounted to some forty or fifty per 
 cent. That such a change should produce some effect 
 on prices was probable. 
 
 Nor can it be doubted that, to whatever cause the 
 change be due, the index numbers of Jevons and of 
 Mr. Sauerbeck establish a decline in general prices. 
 Mr. Sauerbeck's number rests on a similar basis for 
 the earlier and for the more recent years to which he 
 has applied his calculation.^ He adopts as his starting- 
 point the average of the years 1867-77 (which, he 
 remarks, is found in the aggregate to agree with the 
 average of the twenty-five years from 1853 to 1877); 
 and, beginning with the average of this decade, he 
 carries his number back to 1818, while, as year by 
 year, or even as month by month, elapses, he brings it 
 down to date. His number, therefore, covers the 
 longest continuous period of any of the best-known 
 varieties. It is now based on the prices of 45 articles. 
 From 1867 to 1872 the number of articles is 44, and 
 from 1846 to 1866 it is 43, while before 1846 it is 
 only 31. But Mr. Sauerbeck states that the descrip- 
 tions of these 31 articles "correspond as nearly as 
 possible with those since 1846," and therefore the 
 results shown by his number are comparable through- 
 1 Cf. paper in Statistical Journal for June, 1893, quoted above. 
 
 I 
 
 
 •I 
 
 The Fall of Prices after iSio 109 
 
 out. It exhibits a steady fall from 1818 until the 
 time when the gold discoveries of California and 
 Australia had begun to exert an influence. The 
 highest point reached is in 1818, when the index 
 number is 142 — a point, it may be noticed, far above 
 any attained since — and the lowest point for the 
 period, which we are now considering, is 74 in 1849. 
 When the figures are graphically represented, tempo- 
 rary oscillations are shown in an upward and down- 
 ward direction in the curve of prices, which mark the 
 alternating periods of speculative activity and trade 
 depression ; and a more prolonged and decided upward 
 inclination is manifested in the thirties. But the 
 general trend of the curve is as decidedly downwards 
 as it inclined upwards after the gold discoveries of the 
 middle of the century. If the results are averaged 
 for successive decades, the index numbers are for 
 1818-27, 111; for 1828-37, 93; for 1838-47, 93 again; 
 and for 1848-57, 89; while in the next decade the 
 number rises to 99. The decline in the earlier years 
 is very marked. From 142 in 1818 the number falls 
 to 121 in 1819, to 112 in 1820, to 106 to 1821, and to 
 101 in 1822. In 1825 it rises to 117, but in the next 
 year it falls to 100, and in 1827 to 97, in 1829 to 93, 
 and in 1830 to 91. 
 
 Turning to the inquiry made by Jevons,^ we dis- 
 cover results which are generally similar; but his 
 investigations are pushed to an earlier date. They 
 begin with 1782 and extend to 1865. His prices are 
 those of about 40 chief commodities, selected for the 
 period from 1782 to 1844 from tables in Tooke and 
 Newmarch's "History," and, after the later date, 
 
 1 Gf. " Inveitigations," Essay iii., "On the Variation of Prices 
 and the Value of the Currency since 1782." 
 
 
 liaarrtifciii'lrfl- Till 
 
 ^r-.:*-!^ '-"*''-- 
 
I 
 
 '•i 
 
 1*^ 
 
 no Money and its Relations to Prues 
 
 based on his own calculations made from the Econo- 
 mist. The commodities, with some inevitable changes 
 of quotation, are identical throughout, and are 
 generally similar to those contained in Mr. Sauer- 
 beck's calculations. But for his general average 
 Jevons adopts the geometric mean in place of the 
 simpler method of the arithmetic mean pursued by 
 Mr. Sauerbeck, and he starts with the prices of a 
 single year — that of 1782^ — a course, which he allows 
 to be " purely arbitrary," and yet claims to be per- 
 missible, if nothing more is sought than a broad view 
 of the direction of the movement of prices over a 
 long period. A single quotation is taken of each 
 commodity for each successive year, and is sometimes 
 based on an average for the year, and sometimes on a 
 mean between the highest and lowest price for March 
 supplied in Tooke's tables, where, as a general rule, 
 the quotations are given quarterly. 
 
 Illustrating his results by a curve of prices, Jevons 
 finds, like Mr. Sauerbeck, smaller fluctuations up and 
 down, marking the flow and the ebb of credit, and 
 beneath these temporary changes he detects a general 
 inclination, first (after 1790) upwards to 1809, and 
 then downwards to 1849, when the lowest point is 
 reached. Between 1809 and 1849 prices fell, he ob- 
 serves, in the ratio of 100 to 41, while Mr. Sauerbeck's 
 figures show a fall from 142 in 1818 to 74 in 1849, or 
 some 45 per cent. In accordance with the results 
 indicated by Mr. Sauerbeck's curve, he notes an "eleva- 
 tion of prices " from 1833 to 1843, which, he considers, 
 can hardly be assigned to the speculative movement 
 alone ; and, after 1852, again in accordance with Mr. 
 
 1 This is the first year of Tooke's tables. 
 
 The Fall of Prices after iSio in 
 
 Sauerbeck's figures, prices rise, and the rise is perma- 
 nent. Such are the general results of his investiga- 
 tion ; and the broad conclusions on the course of prices 
 during the earlier portion of the nineteenth century 
 reached by means of his index number and by that 
 of Mr. Sauerbeck are not dissimilar. They agree in 
 establishinjr the fact of a fall of between 40 and 50 
 per cent. 
 
 In order to eliminate minor influences, it is neces- 
 sary to take a comprehensive view over an interval 
 of time; for only thus can we hope to detect that 
 " secular " movement of prices which is due to changes 
 in the supplies of the precious metals ; and it is be- 
 cause index numbers, especially when represented by 
 the graphic method, aflbrd the means for this wide 
 survey, that they are a valuable instrument of scien- 
 tific inquiry. Before, then, we can form an adequate 
 conception of the real effect on prices of the known 
 diminution in the production of the precious metals 
 during the earlier portion of the nineteenth century, 
 we must note, and discount, the influence of speculative 
 activity issuing in commercial crises. Periodic altera- 
 tions of expanding and contracting credit may now 
 be treated as unquestioned facts of the modern 
 economic world, whatever may be the ultimate cause 
 to which they should be traced ; and Jevons' studies 
 of these passing fluctuations ^ have contributed in no 
 small measure to this result. In the period under 
 review, proceeding backwards from the acknowledged 
 and notorious crisis of 1847, he passes ^ successively 
 to 1837, 1825, 1816, 1805, 1793, and 1783.^ The great 
 height, therefore, of Mr. Sauerbeck's number in 1818, 
 
 1 Cy. " Investigations," Essays i., v.-viii. 
 
 2 GJ. Essay viii. ^ qj^ also Essay vii. 
 
112 Money and its Relations to Prices 
 
 The Fall of Prices after 1810 113 
 
 f,. 
 
 I^ft 
 
 w 
 
 its rise in 1825 to 117, and its rise again in 1847 to 
 95, are explicable, so far as they show a deviation 
 from the general trend, as marking periods of unusual 
 business activity followed by periods of comparative 
 distress and stagnation. The elevation of the curve 
 of prices from 1833 to 1843, however, is, in Jevons* 
 opinion, too pronounced to be assigned to speculation 
 alone, although, as he notes, a crisis of severity 
 occurred in the United States in 1837, accompanied 
 by two partial crises in England in 1836 and 1839.^ 
 Later research has pointed to the connection of this 
 marked movement with the increase of Russian gold, 
 due to discoveries in Siberia in 1830.^ In 1805, again, 
 the crisis, which actually occurred, was of minor inten- 
 sity, and the great collapse was not evident until 1810.' 
 But, after allowing for these apparent fluctuations 
 of the credit cycle, a broad movement remains under- 
 neath. The steady upward inclination until 1809, 
 and the pronounced trend downwards from 1809 to 
 1849, must be due to some deeper and more perma- 
 nent influence. And the same broad movement was 
 evident, as Jevons subsequently showed,* if 1849 
 were taken as the starting-point of the calculation, 
 instead of 1782. In view, therefore, of the evidence 
 supplied by the index numbers, in conjunction with 
 the notorious revolutionary disturbances in America, 
 
 1 The elevations of prices due to speculation are assigned by 
 Jevons to the years 1796, 1801, 1809, 1814, 1818, 1825, 1836, 1837, 
 
 1847. 
 
 2 Following on those in the Ural Mountains in the previous 
 
 decade. 
 
 3 The crisis of 1810 Jevons acknowledges as an exception to the 
 decennial variation which he endeavours to establish. 
 
 * Cf. Essay iv., being a letter to the Economist on the *' Deprecia- 
 tion of Gold," written in 1869. 
 
 \ 
 
 and a known diminution of the supplies of the 
 precious metals, amounting between 1810 and 1840 to 
 some 40 per cent., it is impossible to resist the con- 
 clusion that the cause was adequate to produce an 
 eflfect on prices, that the eflfect was produced, and 
 that there must have been a connection between the 
 cause and the effect. The broad concomitance of 
 the variations renders improbable a contrary con- 
 clusion. 
 
 But the exact amount of the effect, which was due 
 to the cause, is less easy — is, indeed, impossible — to 
 determine ; and the relation of the cause to the effect 
 is far less obvious than it was in the period treated in 
 the preceding chapter. At that time the influence of 
 credit was comparatively insignificant, and the 
 elaborate organisation, through which it operates in 
 modern commerce, was practically unknown. The 
 crisis of 1793, indeed, has been described as the "first 
 modern crisis." ^ It is true that Jevons has gone far 
 to establish the periodical recurrence of such fluctua- 
 tions for the whole of the eighteenth century, and the 
 South Sea bubble of 1720 is as notorious as that 
 "Black Friday" of the Overend and Gurney smash, 
 which was separated by an interval of nearly a cen- 
 tury and a half. It is true also that the crisis of 1793 
 may have earned the designation of the " first modern 
 crisis," because it is the first of which the course can 
 be traced with any scientific exactness. But it is 
 certainly noticeable that even its influence, as Jevons 
 has remarked, can scarcely be detected in the general 
 curve of prices, and it is incontestable that the exten- 
 sive development of banking and credit, with all its 
 
 '^Cf. "■ Investigations," Essay vii. 
 
 H 
 
114 Money and its Relations to Prices 
 
 The Fall of Prices after 1810 115 
 
 1 
 
 confusing effects on the relation of the precious metals 
 to prices, accompanied, and did not precede, that in- 
 dustrial revolution, which marked the close of the 
 eighteenth and the opening of the nineteenth century. 
 But what, it may be asked, of that revolution itself? 
 Does it not supply a common cause acting on com- 
 modities, which renders it unnecessary to look for any 
 other explanation of the fall of prices ? It must be 
 admitted without hesitation that the tendency of the 
 times inclined to an improvement in the methods of 
 production, which would naturally result in an increase 
 in the number of commodities and a diminution in 
 their prices. A broad general cause for this descrip- 
 tion stands, it must be allowed, on a different footing 
 from the assertion that, if each commodity be con- 
 sidered by itself, a sufficient explanation of changes 
 in prices can be discovered without raising the question 
 of any alteration in the supplies of the precious metals. 
 For the very meaning of an average is that minor 
 influences are eliminated, and the action of some 
 common cause detected. The validity of an index 
 number rests in the last analysis on the possibility of 
 this elimination ; and the advance established by the 
 inquiries of such a writer as Jevons over those of 
 Tooke consists ^ in the greater breadth of view at- 
 tained. But the confidence, with which minor causes 
 affecting particular commodities can be dismissed by 
 enlarging the basis on which the average of prices 
 rests, and parsing influences common to all, such as 
 
 1 Cf. a paper by Sir Robert Giffen, in the Statiatical Journal for 
 December, 1888 (vol. 11., pt. iv.), on "Recent Changes in Prices 
 and Incomes Compared," p. 757- "To my mind he {».e.. Tooke) 
 '•is completely superseded by Jevons." 
 
 the ebb and flow of credit, can be discounted by in- 
 creasing the interval over which the observation 
 extends, may be shaken by the possibility of the 
 presence and action of some general cause common to 
 all, or to a large majority, of the commodities, which 
 is abiding and not transitory. Such a common cause 
 may be found in the general progress of civilisation, 
 if it is the case, as some observers have maintained, 
 that man's efforts to win wealth from bounteous or 
 reluctant nature are, with the lapse of time, rewarded 
 with more success in the case of the mass of com- 
 modities than in that of the precious metals. This 
 tendency, however, if real, is so permanent that it 
 may be taken to be always present; and, while it 
 would serve to account for a general downward in- 
 clination of the curve of prices, it does not furnish 
 any adequate explanation of the reversal of a move- 
 ment in the opposite direction. If the general in- 
 clination be interrupted by an upward tendency, then, 
 when this tendency is reversed, we require some 
 explanation of the change different from any to be 
 found in the action of that which has been always 
 present. The interruption itself must be due to a 
 different cause, and the cessation of the interruption 
 must be occasioned by the removal or counteraction of 
 that cause. 
 
 But it may be argued that this general tendency 
 to progress may be accelerated, and thus outweigh the 
 influence of the interrupting cause. Even then the 
 interrupting factor itself must have grown relatively 
 less potent, and so far it is shown to have been a 
 contributory cause to the previous movement; and, 
 granting the possibility of a relative increase in the 
 
ii6 Money and its Relations to Prices 
 
 The Fall of Prices after 1810 T17 
 
 general tendency as a cause adequate to produce a fall 
 of prices, we have still to ask whether, as a matter of 
 actual fact, such an increase was manifested in the 
 particular period under consideration. The time, 
 when England was laying the foundations of her 
 manufacturing and trading supremacy, was unques- 
 tionably a period of development of business and of 
 growth in population. If the supplies of the precious 
 metals had been maintained at their former level, the 
 work of exchanging, which they would be called upon 
 to discharge, would, in consequence of that manufac- 
 turing development, and of the growth of population, 
 and of the number of commodities produced, have 
 undergone a relative increase. The precious metals 
 would, therefore, have tended to rise in value by 
 reason of their relative scarcity; and the monetary ex- 
 pression, or, in other words, the prices of commodities, 
 would have tended to fall in consequence of their 
 relative abundance. That such a cause was in opera- 
 tion during the first portion of the nineteenth century, 
 and that the fall in prices between 1810 and 1849 
 may be attributed to it in part, cannot be doubted. 
 But it is undeniable that the same cause was acting 
 upon prices in the previous period when they were 
 rising. Later inquiry has modified the conception 
 sometimes formed of the "industrial revolution," and 
 suggested by its very name. It has traced rudi- 
 mentary beginnings of later developments to earlier 
 times, and substituted the epithets "gradual" and 
 " varied" for "sudden" and "uniform." ^ But, whether 
 or not the designation of "revolution" be mislead- 
 
 ^Cy. Hobson's "Evolution of Modern Capitalism," chapter ill., 
 and Taylor's *' Modern Factory System," chapters i.-iii. 
 
 Ipl 
 
 .t 
 
 ing, it is certain that those remarkable inventions, 
 to which the title is largely due, were exerting an 
 influence on the manufacturing development, and that 
 the industrial organisation was undergoing a trans- 
 forming change, before no less than after the time 
 when the inclination of the curve of prices altered ; 
 and it would even seem that the conclusion of peace 
 removed, in some measure at any rate, the stimulus to 
 that development and change, which had been applied 
 in extraordinary potency in England by the absence 
 of competition on the part of those foreign countries 
 that formed the seat of war. 
 
 The question, to use the language applied by Sir 
 Robert Giffen to a later period of changes in prices, 
 must be viewed " dynamically." ^ We find that both 
 before and after the change in prices the manufactur- 
 ing development and the industrial transformation 
 were progressing.^ Before the change the movement 
 of prices, like that manufacturing and industrial pro- 
 gress, tended in an upward direction ; but after the 
 change the two movements diverged, and, while the 
 manufacturing development continued — possibly, 
 after an interval of comparative slackness, at an 
 accelerated rate — the movement of prices altered its 
 direction and inclined downwards. The admitted 
 tendency of the manufacturing development was un- 
 questionably to lower prices ; but it cannot be em- 
 ployed as an explanation at once of the rise of prices 
 before and of the fall after, and the presence of some 
 other cause is indicated. Some factor must be found, 
 which was operating before the change, and was then 
 
 ^ Of. the paper quoted above. 
 
 2 Tooke (*♦ History," p. 5) would have concurred in this opinion. 
 
 It!* 
 
 w 
 

 t < 
 
 i I 
 
 1 1 8 Money and its Relations to Prices 
 
 removed, or some fresh cause must be discovered, 
 which then commenced to act. In either case, it is to 
 this cause mainly that the logic of the facts would 
 attribute the change. 
 
 From an unwillingness to admit the competence of 
 two causes, which were commonly assiizned for the 
 rise of prices, followed as it was by the fall, Tooke, in 
 his elaborate investigations^ of the period, attached 
 the chief importance to the varying seasons. This 
 exclusive emphasis may be traced to a certain narrow- 
 ness of view,2 which may perhaps be said to have 
 manifested itself especially in two ways. If short 
 periods of years are taken, the changing seasons may 
 seem, as Tooke contended, to account adequately for 
 fluctuations, even of great extent, in the price of corn 
 and of other forms of agricultural produce ; for such 
 commodities belong to a class the demand for which is 
 inelastic, and therefore unresponsive to changes in the 
 supply. The rise or fall of price occasioned by some 
 alteration in the supply may appear to be out of all 
 proportion to the nature of the change. But if, 
 unlike Tooke, we extend our survey over longer 
 intervals, the influence of the seasons is generally 
 merged in other causes ; and Adam Smith's opinion 
 on the steadiness in the value of corn is, with some 
 qualifications, apposite. Nor would changes in the 
 seasons adequately account ^ for a general rise or fall 
 
 1 In his (1838) ** History of Prices and of the State of the Circula- 
 tion from 1793 to 1837 " (an enlargement of an earlier work). 
 
 2 Cf. Prof. Foxwell in evidence before Commission on Agriculture, 
 
 qq. 23,580, etc. 
 
 » Even if we allow for the indirect influence of good or bad 
 
 harvests on general expenditure. 
 
 The Fall of Prices after 1810 119 
 
 of prices ; and such, as Jevons has urged,^ was the 
 character of the alterations shown. 
 
 The two causes, which Tooke dismissed as insuffi- 
 cient, were the inconvertible paper currency and the 
 war. To both he was inclined to attribute very little 
 influence ; and he was certainly successful in showing 
 that to both exaggerated importance had been given. 
 What he attempted to prove seems often to have been 
 this— that, even if it were established that a rise of 
 prices had occurred of a character, which could be 
 plausibly ascribed to the one or the other of these 
 agencies, the change would have taken place in any 
 event, and therefore they could not be considered the 
 cause. To this method of argument he added another, 
 on which later investigation has thrown some doubt. 
 Probably owing to an inability to attain a broad view 
 of the circumstances, he seems to have expected that 
 the presence of the cause and the appearance of the 
 efiect would necessarily be coincident, and to have 
 held that, if he could show that the supposed effect 
 was not in its outward manifestation simultaneous 
 with the alleged cause, he had proved the impossibility 
 of their connection. This mode of reasoning appears 
 repeatedly in the course of his inquiries; and, al- 
 though it is not absent from later investigations, the 
 more scientific knowledge of the conditions of the 
 problem, which has been subsequently gained, has 
 exposed to serious question the reliance, which can be 
 placed upon it. It is true that in dealing with the 
 effects of the war, or of an increase in the issues of 
 
 1 "Investigations," p. 131. Tooke is inclined to attribute the 
 changes in the prices of other articles also to circumstances of their 
 own production rather than to any change in the volume of money. 
 
I20 Money and its Relations to Prices 
 
 paper money, the expectation that the cause would be 
 followed immediately by the effect was better founded 
 than it would be with respect to the relation to prices 
 of the supplies of the precious metals. But, even thus 
 employed, the method was open to objection. 
 
 Less doubt may be felt of Tooke's contention that^ 
 the increased military expenditure, and the consequent 
 stimulus to demand, meant in many, perhaps in most, 
 cases a transfer from the pockets of one part of the 
 nation to another, and (on the supposition that no 
 alteration occurred in the quantity of the circulating 
 medium) implied a change, not in general prices, but 
 in the relations of the prices of one commodity to 
 those of another. Whether an index number, like that 
 of Jevons or of Mr. Sauerbeck, would be prejudicially 
 affected by such a change would depend on its com- 
 prehensive character ; and, unless the commodities, of 
 which it was composed, consisted to a preponderating 
 extent of those, the prices of which were thus specially 
 raised by the war, or of those, the prices of which 
 were similarly lowered, the general change indicated 
 might be treated as independent of this influence. 
 Tooke himself was ready to allow ^ that the war 
 might have obstructed the importation of foreign 
 produce, and have combined with a succession of bad 
 seasons to raise the price of corn ; and, on a broad 
 survey of the facts, the war must be pronounced to 
 have exercised an influence on the course of general 
 prices, as measured by an index number. But we 
 may agree with Tooke that, in the case of many of 
 the efiects ascribed to it, counteracting influences were 
 
 1 Gf. pt. ii., chap, iii., p. 92. 
 
 2 Chapter vii. 
 
 The Fall of Prices after i8io I2i 
 
 at work, which were competent to neutralise its action, 
 and that in the case of others the effects were manifested 
 in a more pronounced shape, and in fuller measure, dur- 
 ing the succeeding peace than during the war itself 
 
 To arrive, then, at a correct decision on the precise 
 influence of the war in raising, and of the subsequent 
 peace in lowering, prices, required a balancing of 
 opposite considerations. But, if in this case the 
 precise result was doubtful, it was, perhaps, more 
 diflScult to gauge the exact effects of the other cause 
 which Tooke examined. This was the question of 
 the paper currency.^ That during the period of the 
 Bank Restriction the inconvertible paper was de- 
 preciated, and that prices reckoned in it rose, was a 
 fact established by that Report of the Bullion Com- 
 mittee, which has obtained such classic fame. That 
 the depreciation amounted at the least to the difference 
 between the market and the mint price of gold,^ and 
 that there were times when the degree thus indicated 
 was no less than twenty-five per cent., is undeniable. 
 But Tooke endeavoured to show — and in this he seems 
 to have been successful — that, with brief exceptions, 
 during the first twelve years of the war the deprecia- 
 tion was not more than four per cent., and that at the 
 time of the resumption of cash payments it had again 
 
 1 Pt. iii., etc. 
 
 2 Excluding, as the Committee stated (p. 12), a small sum equiva- 
 lent (1) to the loss of interest incurred in converting bullion into 
 coin, and (2) to the diminution by use in weight of the coin, and (3) 
 to legal impediments to smelting into bullion (none but light coin 
 being allowed) and to exportation (that of our own gold coin or gold 
 produced from our own coin being prohibited). The first of these 
 causes was inoperative after 1797, and the other two would only 
 account for a very small depreciation. 
 
 i 
 
 ii 
 
122 Money and its Relations to Prices 
 
 reached that figure. So far as the influence of the 
 Resumption Act of 1819 was concerned, it could not, 
 he argued, be held responsible for a fall in prices of 
 thirty or forty or fifty per cent. The fall below the 
 specie limit of the exchanges formed, indeed, in his 
 opinion, a proof of the depreciation of the paper, and 
 was a test by which to gauge the influence upon 
 prices to be attributed to the inconvertibility and 
 over-issue of the note. But, so far as the eff'ects 
 ascribed to it in promoting the increased use of sub- 
 stitutes for metallic money, in stimulating the issues 
 of the country banks, or in giving a fresh expansive 
 force to credit, were concerned, those influences, he 
 maintained,' were equally operative, and were indeed 
 more obviously manifest, after the resumption of cash 
 payments, when prices were falling and not rising. 
 In fact, but for the unusual pressure caused by large 
 foreign payments, prejudicially afiecting the exchanges, 
 he does not think ^ that the issues would have proved 
 generally excessive, or more than would have been 
 needed with convertible paper or a purely metallic 
 
 currency. 
 
 It is true that in the subsequent controversy, in 
 which he appears to later students as protagonist on 
 the one side, and opposed to Lord Overstone on the 
 other, the Legislature adopted^ the view of his opponent 
 on the possible effects of a paper currency in aggravat- 
 
 iPt. iii., ch. ii., sec. 2. '^lUd., sec. 4. 
 
 3 In the Bank Charter Act of 1844. It may be added that Tooke 
 himself, in the first edition of his work, agreed with the views after- 
 wards advocated by Lord Overstone, and contested by himself. In 
 one of the prefaces to the later volumes he acknowledges the cor- 
 rectness of the history of the change of his opinions given by 
 FuUarton. 
 
 The Fall of Prices after i8io 123 
 
 ing the excesses of speculative excitement, and the 
 probability that, without express provision for main- 
 taining a coincidence between the issues and the 
 changes in the metallic basis on which they rested, 
 the paper, even if convertible in name, might still be 
 issued in excess, and by that excessive issue would 
 exert a mischievous influence on prices. It is true 
 also that a question of some nicety arises on the 
 possibility of the depreciation of the paper against 
 gold failing to afford an exact index of its own 
 depreciation against commodities as compared with 
 that of gold.^ And once more it is true that here, as 
 in the former case of the war, Tooke, though with 
 more reason, seems to look for an instantaneous con- 
 nection between the changes in the cause and the 
 corresponding alterations in the effect. 
 
 But after allowing due weight to such considerations, 
 he appears to have been successful in disproving ^ the 
 likelihood of any more direct action of the inconvertible 
 paper upon the course of general prices, so far, at least, 
 as the special point with which he was dealing— its 
 inconvertibility— was concerned, than that shown by 
 the difference between the mint and the market price 
 of gold; and in the index numbers both of Jevons^ 
 and of Mr. Sauerbeck * express allowance is made for 
 this amount of difference. Into the mazes, therefore, 
 of the controversy on the precise eff*ects of the suspen- 
 sion and resumption of cash payments, which, begin- 
 
 1 Cf. Walker : ** Money," ch. xvii. 
 
 2 Gf. , however, Sumner: " History of American Currency," pp. 253, 
 etc., for qualifications of Tooke's views. 
 
 8 CT/l " Investigations," p. 127. 
 
 4 Cf. paper in Statistical JourTwd for June, 1893, p. 240. 
 
124 Money and its Relations to Prices 
 
 ning with this period, was prolonged beyond the passing 
 of the Bank Charter Act in 1844, we need not enter 
 further.' That the resumption of cash payments was 
 at once necessary and painful, and that, like the sub- 
 sequent contraction of excessive issues of paper by 
 the country banks, it may, both by its own opera- 
 tion and by its conjunction with other causes, have 
 tended to engender a feeling of extreme depression, to 
 have increased the normal ebb of the tide of credit, 
 and to have accelerated the fall of prices, may be 
 allowed. But it was perhaps from a failure to detect 
 the other underlying causes that men were inclined to 
 assign to the manipulation of the paper currency such 
 exclusive importance. 
 
 The expansion of the paper issues may also have 
 exercised an indirect influence, in which some explana- 
 tion may be found of the apparent discrepancy shown 
 by experience between depreciation of inconvertible 
 paper measured against gold and its depreciation when 
 contrasted with commodities. The large issues of the 
 Bank of England during the Restriction, and of the 
 country bankers, must, as Jevons has urged,^ when 
 taken in conjunction with the paper currencies of 
 France and Austria, of Russia and of other countries, 
 have thrown some quantity of the precious metals on 
 the market, and the natural result would be a rise of 
 prices. Tooke is ready ^ to allow the possibility of 
 
 1 The question, on which the controversy mainly turned, was the 
 effect of a currency convertible in name, but appeal was constantly 
 made by the disputants to the experience of the Restriction and the 
 Resumption, and the facts of those times were interpreted in opposite 
 ways. Tooke himself was open to the charge of a complete change 
 of opinion. (C/. above, p. 122, note 3.) 
 
 2 " Investigations," 131. ^ " History," pt. iii., ch. ii., sec 1. 
 
 i 
 
 The Fall of Prices after i8io 125 
 
 such an effect following on such a cause, but he thinks 
 that at the time of the Bank Restriction opposing 
 forces would more than counterbalance it. The hoard- 
 ing by governments in their war-chests, and by private 
 individuals alarmed at the disturbance of the times, 
 the obstruction of the familiar channels of commercial 
 intercourse, and the hindrance to business, which would 
 retard the free circulation of money and diminish its 
 " efficiency," and the payments to armies in the field, 
 would thus operate, would combine to raise the de- 
 mand for money, and to lower prices. What the pre- 
 cise result on balance might be it is not easy to say. 
 Tooke himself considered that the amount released 
 from the English circulation, and recovered after the 
 resumption of cash payments, would be small and 
 inappreciable compared with the stock of the metals 
 in existence. Jevons is disposed to concur with Jacob ^ 
 in attributing little influence to the effects of the 
 paper currencies in liberating metal. But it must be 
 remembered that these effects would be increased by 
 according with the natural movement of the metals 
 themselves ; and the production of the metals was in- 
 creasing before the revolutionary disturbances in 
 America, as it was afterwards diminishing, when prices 
 were falling and cash payments were resumed. Some 
 influence may also be attributed to improvements in 
 metallurgy, which seem to have been effected at the 
 former time. 
 
 A circumstance on which Tooke relied ^ to prove the 
 unimportance of this liberation of metal from the 
 currency, was the increase in the drain to the East. 
 
 ^ Chapter xxx. 
 
 2 " History," pt. iii., ch. ii., sec. 1., p. 140. 
 
126 Money and its Relations to Prices 
 
 The Fall of Prices after 1810 127 
 
 , 
 
 That, he urged, was an augmented demand, which 
 would tend to counteract any addition to the supplies. 
 It is curious to note the different inference drawn by 
 Jevons ^ from the same phenomenon ; for he expressly 
 cited the increase in the drain as corroborative evi- 
 dence of a comparative redundancy in Europe. It is 
 certainly true that in the history of prices the East 
 has on more than one occasion proved the great ab- 
 sorbent of the precious metals. It was so at the dis- 
 covery of America, when the Netherlands, attracting 
 by their trade the new supplies from Spain, passed on 
 a large portion in exchange for Oriental merchandise.'* 
 The same phenomenon was repeated at the later 
 period of the discoveries of Calif ornian and Australian 
 gold in the middle of the nineteenth century.^ Again — 
 this time through the channel opened by the compen- 
 satory action of the French bimetallic standard — the 
 new gold flowed to the Paris mint, and displaced the 
 silver, which was carried to the East. During the 
 process the prices of Eastern produce were relatively 
 lower than those of the countries from which the new 
 supplies were passing ; and, therefore, when Jevons 
 found a similar set of conditions manifested at the 
 period which we are now considering, he drew a 
 similar conclusion, and argued back to the probability 
 of a redundancy in Europe, followed by comparative 
 scarcity. The one implied a rise of prices due to 
 abundance of the monetary medium, the other in- 
 volved contraction of the monetary supplies, with its 
 inevitable consequence of a fall in prices. The facts 
 
 1 " Investigations," pp. 133, 
 
 2 Cf, chapter ill. 
 2 Cf. chapter v. 
 
 admitted obviously of such an interpretation; but 
 their meaning must be broadly and not narrowly con- 
 strued. The prices of Oriental produce were low re- 
 latively to those of Western goods when prices in 
 England were at their highest level. ^ The drain to the 
 East was at that time greater than it had been ; but 
 after 1819 it declined until for a year or so, about 1832, 
 the balance of trade was actually against India, and 
 the flow of bullion turned outwards. An exact coin- 
 cidence was not established ; for in 1814 prices in 
 Europe had fallen, and those of Oriental produce had 
 risen, while the drain to the East increased.^ But a 
 broad correspondence was manifest ; and the advance 
 of Jevons on Tooke consists largely in the greater 
 attention paid to broad as opposed to narrow con- 
 siderations. 
 
 By eliminating, therefore, other causes, we are 
 brought to the conclusion that the change in the sup- 
 plies of the precious metals, which unquestionably 
 occurred, must have exercised ^ considerable influence. 
 An important incident of its relation to prices has yet 
 to be noticed. The prices, of which the changes were 
 investigated in the preceding chapter, when the rise 
 consequent on the discovery of America was examined, 
 were silver prices ; but the prices, on which the index 
 
 ^ According to Rogers, this seems to have been also the case in 
 the seventeenth century, 
 
 '^Jevons urges (** Investigations," p. 135) that this " might be 
 accounted for by the opening of markets, and by political events," 
 which might "dislocate and reverse trade for a few years," while 
 ** on an average of a long period trade will assert its own character, 
 and deeper causes will produce their effects." 
 
 * Tooke : •' History," pt. iv., ch. xi., sec. 3, allows the possibility 
 of Sonne influence. 
 
128 Money and its Relations to Prices 
 
 M 
 
 numbers of Jevons and of Mr. Sauerbeck are based, 
 are given in gold. The history of the metallic cur- 
 rency of this country is one of the topics, which have 
 derived elucidation from the interest kindled by 
 controversy; and, although doubt may be felt on 
 points of detail, it does not seem too sanguine to 
 believe that agreement is possible on the main par- 
 ticulars. The chief result of the fresh interest, which 
 has been awakened, may perhaps be thus described. 
 Accepted traditional accounts have been re-examined, 
 and reasons adduced for doubting whether the inter- 
 pretation commonly given to the language, and the 
 acts, of those who set on foot,and carried out,important 
 monetary changes, has not been due to some misread- 
 ing, or misunderstanding, of their meaning and purpose 
 by later authorities. It is difficult for men, who live 
 in one environment, to place themselves in the position 
 of those dwelling in another; and it is a common 
 error with students in every branch of knowledge, 
 and with practical men in every department of affairs, 
 to read into the writings, and actions, of their prede- 
 cessors a significance and intention characteristic, not 
 of the time in which those predecessors lived and 
 wrote, but of their own later age. The candid critic 
 will allow that the learned researches of the late Mr. 
 Dana Horton,^ and of others,- into the monetary 
 history of the last two hundred years, have at least 
 established a prima facie c&hq for reconsidering the 
 interpretation of phrases used by Petty, and Locke, 
 and Newton, which has been handed down through 
 
 iln his " Silver Pound," and other publications. 
 ^E.y., Lord Aldenbam in his " Colloquy on Currency." 
 
 TAe Fall of Prices after 1810 129 
 
 the medium of the writings of Lord Liverpool and 
 the speeches of Sir Robert Peel. Indeed, it may be 
 doubted whether in the study of monetary history an 
 analogy may not be found to the practice, which 
 Bagehot considered ^ characteristic of the economists 
 of his own day, who recognised so completely the 
 supremacy of Mill that they saw in Adam Smith and 
 Ricardo, if they consulted their writings at all, only 
 what he taught them to see, or to an opinion, perhaps 
 still more general, which regards Economics as non- 
 existent before the " Wealth of Nations." Certainly 
 the supremacy enjoyed by Lord Liverpool's " Treatise 
 on the Coins of the Realm " is not unlike that occu- 
 pied by Mill in Bagehot's description, and inquirers 
 into the history of the currency in England prior to 
 the introduction of a gold monometallic standard are 
 probably even less numerous than researchers into 
 the antecedents of the " Wealth of Nations." 
 
 Yet, whatever be the precise interpretation to be 
 given to the policy and opinions of monetary reformers, 
 the main facts of the monetary history of the last two 
 hundred years are established with tolerable com- 
 pleteness. In Adam Smith's time, as at the discovery 
 of America, the silver pound was the monetary 
 unit, and prices were reckoned in silver. " In Eng- 
 land," he writes,2 " and," "I believe," "in all other 
 modern nations of Europe, all accounts are kept, and 
 the value of all goods and of all estates is generally 
 computed in silver." But, while the pound was the 
 unit, the current silver coin was of lower denomina- 
 tion ; and, while at first the pound contained a pound 
 
 ^ " Economic Studies," p. 215. 
 
 2 " Wealth of Nations," bk. i., ch. v. 
 
 r 
 
130 Money and its Relations to Prices 
 
 of metal, and was coiaed into twenty shillings, and 
 two hundred and forty pence, and therefore the penny 
 also contained a pennyweight, in Adam Smith's time 
 the pound was coined into sixty-two shillings. In 
 addition to silver coins, from the time of Edward 
 the Third gold also circulated. It was rated at a 
 certain ratio to the silver; and in England, as in 
 continental countries, by altering the terms of purchase 
 of either metal at the mint, or the weight or fineness 
 of the ballion put into the coin, governments seem to 
 have attempted to encourage the influx of the metals 
 from countries where they were rated lower, and to 
 prevent their efflux to countries where they were 
 rated higher.^ For, in spite of prohibition, bullion 
 exchangers found it profitable to send the metals to a 
 better market, and, where the ratio became more 
 favourable to one or other metal than that prevailing 
 elsewhere, these motives would operate, while their 
 comparative scarcity before the discovery of America 
 increased the desire, and intensified the struggle, 
 to secure and retain possession of them. The 
 natural course of trade, and the lack of native coin, 
 brought foreign monies into different countries ; and 
 the selection of the better coin for export, and de- 
 liberate " clipping " by bullion sweaters, together with 
 legitimate and regular wear and tear, tended to cause 
 confusion in a currency, and to render men uncertain 
 of the worth of the money they were handling. 
 
 Into such a condition, largely due to deliberate de- 
 basement, the English currency had fallen in the reign 
 of Elizabeth, when the first great re-coinage was 
 
 1 Of, Shaw's " History of Currency.'* 
 
 Tke Fall of Prices after 18 10 131 
 
 effected. By the time of William the Third a similar 
 condition prevailed, and again a reformation of the 
 currency was undertaken.^ In the interval the prin- 
 ciple of free and gratuitous coinage had taken the 
 place of a varying seigniorage; and this important 
 change, which opened a free mint to both metals, was 
 effected in 1666. Between the re-coinage of Elizabeth 
 and that of William the silver had remained unaltered, 
 and the gold had been raised four times. The gold 
 coin current was the guinea, which, though legal 
 tender at a value of twenty shillings, was apparently 
 accepted in government offices at twenty-one shillings, 
 and then for some time at twenty-one shillings 
 and sixpence. The silver, by dint of clipping 
 and wearing, and exportation of the heavier 
 coins, deteriorated further, and, in a short 
 space of time, the guinea rose from twenty-two to 
 thirty shillings. In a graphic passage ^ Macaulay has 
 described the evils thus occasioned, when money had 
 lost even that amount of certainty of value, which 
 was necessary to make it a convenient medium of 
 exchange. 
 
 The light coin, accordingly, was called in, and new 
 coin issued in its place of the Elizabethan standard ; 
 for it was determined to maintain at its old intrinsic 
 value the silver,^ which was the unit of account. The 
 gold guinea was, therefore, rated to the silver, first at 
 
 1 Of. Dana Horton : ♦* Silver Pound," chapters v., vi. 
 
 2 " History of England," ch. iv. 
 
 3 Mr. Horton contends that insistence on this condition was compat- 
 ible with what, as a matter of actual fact, existed— the official rating 
 of gold, and free coinage and unlimited legal tender of both metals. 
 
132 Money and its Relations to Prices 
 
 twenty-eight shillings, then at twenty-six, and then 
 at twenty-five, until it was brought down at last to 
 twenty-two. The free coinage of gold was suspended 
 for a few months, and the importation of guineas pro- 
 hibited, while the early stages of the re-coinage were 
 carried through. The manner, in which the re-coinage 
 affected the position of the guinea, seems to have been 
 of this nature. As legal tender in the fullest sense it 
 was considered to be worth twenty shillings, and, by 
 the provisions connected with the re-coinage, it was 
 not to be current for more than twenty-two. In 
 government offices it appears to have passed at this 
 rate, until in 1699 orders were issued to reduce its 
 rating to twenty-one shillings and sixpence. In 1717, 
 in accordance with a report from Sir Isaac Newton, 
 as Master of the Mint, it was reduced to twenty-one 
 shillings, and was to pass current at that rate. 
 
 But^'both before and after the re-coinage, the gold 
 had been rated too high in England as compared with 
 the rate abroad, and the natural result had followed 
 that under the system of free and gratuitous coinage, 
 it hkd been poured into the mint, and the silver, 
 underrated by comparison, had been melted and 
 exported. The only way to arrest this influx of gold 
 and efflux of silver was to readjust the ratio to that 
 prevailincr abroad ; and both Locke and Newton seem 
 to have r°ecognised the advisability of achieving this 
 object by altering the rating of the gold, without 
 disturbing the value of the silver from that Eliza- 
 bethan standard, which was regarded as fixed and un- 
 impeachable by the monetary reformers of the reign 
 of William the Third. But the action suggested by 
 them was taken too late ; and, owing to the new 
 
 The Fall of Prices after i8io 133 
 
 
 I 
 
 \ 
 
 supplies of the yellow metal from Brazil, the value of 
 gold compared with silver fell still further, and the 
 overrated metal continued to displace the underrated 
 silver, until at the time of the next re-coinage, in 1774, 
 the gold had become the preponderant metal in use, 
 and to its deteriorated condition attention was now 
 chiefly directed. 
 
 This last re-coinage was effected at the suggestion of 
 Lord Liverpool.^ In consequence, apparently, of the 
 quantity of light silver in circulation, and especially 
 of silver coin of defective weight imported from 
 abroad, silver was to be legal tender by tale only for 
 less sums than twenty-five pounds, but it might still 
 be legal tender by weight for any amount. This law 
 expired in 1783, but was revived in 1798, and clauses 
 were added, first suspending, and then prohibiting, 
 the coinage of silver. At the resumption of cash pay- 
 ments the gold standard was formally introduced, the 
 legal tender of silver was restricted to two pounds, 
 and a heavy seigniorage was charged upon its coinage. 
 These changes were in keeping with the tenor of 
 Lord Liverpool's Treatise^ and were carried out by his 
 son as Prime Minister. But they seem in some re- 
 spects to have gone beyond his real intentions. He 
 suggested that the cost of coinage only (or, as it is 
 technically termed, brassage) should be taken out of 
 the silver, but the natural desire to defray the neces- 
 sary expense of the resumption of cash payments by 
 a larger seigniorage prevailed. Nor did he necessarily 
 contemplate the impossibility of the mint being free 
 to the coinage of token silver ; but the Act of 1816 
 made this freedom dependent on a proclamation, 
 ^ Cf. " Silver Pound," chapter vii. 
 
 W 
 
fstX 
 
 'i 
 
 134 Money and its Relations to Prices 
 
 which was never issued, and it is doubtful whether 
 the right of making it was, or was not, withdrawn by 
 an act of 1870. 
 
 Such, then, in briefest outline, is the monetary 
 history of England during the last two centuries. In 
 the account which we have given, we have freely 
 borrowed from Mr. Dana Horton s "Silver Pound"; 
 and it is impossible to read that book without being 
 sensible of the mass of recondite learning on which it 
 is founded, and of the probability of the conclusions, 
 which the author has drawn from the study of 
 orif^inal documents, even when they conflict with 
 traditional opinion. In the subsequent chapters of 
 the present inquiry we shall examine some of the 
 more important consequences of the changes we have 
 sketched. Those consequences did not disclose them- 
 selves until after an interval of time ; and we have 
 now only to investigate their immediate bearing on 
 the period before us. We must be content with brief 
 consideration. It must be remembered that at the 
 time when the free coinage of silver was suspended, 
 the relation between the output of the metals was 
 changing again, and gold was once more falling 
 behind. It is therefore possible, or indeed probable, 
 that the directions of the influx and efflux would 
 have been reversed, and that the currency might 
 have become preponderantly silver. The lack 
 of silver coin, which undoubtedly was attended by 
 serious inconvenience during the progress of the war 
 with France, might have been supplied, or have been 
 met by the introduction of a token coinage,^ without 
 
 ^. This possibility seems to remove (c/. Mr. Barr Robertson in 
 paper in Statistical Journal for September, 1895) the ground from 
 
 T/ie Fall of Prices after 18 10 135 
 
 disturbance of the standard. When the suspension of 
 specie payments was ended, the resumption might 
 have been effected on a broader metallic basis, and 
 the fall of prices, which continued to the fifties, not 
 indeed prevented, but appreciably lessened. The 
 inevitable ups and downs of credit would have been 
 present, whether the currency were bimetallic, or 
 monometallic on a silver basis; but the recovery from 
 the periodic depression might have been less difficult, 
 and speedier to achieve, if the basis had been broader. 
 A general fall there must apparently have been in any 
 case ; and, so far as the inconvertible bank-note had 
 been issued to excess, suffering must have attended 
 its contraction, just as it followed on the withdrawal 
 at a later time of the excessive issues of the country 
 banks. The question remains whether a broader 
 metallic basis for the standard might have rendered 
 the fall less severe and the suffering less acute.^ 
 
 In the period under consideration, it is impossible to 
 disengage from the operation of other causes the in- 
 fluence of the fall of prices upon the general welfare. 
 On the one hand, there is no doubt that the period 
 immediately previous, when prices were rising by 
 leaps and by bounds, was one of extraordinary manu- 
 facturing and commercial progress, and that the close 
 of the war, and the resumption of cash payments, 
 were followed by serious and continued depression in 
 trade and agriculture. On the other hand, it is 
 
 the inferences drawn from the undoubted inconvenience of the older 
 bimetallic currencies to the inadvisability of international bimetal- 
 lism. 
 
 1 Cf. Mr. Everett in evidence before the Commission on Agricul- 
 ture, qq. 18,796, etc. 
 
"*•■ 
 
 11 
 
 ' 
 
 V • 
 
 r 1 
 
 136 Money and its Relations to Prices 
 
 > 
 
 The Fall of Prices after 18 10 i37 
 
 equally indisputable that the condition of the wage- 
 earner during the period of our early manufacturing 
 development was the reverse of prosperous. But the 
 other forces, which were in operation, were so 
 tremendous that it is impossible— if, indeed, it is really 
 possible in any case — to eliminate their influence, and 
 attribute the residuum to the action of money on 
 prices. In the eighteenth, as in the sixteenth century, 
 the break-up of the old order, and the substitution of 
 the new, were remarkable and bewildering. Alike 
 in their effects on the prosperity of the manufacturer 
 and trader, and on the misery of the wage-earner and 
 apprentice, on the permanent advance of the nation, 
 and on temporary dislocation of social arrangements, 
 the new inventions and the growth of the factory 
 may be described as revolutionary. The great war, 
 again, stands out among such conflicts for the magni- 
 tude of its cost and the importance of its results. Nor 
 is it possible to say that the misery of the workman 
 ended with the rise of prices,^ or that the manufactur- 
 incy development was arrested by the fall. 
 
 We cannot, indeed, expect to isolate the influence of 
 changes in prices, and we must rather regard them as 
 adding to, or taking away from, other influences. In 
 the period, with which we are now dealing, those other 
 influences are so remarkable that they seem to throw 
 all else into the background. We are perforce driven 
 back on probabilities; and from these we should infer 
 that, while the sudden rise— for it was undoubtedly 
 
 'The reverse was certainly the case. Cf. Cunningham: 
 ♦♦Growth of English Industry and Commerce," bk. viii., chaps, xxi., 
 xxii. ; and also Spencer Walpole's "History of England" and 
 Harriet Martineau's " History of the Peace." 
 
 i 
 
 i 
 
 rapid from 1792 to 1809— was, like that in the six- 
 teenth century, calculated on the one hand to dislocate 
 industrial relations, and on the other to stimulate manu- 
 facturing enterprise, the steady fall, which followed, 
 may have allowed time for the dislocation to be re- 
 duced but must also have exerted some retarding in- 
 fluence on commercial progress. The consequences of 
 the stimulus remained in an extended trade, while the 
 evil eff'ects on the condition of the labourer passed 
 away, as his political standing improved, and his 
 economic power increased. Both in the sixteenth 
 century and in the period, with which we are now 
 dealincr, the change from the old order to the new 
 which°was due to causes different from any connected 
 with the supplies of the precious metals, amounted to 
 a revolution ; and it is in quieter times that we are 
 more easily able to trace in facts the confirmation or 
 rebuttal of our theories. It is especially to the 
 modern organisation of industry, inaugurated by the 
 industrial revolution, where the function of the 
 employer is conspicuous, and the system of credit 
 elaborate, that those conclusions apply at which we 
 arrived, when in the second chapter we considered 
 the possible effects of changes in prices on the 
 economic conditions of the general community. The 
 period that we are now approaching partakes more 
 fully of this character. 
 
 I 
 
The Rise of Prices after 1850 139 
 
 1! 
 
 
 I1 . .1 
 
 \K i 
 
 CHAPTER V 
 
 THE RISE OF PRICES CONSEQUENT ON THE DISCOVERIES 
 OF GOLD IN CALIFORNIA AND AUSTRALIA 
 
 In the sixteenth century the supplies of the precious 
 metals received an extraordinary addition from the 
 mineral wealth of Mexico and Peru. For the space of 
 three centuries the new silver found its way into the 
 world in quantities, which, with some decline during 
 the seventeenth from the high point reached at the 
 beginning of that century, steadily increased during 
 the eighteenth, and towards the close at an accelerated 
 rate, until in the first decade of the nineteenth the 
 volume of production attained an annual average of 
 894,150 kilograms. During the earlier part of the 
 eighteenth century the supplies of silver were 
 supplemented in increasing force by Brazilian gold ; 
 but, with the disturbances in America at the close of 
 the opening decade of the nineteenth century, the 
 supplies of both metals underwent a sudden and 
 serious decline. A steady fall in prices ensued, which, 
 with the interval of a partial recovery in the fourth 
 decade, due apparently to new gold from Siberia,^ 
 continued until the fresh discoveries of that metal in 
 California in 1848, and in Australia in 1851, furnished 
 
 ^ This reinforced those Russian supplies from the Ural Mountains, 
 which had begun to assume an important place in the previous 
 decade. 
 
 a parallel, by the magnitude and rapidity of their 
 additions to the existing stock, to the memorable 
 discoveries of three centuries earlier. Competent 
 observers^ ventured to predict that similar results 
 would follow both with regard to prices and to the 
 welfare of the community; and their predictions 
 were proved untrue, not so much because they 
 exaggerated the additions to the mineral wealth, 
 as because they under-estimated the counteracting 
 
 influences. 
 
 The world, in fact, into which the new gold came, 
 was different from that existing at the time of the 
 discovery of America. The fresh supplies made their 
 entrance with greater rapidity into the highways of 
 commercial intercourse, and even penetrated with far 
 less delay into many of the by-ways; and the 
 stimulus naturally applied to the increase of produc- 
 tion and population was more speedily manifest. 
 Cairnes 2 put forward as a partial explanation of the 
 suflferings of the English labourer at the time of the 
 influx of the new supplies from Spanish America the 
 consideration that the prices of the goods, on which he 
 spent his wages, rose in neutral markets before any 
 corresponding advance in the prices of the goods that 
 he produced ; and, although it is true that the rise of 
 prices was not uniform or universal in the nineteenth, 
 it was likely to be less spasmodic than in the sixteenth 
 century. There might, as Clifle Leslie contended, ^ be 
 districts into which the Californian and Australian 
 
 ^^.y., M. Chevalier in his "De la Baisse Probable de I'Or," 
 translated into English by Cobden. 
 2 «• Essays in Political Economy," p. 150. 
 3/ftid., xix., XX. 
 
140 Money and its Relations to Prues 
 
 The Rise of Prices after 1850 141 
 
 
 t 
 
 v 
 
 gold did not penetrate. There were certainly 
 countries and places which came more tardily into 
 contact with it, and were later in the upward move- 
 ment of prices. There might be towns and trades, 
 where the new supplies were introduced into a 
 previous lower level of prices ; and, when once they 
 found an entrance, they caused a more rapid and 
 extensive advance than in those populous industrial 
 centres where the previous level was higher. For 
 reasons such as these the rise of prices consequent on 
 the gold discoveries of the nineteenth century would 
 so far resemble that of the sixteenth that it would 
 proceed by a series of jerks. But the jerks were less 
 extreme and less spasmodic. Trade was more evenly 
 diffused. The channels of commercial intercourse 
 were wider and deeper. The means of communication 
 were easier and more effective; and, while local 
 inequalities might prevail, they were less pronounced 
 and less obstructive. 
 
 In short, the fall in the value of gold, to quote from 
 Jevons' answer^ to Chevalier and Cobden, who had 
 anticipated a series of "innumerable shocks and 
 sufferings," was "gradual and gentle." "Far from 
 taking place with sudden and painful starts, flingino* 
 the rich headlong to a lower station, and shaking the 
 groundwork of society, nothing," he remarked, " is 
 more insidious, slow, and imperceptible." " It is in- 
 sidious," he continued — in language, which is full 
 of instruction, and should be continually borne in 
 mind in all inquiries into the nature and effects 
 of changes in general prices — "because we are 
 acciistoraed to use the standard as invariable, and to 
 
 ' "Investigations," p. 78. 
 
 measure the changes of other things by it, and a rise 
 in the price of any article, when observed, is naturally 
 attributed to a hundred other causes than the true 
 It is slow, because the total accumulations of 
 
 one. 
 
 gold in use are but little increased by the additions of 
 any one or of several years. It is imperceptible be- 
 cause the slow rise of prices due to gold depreciation 
 is disturbed by much more sudden and considerable 
 but temporary fluctuations which are due to com- 
 mercial causes, and are by no means a novelty." 
 
 It was, then, into a world to which these remarks of 
 Jevons were applicable, and not into the compara- 
 tively simple and primitive industrial and commercial 
 economy of Elizabethan times, that the new gold 
 from California and Australia made its entrance. 
 That the discoveries were enormous is shown by sta- 
 tistics of their volume. The average annual produc- 
 tion of gold in the second decade of the nineteenth 
 century is stated by Dr. Soetbeer ^ to have amounted 
 to 11,445 kilograms. By the fifth decade it had in- 
 creased, largely in consequence of the output from 
 Siberia, to 54,759 kilograms, and in this decade the 
 Calif ornian discoveries of 1848 had begun to take 
 their place in the supply. These discoveries were 
 followed in 1851 by those in Australia; and the annual 
 production increased in the next five years to 199,388 
 kilograms. From that point it rose to a maximum 
 of 201,750 kilograms in the five years extending from 
 1856 to 1860 ; and then a decline began. 
 
 Nor was the magnitude of the increase more re- 
 markable than its suddenness. Between the fourth 
 and the fifth decade of the century the annual pro- 
 
 ^ " Materialien," pt. i. 
 
 H 
 
42 Money and its Relations to Prices 
 
 The Rise of Prices after 1850 143 
 
 III.' 
 
 in: 
 
 'I 
 
 
 duction of gold exhibited an increase of 170 per cent., 
 and in the next decade the increase amounted to about 
 290 per cent. In the following five years, when the 
 highest point was attained, the increase on the pro- 
 duction of a quarter of a century before was as much 
 as 900 per cent. Such a large and rapid increase 
 exceeded anything that had occurred in the sixteenth 
 century, so far as Dr. Soetbeer's figures for that period 
 show ; nor are the statistics less remarkable when we 
 turn from the volume to the value of the annual 
 production. 
 
 In the fourth decade of the century the value of 
 the annual production is estimated by Dr. Soetbeer at 
 £2,880,300, in the fifth at £7,638,850, in the next five 
 years at £27,815,400, and in the next five, when the 
 highest point was reached, at £28,144,950. Thus the 
 increase in a quarter of a century would appear to be 
 about 1,300 per cent., and the value first more than 
 doubled, and then more than trebled itself. Although 
 the production of silver advanced steadily, the percent- 
 age of the successive increase was comparatively small, 
 and during part of the time, contrasted with the gold, 
 might be deemed insignificant ; and yet the total pro- 
 duction of the two metals increased from £8,108,900 
 first to £14,506,500, then to £35,834,750, and, finally, to 
 £36,380,400. In other words, it was more than quad- 
 rupled. The ratio of the total volume of the gold to 
 that of the silver altered from 33 to 967 to 182 to 
 81-8, and the ratio of the value from 349 to 65*1 to 
 
 77*4 to 22-6. 
 
 Within the first decade that the United States be- 
 came a considerable source of supply, the volume of 
 production of the yellow metal increased in that 
 
 country from 850 kilograms to 17,600,^ and largely 
 exceeded that furnished by any other country but 
 Russia, where the annual yield amounted to 22,515 
 kilograms, and had increased to this figure from 7,050 
 kilograms in the previous decade. Of the total pro- 
 duction for the whole world, the United States, even 
 in that decade, supplied somewhat less than a third. 
 In the following five years the output increased to 
 88,800 kilograms, or, in other words, by a percentage 
 of more than 400, and, together with the Australasian 
 supply, which amounted to 69,573 kilograms, furnished 
 158,373 kilograms out of a total production of 199,388, 
 or more than three-quarters. Within a single year, 
 according to the American statistics, the production 
 of gold in that country increased from 889,085 dollars 
 to 10,000,000 ; and in the subsequent year— that of 
 1849— there was a further increase to 40,000,000. In 
 1853 a maximum was reached of 65,000,000, or more 
 than sixty-five times the production of the sixth year 
 previous. In Australia, the output of gold increased ^ 
 from 357,019 ounces or 10,179 kilograms in 1851 to 
 3,105,286 ounces or 88,532 kilograms in 1852, and 
 rose to a maximum of 3,292,150 ounces or 93,859 
 kilof^rams in 1853. The increase here amounted to 
 between 800 and 900 per cent. 
 
 We may now proceed to inquire into the effect upon 
 prices of this remarkable increase. In his pamphlet 
 on " A Serious Fall in the Value of Gold," ^ published 
 
 1 Cf, tables in Statistical Journal for June, 1894. 
 
 2 According to a table prepared for the Report of the British Master 
 of the Mint by the Master of the Melbourne Mint (given by Dr. 
 Soetbeer in his •' Materialien"). 
 
 3 Jevons' *' Investigations," ii. 
 
w^ 
 
 fi 
 
 i^:[ 
 
 I'- 
 
 ll » 
 
 
 IP 
 
 l!i 
 
 144 Money and its Relations to Prices 
 
 in 1863, fifteen years after the discoveries in Cali- 
 fornia, and twelve after those in Australia, Jevons 
 calculated the average fall in the purchasing-power of 
 gold, measured by the change in the prices of 39 ** chief " 
 articles, between 1845-50 and 1860-62 at 14, and, mea- 
 sured by 64^ ** minor " articles, at 6"34 per cent. The 
 total average fall he put at 9 per cent., or the average 
 rise of prices at lOJ per cent. But the period, which 
 he took as the terminus of this calculation, was, as he 
 stated, one of "low water" in the commercial tide, and 
 he anticipated that within half-a-dozenyears later prices 
 might rise to 40 or 50 per cent, above the average 
 of the years from which he started. He pointed out 
 that in 1857 the " prices at high tide were 29 per cent, 
 above the average." 
 
 This prediction was not, however, fulfilled. In a 
 subsequent letter to the Economist,- taking this time 
 as his starting-point the year 1849 — a year which, he 
 observed, was specially adapted for such a purpose, 
 because it was at once the first year of the gold dis- 
 coveries, and also the year in which prices reached the 
 lowest point that, when he was writing, they had 
 attained during the century — and, basing his calcula- 
 tions on the prices of about fifty articles, he found 
 that the index number thus constructed showed a rise 
 from 100 in 1849 to 101 in 1850, 103 in 1851, 101 
 again in 1852, and then made a sudden advance to 
 117 in 1853 and 130 in 1854, until in 1857 it had 
 reached its maximum of 132. It then fell in 1858 
 to 118, and in 1860 was 124, in 1861, 123, and in 1862 
 
 iThe original number taken was 79, but, by grouping, it was 
 reduced to 64 *' independent " articles. 
 2** Investigations," No. iv. 
 
 TAe Rise of Prices after 1850 145 
 
 again 124, rising again in 1866 to 128, and falling to 
 119 in 1869, the year in which he was writing. Com- 
 paring the numbers for the three years of commercial 
 collapse — 1849, 1858, and 1867 — when prices, so far 
 as credit and its fluctuations were concerned, were 
 presumably at their lowest point, he established a 
 permanent rise of 18 per cent., which he considered 
 to be due to the more deeply-seated cause of an 
 alteration in the supplies of gold. 
 
 With the results thus attained by Jevons, whose 
 inquiries into the subject may be treated as classical, 
 we may contrast the conclusions shown by the index 
 numbers of Mr. Sauerbeck ^ and of Dr. Soetbeer.^ As 
 we have noticed,^ Mr. Sauerbeck employs a simple 
 arithmetic mean, and starts with the average of the 
 years 1867-77. His index number for 1849 is 74, and 
 is the lowest for the whole century until that date. 
 From 1849 the number increases until, in 1857 — a 
 period, no doubt, of speculative excitement — it reaches 
 the figure 105. In 1864 also it was 105. The differ- 
 ence between the two years 1849 and 1857 is thus 31> 
 while Jevons, taking 1849 as his terminus a quo, 
 reached the number 132 in 1857. For the years 1860-2 
 Jevons estimated a rise of some 10 per cent, on the 
 average of the years 1845-50 ; and, taking the single 
 year 1849 as the starting-point of the calculation, the 
 numbers for the three later years were 124, 123, and 
 124 again. Mr. Sauerbeck gives 74 for the earlier and 
 99, 98, and 101 for the later years, thus showing in- 
 creases of 25, 24, and 27, against Jevons' 25, 23, and 24. 
 
 Cf. paper in Statistical Journal for June, 1893. 
 2 " Materialien," pt. vii. 
 »P. 31. 
 
11^ 
 
 '*^li 
 
 146 Money and its Relations to Prices 
 
 ,f 
 
 For the years 1858 and 1867, taking 1849 as the 
 terminus a quo, Jevons' numbers are 118 in either 
 case, and Mr. Sauerbeck's numbers are 91 and 100, 
 being an increase of 17 for the former year, and of 26 
 for the latter, on the number for 1849. The general 
 consilience of the results, when allowance is made for 
 the difference in the numbers from which the calcula- 
 tions respectively commence, and the increases shown 
 by Mr. Sauerbeck, are, like those of Jevons, reduced to 
 percentages, is far more remarkable than the differ- 
 ence exhibited in the last case— that of the year 1867 ; 
 and this is perhaps due to a cause indicated ^ by 
 Jevons himself as responsible for the divergence 
 between his own results and those of the Economist. 
 In the index number of that newspaper, 4 of the 
 22 articles, which formed the basis of the number, 
 consisted of cotton, and the rise in the price of that 
 commodity during the American Civil War, and the 
 so-called " cotton famine," was nothing less than enor- 
 mous. In Jevons' own number, starting with 1849, 
 3 of 50 commodities consisted of cotton, and a 
 geometric mean, specially intended to correct undue 
 influence, was substituted for the simple arithmetic 
 mean of the Economist. In Mr. Sauerbeck's number it 
 is true that only two places in 44 are assigned 
 to cotton, but a simple arithmetic mean is taken, and, 
 as he himself states,^ "the extreme prices of cotton 
 during the American Civil War" have "raised the 
 general average considerably." 
 
 Turning to Dr. Soetbeer's number, which is based 
 
 * '• Investigations," p. 154. The effect continued, of course, for 
 some while after the war was ended. 
 
 '^ Cf. paper in Statistical Journal quoted above, p. 240. 
 
 
 The Rise of Prices after 1850 147 
 
 on 114 commodities (of which 100 are Hamburg and 
 14 English prices), and starts from the average of the 
 years 1847-50, and adopts a principle, which^'in effect 
 gives some amount of weighting to thegeneral average,^ 
 we find that the number is not given for 1849, but that 
 in 1857 the rise is 30 per cent, on the average of 1847-50; 
 in 1860-2 it is 20, 18, and 22 ; in 1858 it is 13 ; and in 
 1867 it is 24, as contrasted with advances of 32, 24, 
 
 23, 24, 18, and 18 shown by Jevons for the corre- 
 sponding years. Mr. Sauerbeck's differences are 31, 25, 
 
 24, 27, 17, and 26 ; but in this case allowance must be 
 made for the different number (74), from which the 
 increase is reckoned. From a comparison of the three 
 sets of numbers certain conclusions emerge. They 
 agree in tending generally in one direction. That of 
 Dr. Soetbeer resembles that of Mr. Sauerbeck in 
 exhibiting a more marked advance in 1867 than that 
 shown by Jevons, and this, as we have seen, is per- 
 haps due to the influence exercised on the general 
 average by the extraordinary rise in cotton. On the 
 other hand, Jevons is in accord with Mr. Sauerbeck in 
 arriving at an advance, which, viewed throughout the 
 series of years embraced, is greater than that indicated 
 by Dr. Soetbeer. In appreciating the significance of 
 this special difference, it should^ be remembered, as 
 Mr. Sauerbeck urged before the Gold and Silver 
 Commission,2 thatDr. Soetbeer's number includes many 
 
 1 By dividing the articles into groups, and giving an index number 
 for each, and then working up to the final index number by treating 
 the groups as equally important, although differing in the number 
 of articles comprised. (C/. Sir R. Giffen in evidence before Gold 
 and Silver Commission, q. 753. C/., however, also p. 32, note 1.) 
 Q. 1,015, where he also argued that import prices (such as those 
 on which Dr. Soetbeer's number is largely based) *« follow movements 
 
n 
 
 M 
 
 148 Money and its Relations to Prices 
 
 commodities, which may be described as *' small," and, 
 by comparison with those embraced in other numbers,' 
 such as Mr. Sauerbeck's own, considered unimportant! 
 Mr. Sauerbeck himself, dealing with a later period,' 
 found that, by taking Dr. Soetbeer's figures for the same 
 commodities only as his own, the diflference between 
 the two numbers was reduced ; and at the time, with 
 which we are now concerned, Jevons similarly dis- 
 covered 1 that the inclusion of minor articles produced 
 a noticeable diminution in the general average. On 
 d priori grounds it would seem probable, both as 
 respects a rise and as regards a fall, that the minor 
 articles would be less responsive to the influence of 
 changes in general prices, that they would not come so 
 rapidly into contact with the supplies of the metals, 
 and that the vis inertice opposing an alteration 
 would in their case be greater and more obstinate.^ 
 But the broad consilience of the results is more notice- 
 able than the differences of detail; and of the fact 
 of a marked and general rise of prices following on 
 the gold discoveries of California and Australia little 
 doubt can be seriously entertained. 
 
 The amount, however, of the rise is noteworthy, 
 when contrasted with the evidence attainable of the 
 occurrences of the sixteenth century. In its effects 
 
 more slowly than market prices," and that it is better to measure 
 from high prices downwards than from low prices upwards. {Cf. 
 also his paper in Economic Jownal for June, 1895, and Mr. Pierson's 
 reply in September, 1895.) 
 
 icy. "Investigations," no. ii. 
 
 « Cf. the evidence of Sir R. Giflfen before the Gold and Silver Com- 
 mission, q. 819, where he points out that the cost of manipulation 
 and of distribution afifects retail prices. {Cf. also below, chapter vi. 
 on the possible influence of wages on retail prices.) *' 
 
 TAe Rise of Prices after 1850 149 
 
 on the welfare of the community, and on the relation 
 of various classes to one another, an advance of 18 per 
 cent., such as Jevons thought he had established in 
 1869, was not unimportant ; but it sinks into insig- 
 nificance when compared with the movement recorded 
 at the earlier time. At that period Adam Smith, 
 taking the price of corn alone, discovered a rise of some 
 200 per cent, in the seventy years between 1570 and 
 1640; and his conclusions have been substantially 
 confirmed by those obtained by other means.^ We 
 niay fittingly inquire into the explanation of this 
 difference, which, whether we look at the effects on 
 prices or on the general welfare, places in distinct 
 categories changes in the supplies of the metals in the 
 modern world and similar alterations in Elizabethan 
 times.2 Such a difference dictates no small amount of 
 caution in arguing from the experience of the earlier 
 to the later age, and points to the likelihood that 
 under the present industrial and commercial economy 
 changes in the supplies of the metals will be more 
 subtle and gradual in their operation, and more cal- 
 culated to produce the effects— based partly on a real 
 difference in the relation of debtor and creditor, and 
 
 ^ Cf. Newmarch's examination of the results reached by various 
 inquirers, such as Arthur Young, in vol. vi., app. ii., of Tooke 
 and Newmarch's '* History of Prices." pp. 388, etc. The rise in 
 France he puts at a similar figure, and dates its commencement 
 from about 1570. Arthur Young's inquiry related chiefly to agri- 
 tultural wages, but also to prices. 
 
 2Newmarch points out ("History of Prices") that even in the 
 Elizabethan period a rise of 200 per cent, in prices was less than 
 might, d prion, have been expected from the increase in the pro- 
 duction of the metals, and that by 1640 the rise was apparently 
 over, and the new silver only sufficed to meet the growth in demand 
 caused by extended trade, etc. 
 
150 Money and its Relations to Prices 
 
 partly on a sentimental influence exercised on the 
 imagination — which were set forth in the second 
 chapter of the present inquiry, when the question 
 was examined of the balance of advantage and draw- 
 back between a rise and a fall. The sudden disloca- 
 tion of the sixteenth century, aggravated, as it seems 
 to have been, by the previous debasement of the coin- 
 age, is foreign to the conditions of the nineteenth, 
 and the accompanying evils, and the specially injurious 
 influence on the position of the wage-earner, are the 
 less likely to be repeated. 
 
 At any rate, in the period which we are now 
 considering, no such sudden dislocation occurred, and 
 no such rapid and excessive rise in prices was 
 evident. It was anticipated, but it did not happen ; 
 and into some of the reasons we may now inquire. 
 The first, most obvious, and most important, is found 
 in the relative magnitude of the existing stocks of the 
 metals. At the discovery of America these stocks 
 were reduced to a very low sum ; and Jacob puts the 
 amount in coin at £33,000,000. This is a sruess 
 founded on more or less reliable data ; and any corre- 
 sponding estimate for the present day cannot pretend 
 to more than conjecture. But it is not unlikely that 
 the existing stock of coin in Europe at the time of 
 the Californian and Australian discoveries may have 
 been at least ten times as great as it was three 
 centuries earlier. The initial effect, therefore, of any 
 increase in the annual additions was largely reduced ; 
 and the influence of the successive increments, which 
 in any case would tend to diminish in consequence of 
 the preceding, would decline at a more rapid rate in 
 the nineteenth than in the sixteenth century. This 
 
 The Rise of Prices after 1850 151 
 
 diminution in the influence exerted by an increase in 
 the annual output is distinguished ^ by Jevons as due 
 to a " swelling" of the currency in contrast with what 
 be terms an " extension " ; and he believed that most 
 of the writers on the probable effects of the new gold 
 supplies had under-estimated the first of these forces 
 and over-rated the second. 
 
 Yet that the currency would be "extended" by the 
 growth of commerce and manufacture, stimulated, 
 perhaps, by the new supplies of gold, but in any event 
 naturally increasing with the progress of invention 
 and the development of organisation, was inevitable. 
 That this "extension" would exert a retarding in- 
 fluence on the advance of prices could not be ques- 
 tioned ; nor could it be denied that such a cause was 
 likely to operate with greater speed and intensity in 
 the nineteenth than in the sixteenth century. Such 
 an "extension" might take different forms, and among 
 the more important would be a new expansive force 
 given to credit. 
 
 The relation between the supplies of the metals and 
 credit is a difficult problem ; and the development of 
 credit, with its substitutes for cash, is one of those 
 incidents of the organisation of the modern world, 
 which tends to obscure the connection between the 
 metals and prices. How, it is sometimes asked,^ 
 do they come into contact ? Prices in wholesale 
 markets, to which index numbers relate, are generally 
 determined without the passage of actual cash, and 
 
 1 *' Investigations," p. 69. 
 
 2 Cf. Lord Farrer in "Gold, Credit, and Prices." {Cf. also Lord 
 Herschell in the examination of witnesses before the Gold and Silver 
 Commission, qq. 9,640, etc.) 
 

 n 
 
 J 
 i 
 
 152 Money and its Relations to Prices 
 
 the transaction is effected by a credit-instrument— a 
 cheque, it may be, or a bill of exchange. The multi- 
 plication of these instruments, it is contended, has 
 resulted in a great economy of cash ; and, as with the 
 flow and ebb of credit they increase and decline, so 
 prices rise and fall. The connection between the 
 metals and prices is at the best indirect and remote, 
 and is continually becoming more complex and 
 obscure. 
 
 This argument is certainly right in denying the 
 directness of the relation ; but it seems no less true 
 that a real connection exists between the metals and 
 prices. The connecting link is discovered in the bank 
 reserves.^ In the last analysis, as Bagehot^ and other 
 inquirers have shown, the fabric of credit is found to 
 be built on the cash-reserve in the Bank of England. 
 Credit may indeed expand and contract. Its move- 
 ments may be more extensive at one time than at 
 another; but it rests on the reserves, and the con- 
 nection is brought into prominence at times of com- 
 mercial crisis, when men turn with panic from credit 
 to cash. Every banker in succession, from the Bank 
 of England, the custodian of the ultimate cash- 
 reserve, maintains, if he wishes to avoid insolvency, 
 a proportion between his liabilities and his reserve. 
 And thus the connection between the reserves, into 
 which, in the modern banking world, the new supplies 
 would naturally find their way at the outset, and 
 credit, which, expanding and contracting of itself, 
 owing to alternations of speculative or stagnating 
 
 ^ Cf. Giffen : "Essays in Finance," second series, ii. ; "Gold 
 Supply : the Rate of Discount and Prices." 
 2 In *• Lombard St.," passim. 
 
 \ 
 
 
 The Rise of Prices after 1850 153 
 
 trade, is yet limited ^ in the extent of its movements 
 by the basis of cash on which it is founded, implies a 
 real connection between the precious metals and prices. 
 If the reserves increase, and promise to increase still 
 further, a rise of prices, above the temporary advance 
 due to a period of active speculation, will be pro- 
 duced; and if the reserves diminish, and apprehension 
 is felt of their further diminution, the fall, which 
 would naturally follow contracting credit, will be 
 accentuated. For this reason, to detect the deeper 
 cause, which consists of changes in the supplies of 
 the metals, we must eliminate the more superficial 
 influence of credit-fluctuations. It may be that, with 
 the increase of banking, a larger fabric of credit is 
 habitually constructed on a narrower foundation of 
 cash, and this " extension " of the currency may exert 
 some counteracting influence to a diminution in the 
 supplies of the metals. It is a circumstance to be 
 noted, when we are comparing over an interval of 
 years the effects on prices of the precious metals; but 
 it admits of some statistical verification, and, in the 
 absence of evidence of important change, we may 
 contrast the level of prices reached in one credit cycle 
 with that contained in another, and conclude that, if 
 the level be raised or lowered, the change is due, not 
 to credit, but to some more fundamental alteration 
 between the circumstances of the production of com- 
 modities and the supplies of the precious metals. 
 Estimated by this test, there could be little doubt that 
 at the period we are now examining the addition to 
 the supplies of the precious metals had exerted an 
 important influence on the course of general prices. 
 
 ^ Qf. Jevons' "Investigations," p. 32. 
 
1 1 
 
 154 Money and its Relations to Prices 
 
 A further question, however, may be raised whether 
 this development of credit, which admittedly renders 
 the connection between the metals and prices less 
 direct, increases or diminishes the influence of the one 
 or the other. It might seem, on the one hand, as if 
 the effects would be lessened as they are spread 
 through a wider area ; and yet, on the other, that 
 their importance would be increased because so large 
 a mass of business transactions is ultimately dependent 
 on them.i Either view expresses apparently a portion 
 of the truth. It would certainly seem that, considered 
 simply with reference to immediate consequences, a 
 relatively small change in the supplies of the precious 
 metals, acting through the medium of so elastic and 
 expansive an agency as credit, would produce a 
 greater and wider effect on prices than would result 
 if no such medium existed. But, on the other hand, 
 it would also appear to be probable that the counter- 
 acting forces would be set in action more rapidly. 
 The " extension " of trade would more speedily make 
 its appearance, and what Jevons distinguished as the 
 " swelling " of the currency consequent on depreciation 
 would be sooner effected. The rise would be quickened 
 and, for the time, magnified ; but the reaction, which 
 it would tend to produce, would also be readier and 
 more extensive. Regarding the matter thus, Cairnes 
 reached the prediction,^ verified by events, that the 
 rise occasioned by the new gold from California and 
 Australia would be more speedily completed in 
 England, with its developed credit, than in the less 
 
 1 Gf. Professor Foxwell in the EcoTwmic Review for July, 1893 : 
 " Bimetallism : Its Meaning and Aims," p. 316. 
 
 2 " Essays in Political Economy," ii. 
 
 Tke Rise of Prices after 1850 155 
 
 responsive and more absorbent currencies of the East, 
 that the natural reaction would take place more 
 rapidly with manufactured goods, which with ease 
 and without delay could be produced in increasing 
 quantities to meet an extended demand, and that the 
 process would be tardier with raw materials, and 
 that, amongst these, those of vegetable growth would 
 answer more quickly to an increased demand than 
 those of animal origin, which could only be produced 
 after a longer interval. 
 
 Two further considerations must be borne in mind 
 in estimating the total influence of credit. One is 
 that it is a medium peculiarly sensitive, and probably 
 serves to intensify the effects on the imagination of 
 an increase or diminution in the supplies of the 
 precious metals, and therefore accentuates also the 
 consequent rise or fall of prices. The other con- 
 sideration is more complex. If the general level of 
 prices be raised, the smaller transactions of society, 
 which are still conducted by cash, will require a 
 larger quantity, and the demands on the banks for 
 petty cash will become more urgent. This will oc- 
 casion a drain on the reserves, into which the new 
 supplies have come ; and the volume of the currency 
 will be increased, and the counteracting forces set in 
 motion. It can hardly be doubted that the elevation 
 of the general level of prices is effected with greater 
 rapidity through the agency of credit ; and therefore 
 both the rise occasioned by the influx, and the re- 
 action from the rise, seem likely to be accelerated by 
 its presence. 
 
 In the relations thus established in the modern 
 world between the precious metals and prices, through 
 

 I 
 
 iij 
 
 I ! 
 
 il! 
 
 \ i 
 
 156 Monej; and its Relations to Prices 
 
 mavTe1r„f ?''' '"^'. ''"' ''^''''' '"^^ explanation 
 aiscussions. When the new supplies find their way 
 into the reserves, the bankers lower the mte of 
 
 m iZT^ '" "?' ^^ ^^^ ^^"^^ ^^ ^^-^^ble capital 
 m the money market. ^ 
 
 But this willingness to lend encourages traders to 
 borrow and extend their business; and%hetc a e 
 of business leads in its turn to a rise of prices'to a 
 fall in the value of "money," that is, in the sense 
 
 with t ThTT '' ''^- ^'^ '''' '' P"- brini 
 with It the advance of wages, and the demand for a 
 
 larger quantity of petty cash; and now the bankers 
 
 the rate of d scount, unless a fresh or continued influx 
 of the metals should furnish the means of meeting 
 the growing demands. This elevation of the rate of 
 discount will tend, in its turn, to check the extension 
 of business, and to arrest speculation. It wi thus 
 occasion a fall of prices and diminish the deniand 
 for petty cash for the payment of wages and for the 
 purchase of retail goods. The tide ^11 be reversed 
 and cash will flow back to the reserves instead of 
 
 \ C/. Mr. W. Fowler in evidence before the Gold and Silver r 
 mission, qq. 7,705, etc. ; and also Lord Farrer be W th« p ^^"'.^°."'- 
 on Agriculture, qq. 38,624 etc " "'^"^^ ^^^^^^ the Commiasiou 
 
 TAe Rise of Prices after 1850 157 
 
 issuing out, and the bankers will reduce the rate of 
 discount. 
 
 Thus changes in the rate admit of differing inter- 
 pretations. The rate is an index at once of ability to 
 lend and desire to borrow. It may be low, because 
 sluggish trade, and falling prices, have occasioned less 
 demand on the part of discouraged traders for loan- 
 able capital, and the tide moved by the need of cash 
 for small payments has set towards instead of away 
 from the reserves. Or it may be low, because bankers 
 find that a continuous influx of the precious metals 
 increases their ability to meet the growing demands 
 for monetary accommodation, occasioned by brisk 
 trade and rising prices. Or, once more, the rate may 
 be high in consequence, either of the eagerness of this 
 demand, or of the difficulty of replenishing the reserves. 
 According to the circumstances of the moment, the 
 variations of the rate may conceivably afford opposite 
 indications of the state of trade and of general prices ; 
 and the value of money, in the sense of loanable 
 capital in the money market, may differ from the 
 value of money in the sense of the measure of value. 
 
 To these considerations, in any attempt to appraise 
 the real significance of the rate of discount, and of 
 changes, which are made in it, it should be added 
 that the elevation of the rate is the agency employed 
 by the Bank for attracting gold from abroad, and that 
 loans are made for long periods of time as well as for 
 those short periods with which the rate is connected. 
 An alteration in the rate may imply nothing more 
 than a shifting in the " territorial distribution " of 
 money, occasioned by a passing change in the balance 
 of trade, and may not mean a permanent increase or 
 
15S Money and Us Relations to Prices 
 
 u 
 
 diminution in the supplies from the mines, although 
 it is true that it is by affecting the balance of trade 
 that the new supplies make their way in succession 
 into the different countries of the world. The per- 
 manent basis of credit, again, is to be found, not in 
 the money available at any particular time in the 
 money market, but in the capital existing in the 
 country, and in the additions made thereto. A low 
 rate of discount may imply a temporary abundance 
 of the money in the money market, but may not 
 mean a real growth of capital, or an addition to the 
 permanent possibilities of the expansive force of 
 credit. The rate is, in short, an index of the influx 
 and efflux of bullion into and out of the country, into 
 and out of the reserves. But a low rate may be a 
 sign of stagnating trade as well as of ease in the 
 money market, and may be found to co-exist with 
 falling as well as with rising prices.^ 
 
 Nor are large reserves a certain index of abundant 
 supplies of the precious metals ; for they may be 
 hoarded against emergencies. They may, in fact, be 
 the result of deliberate action, and not the natural 
 consequence of economic forces. They may be due, 
 not to abundance, but to a fear of scarcity. In 
 modern times, and in civilised nations, the habits of 
 hoarding have steadily yielded before the advantages 
 of banking in the case of private individuals ; and the 
 accumulation of idle hoards by banks is not likely to 
 be adopted as a continuous policy, if a favourable op- 
 portunity be presented for active employment of the 
 money, and no special purpose for the hoard be enter- 
 
 ' Gf. Prof. Marshall in evidence before the Gold and Silver Com- 
 miBsion, qq. 9,561, 9,678. 
 
 The Rise of Prices after 1850 159 
 
 tained. But it is commonly believed that the rise of 
 prices in the sixteenth century must have been ar- 
 rested by extensive hoarding ; and it is also thought, 
 and attested by reliable authority, that during the 
 troublous times of the Napoleonic Wars mone}^ was 
 hoarded by individuals, and only brought into circu- 
 lation at the conclusion of peace. Tooke, moreover, 
 held 1 the view that any liberation of the metals from 
 their use as money, effected by the issue of incon- 
 vertible paper during the Bank Restriction, was more 
 than counteracted by the lavish expenditure of 
 governments, not only on their armies in the field, 
 but on hoards in their war-chests. This variety of 
 hoarding is still extant in the Western world, and its 
 influence on the values of gold and of silver is a 
 factor which cannot be neglected. 
 
 But the chief locality of hoarding by individuals is 
 the East, and the absorbent character of Oriental cur- 
 rencies is ascribed in part to the prevalence of this 
 disposition. It was, and to a great extent is still, 
 true that the Indian, led by an instinct implanted by 
 long experience of the ravages of succeeding con- 
 querors, has contracted a habit of carrying a great 
 portion of his accumulated wealth on his person in 
 the form of adornment; and he contributes no in- 
 considerable quota to the consumption of the metals 
 in the arts. It is also true that large quantities are 
 hoarded in the East in the shape of coin or bullion.^ 
 At any rate, since the discovery of America, the East 
 has exhibited a capacity for receiving and retaining 
 
 ^ C/. " History of Prices," pt. iii., ch. ii., sec. 1. 
 2 Gf. Sir D. Barbour in evidence before the Gold and Silver Com- 
 mission, qq. 1,090| etc. 
 

 ■ i- 
 I 
 
 I 
 
 m 
 
 I 
 
 160 Money and its Relations to Prices 
 
 the overflow of Europe, which has seemed illimitable.^ 
 Instead of passing the metal on to other countries, 
 it has absorbed it in its currency; and the rise of 
 prices, which, with the expansive force derived from 
 credit, may be soon produced, and speedily completed, 
 in Western nations, in the East occupies a longer 
 period, and it is at once more sluggish and more per- 
 manent. 
 
 Thus the drain to the East has been an influential 
 fa<;tor in determining the effects of the supplies of the 
 metals on prices since the Oriental trade became im- 
 portant; and, in comparing the rise, which formed 
 the sequel of the conquest of Mexico and Peru, with 
 that which followed on the Californian and Australian 
 discoveries, we must remember that the Eastern trade 
 was much larger in the nineteenth than in the six- 
 teenth century. In the interval gold had indeed 
 come from Asia into Europe, and about 1832 the 
 tide, as we saw in the preceding chapter, had been 
 actually reversed, and for a time there was a balance 
 of export over import of treasure in the Indian trade. 
 But for the years 1810 to 1813 Dr. Soetbeer ^ puts the 
 annual imports into the three Indian Presidencies at 
 forty million marks, or two million pounds. After 
 the abolition of the monopoly of the East India Com- 
 pany he estimates them at more than twice that 
 amount. From 1834 to 1850 he places the annual 
 net import at two and a half millions ; but in 1851 to 
 1855 the excess of import doubled that of the previous 
 
 J Sir D. Barbour (- Theory of Bimetallism," chapter xx.) suggests 
 that such an illimitable capacity of absorption cannot be safely 
 postulated in the future. 
 2 " Materialien," pt. iii., 3. 
 
 \ 
 
 The Rise of Prices after 1850 
 
 161 
 
 quinquennium, and in that which succeeded it more 
 than quadrupled the figures of the later period 711 
 
 ^^Z^^!:^ '-^' -- .ainLlurii' 
 
 payments required on acconnf c^9 fi.« . 
 
 the Mutiny.'and of thrdel In y in 2T'" °' 
 cotton crop during the Civil War and ;t 1"°""'^'' 
 by Indian cotton The dIT \ replacement 
 
 for particular «m .■^^^PO'nt. however, which calls 
 
 uppiies, IS that by far the larger pronortion f>f +K^ 
 
 gold, which was pouring out of the new mines but 
 was, on the contrary, silver ^ It m.VKf Z ,\ ^"^^ 
 « as if the dLn to\he' S' ^ St" ^^ 
 arresting influence on the fall in the value of lid 
 
 «r:r StrL^^^-'^i^r^^ ^^^ 
 
 leased the silver which th.T'!:'^ *^' ^"'^ ^'^^ '«" 
 The broad evWeJe ^f 1 fi. ""^ '*' "'"^ *° ''^^ ^-'■ 
 net imports of go d into FrfnT" "°'"'^*^'^^W«- The 
 
 in 1848, to 85 millions in 1851 to 2Sqn° ^'^"""^ 
 to 416 millions in the follow 4 ytr^^^^^^^^ 
 mum of 539 millions in 1859 With k. ^"''^'■ 
 one or t ,_. there seems ^t::'^?^:^, 
 
 , r{u ", '■ ^'''"y 0* Bimetallism," ch xx 
 4 M • I "" ; ^'""'y »' Currency," p \T 
 
1 62 Money and its Relations to Prices 
 
 The Rise of Prices after 1850 163 
 
 of import over export— varying, indeed, but generally 
 very considerable— from 1848 to 1870. Before that 
 time the balance had for several years inclined the 
 other way by comparatively slight amounts. With re- 
 gard to silver, the position was apparently reversed.^ 
 From 1822 to 1851 the imports had exceeded the ex- 
 ports, but from 1852 to 1864 the balance inclined de- 
 cidedly in the other direction. The statistics of coinage 
 tell the same tale;2 and from this ''ostensive instance," 
 as it may be called in Baconian language, the opera- 
 tion of the bimetallic system is clearly demonstrated. 
 If ever a theory was verified by fact it was in this 
 case. 
 
 Nor can it be doubted that this absorption of the 
 gold, and release of the silver, exercised a controlling 
 influence on their relative values. We have already 
 noticed^ that in the period subsequent to the discovery 
 of America a remarkable change was evident both in 
 the total volume and in thetotal value of theannual pro- 
 duction of the two metals respectively, and yet the at- 
 tendant change in their market ratio was comparatively 
 inconsiderable. Although, with the increasing output 
 of silver, the ratio steadily became more favourable to 
 gold, an alteration from 1 to 10 to 1 to 15J was not 
 commensurate with what might have been fairly ex- 
 pected to follow on a change in the proportion of the 
 total volume of production from 11 to 89 to 1 to 98, or 
 in the total value from 57 to 43 to 23 to 76. It is im- 
 possible not to ascribe some steadying influence to the 
 
 ' Cf. Shaw, " History of Currency," p. 184 
 
 ^md., cf, also Soetbeer : «' Materialien,"' pt. iii., and J. Barr 
 Robertson s paper m the Statiaikal Journal for September 1895 
 ^ Chapter iii. ' 
 
 large use of silver in the currencies of the world; and 
 it is at least noteworthy that the advance in the rela- 
 tive value of gold to silver was not diff-used evenly 
 over the whole period, but occurred by what Dr. Soet- 
 beer terms i a "quick and sudden" change between 
 1621 and 1650. From this he draws the natural in- 
 ference that the change could not be attributed to the 
 conditions of production, although he allows that the 
 eflfects of the new discoveries of silver might have been 
 postponed for a time. The continuous wars, and the 
 growth of international trade, occasioning increased de- 
 mands for gold, are believed by him to be the causes 
 most largely responsible. It is not, however, the rise 
 before 1660 which so much concerns us now as the 
 comparative steadiness ^ since that date ; and such an 
 experience certainly seems to point to the conclusion 
 that to deny a steadying influence to a bimetallic 
 system is not merely to contest the theory of supply 
 and demand, but to reject the testimony of obvious 
 facts. 
 
 In 1666 the principle of free and gratuitous coinage 
 was adopted in England, and, with a temporary sus- 
 pension of the coinage of gold at the time of the re- 
 comage under William the Third, and the more per- 
 manent suspension of the coinage of silver in 1798, 
 the English mint was open to both metals during the 
 intervening hundred and thirty years. It is true that 
 some obstruction to mintage in general appears to have 
 been oflfered in practice by the authorities of the Bank 
 during the years immediately preceding the later and 
 
 1 <« 
 
 3 
 
 Materialien," ii. 
 The "noteworthy stability," as Dr. Soetbeer calls it. 
 
11 
 
 164 Money and its Relations to Prices 
 
 permanent restriction/ But from 1803 to the suspen- 
 sion in 1873 of the free coinage of silver at the mints 
 of the Latin Union, the Paris mint was similarly open 
 to the unlimited coinage of both metals, at a fixed 
 ratio, and from 1865 the mints of Belgium, Italy, 
 Greece, and Switzerland were also open. During this 
 period the production of the metals underwent very 
 considerable change. 2 For the first decade of the 
 nineteenth century the volume of gold was to silver 
 as 1-9 to 981, in the fifth decade it became 66 to 93-4, 
 with the first half of the sixth the influx of the new 
 supplies from California and Australia altered it to 
 18-4 to 81-6. In the three succeeding quinquennia it 
 was 18-2 to 81-8, 144 to 85-6, 127 to 87-3, and in 1 871-5 
 it became 81 to 91-9. The alterations in the respective 
 proportions of the total values were equally remark- 
 able. Starting with 23*7 to 76'3, the relation became 
 successively 24*7 to 75-3, 327 to 673, 349 to 651, 
 527 to 47-3, 77-6 to 22-4, 774 to 22-6, 721 to 279,' 
 69-4 to 306, and 58-5 to 41*5. And yet, as the Gold 
 and Silver Commissioners stated in their final report,^ 
 the ratio did not diverge more than three per cent, in 
 either direction from the middle of the seventeenth 
 century until 1873, while— to quote again their 
 authoritative opinion— it had not " materially varied 
 from 15 J to 1 " since the commencement of the nine- 
 teenth century. This comparative steadiness, coupled 
 with the change produced after the suspension of the 
 
 1 Cf, Prof. Foxwell in evidence before the Commission on Agricul- 
 ture, q. 22,823. 
 
 2 Soetbeer : ** Materialien," i. 
 »Sec. 7 
 
 pi 
 
 The Rise of Prices after 1850 165 
 
 free coinage of silver at the mints of the Latin Union, 
 is a noteworthy fact. Taken in conjunction with 
 the theory of the compensatory action ^ of the 
 bimetallic system, which, as students of Economics 
 are aware, is an application to the sphere of money of 
 a recognised extension of the theory of supply and 
 demand, it constitutes that experimental verifica- 
 tion of theory by fact, which is so difficult to discover 
 in the region of the moral as contrasted with the 
 physical sciences. 
 
 It is true that even here an argument based on the 
 plurality of causes has been employed, and we are 
 told on high authority 2 that, had not the circum- 
 stances favoured, the result would not have followed, 
 and therefore the result is due, not to the action of 
 the bimetallic system, but to the favouring circum- 
 stances. Such an argument may be admitted as a 
 conceivable explanation of the stability of the ratio 
 during the time when the bimetallic system was in 
 operation ; but its adequacy is not increased by a con- 
 sideration of the events, which followed the sus- 
 pension of the system. The position seems to present 
 itself thus. The presence of the system, in spite of 
 great changes in the respective volume of production 
 of the two metals, was accompanied by remarkable 
 stability in their ratio. ^ The removal of the system, 
 although the changes in the respective volume of pro- 
 
 ^ Cf. Jevons : ♦' Money and the Mechanism of Exchange," ch. xii. 
 
 2 Cf. Giffen : "Case against Bimetallism," ii., vi. 
 
 3 Mr. J. Barr Robertson, in the paper quoted above, argues that 
 the market price would always differ slightly from the mint price, if 
 the bullion dealers were to get a profit, and the movement of bullion 
 was to continue. 
 
» 
 
 II 
 
 1 66 Money and its Relations to Prices 
 
 duction were not more considerable or revolutionary 
 than those, which occurred during its existence, was 
 attended by great instability in the ratio. If 
 this IS not as convincing an application of the com- 
 bined methods of agreement and difference as we are 
 hkely to encounter in economic experience, it would, 
 at least, be hard to discover a parallel. That the 
 bimetallic system exercised a steady influence on the 
 relative value of the precious metals, and helped 
 to arrest the fall of gold after the discoveries in 
 California and Australia, rests on as logical a founda- 
 tion as can well be found for any like assertion. The 
 conclusion remains valid, whatever may be felt about 
 the influence of other contributory causes in the past 
 whatever opinion may be held on the possibility of 
 forming or maintaining in the future an union of 
 nations sufficiently strong to counteract, by the de- 
 mand for coinage at their mints, such changes in 
 supply as are likely or conceivable, and whatever 
 dispute be raised on the precise meaning to be attached 
 to the agio or premium found on the one, or other, or 
 on both, of the metals at different times in bimetallic 
 France.^ Some of these questions turn on points of 
 fact, and some on considerations of theory ; but they 
 do not upset the reasoning, which recognises in the 
 bimetallic system an arresting influence to the fall in 
 the value of gold, and the divergence in its relation to 
 silver, which, in the absence of the system, might 
 
 \Cf Giffen : "Case against Bimetallism," pp. 58. etc; Aldenham: 
 
 Colloquy on Currency" (3rd edition), Tables on pp. 24 103-7- 
 
 Prof. Foxwell in evidence before the Commission on Agriculture' 
 
 q. 24,179; Mr J. Barr Robertson in a paper in the ^ia^w^ica/ /owrnaJ 
 
 for September, 1895, vol. Iviii., pt. iii., especially pp. 427, etc 
 
 The Rise of Prues after 1850 167 
 
 have been expected to follow the discoveries in Cali- 
 fornia and Australia. The importance of this discus- 
 sion and conclusion will be more evident in the next 
 and final stage of the inquiry, with which we shall be 
 occupied in the following chapter. 
 
 Of the effects of the rise of prices on the general 
 welfare of the community it is unnecessary to treat at 
 any length. The period was undoubtedly an epoch of 
 great economic progress ; and the gold discoveries are 
 generally allowed to have been one of the contribu- 
 tory causes,^ among which the introduction of free 
 trade 2 and the construction of railways ^ were con- 
 spicuous. In every period the influence of variations 
 in the supplies of the metals is properly regarded, not 
 as nullifying or superseding the operation of other 
 causes, but as supplementing or modifying their efiects. 
 Such a conception does not imply that the variations 
 themselves are unimportant, but that they are less 
 obtrusive, and less readily recognised. In estimating 
 the effects of the changes at the period, which we are 
 discussing, it should be remembered that the in- 
 dustrial and commercial economy of England was now 
 so constituted that the good might be produced without 
 the evil. The rise of prices was comparatively gentle, 
 and so imperceptible to the ordinary observer that it 
 was long before the true cause was commonly ac- 
 knowledged. The evidence, which is available, seems 
 to show that wages did not as in the sixteenth 
 century, follow the rise of prices at a distance, but at a 
 
 'Newmarch ("History of Prices," vol. vi., pt. vii., sec. I, p. 135) 
 considers them the most important. 
 
 2/6ic?., vol. v., pt. iv. i lUd.^ pt. iii. 
 
i 
 
 1 68 Money and its Relations to Prices 
 
 short interval.! There was no sudden dklocation of 
 mutual relations, while there was undoubtedly a 
 powerful incentive to business enterprise. 
 
 The tendency of the economic movement was in- 
 clinincr in favour of the workman ; and it is probable 
 that a real change of distribution was in process. In 
 any case it seems likely that his real position would 
 have advanced apart from any increase in its monetary 
 expression. To effect the readjustment of this altered 
 expression might require disputes, and engender 
 irritation, just as the real change itself might not be 
 accomplished without friction. This friction would 
 undoubtedly be a hindrance to production ; but, on a 
 general view of the circumstances, and of the con- 
 siderations advanced in the second chapter of the 
 present inquiry, it is not improbable that the two 
 movements may have helped rather than proved an 
 obstacle to one another. The employer would un- 
 doubtedly be encouraged by the rise of prices, and, 
 with brisker trade, would be more disposed to grant 
 concessions to his workmen, while they would feel 
 a greater consciousness of the improvement in their 
 condition than they would have been likely to enter- 
 tain, if their wages had remained stationary, and 
 prices had fallen. At any rate, there do not seem to 
 be any serious grounds for thinking that the wage- 
 earning classes did not share in the benefit of the 
 stimulus applied to business by the gold discoveries 
 
 1 There is some reason for thinking that the direction of the move- 
 ment shown in the sixteenth may have been reversed in the nine- 
 teenth century, and that the wages of those engaged in producing 
 manufactured goods rose before the price of the food on which they 
 spent their wages. 
 
 
 The Rise of Prices after 1850 169 
 
 of the middle of the century, or that the advance in 
 their position, which was probably proceeding before, 
 and continued after, was interrupted. Indeed, it 
 seems to have been accelerated. 
 
 Nor can it be questioned that the burden of debt 
 was sensibly reduced ; and in the nineteenth century 
 national indebtedness, like the obligations of in- 
 dividual traders, working with borrowed money, had 
 become an important factor in the social and in- 
 dustrial economy. It was true, and must be freely 
 admitted, that widow and orphan might suffer ; but 
 it was also true, and served as a counterweight, that 
 living active energ}^ was benefited at the expense of 
 inactive inherited accumulation. That a stimulus was 
 given to the forces, which were making for increased 
 production, which accelerated their pace, and extended 
 the sphere of their operation, seems as unquestionable 
 as that no serious or lasting injury was inflicted on 
 the wage-earner, and no suffering on creditors, which 
 could be regarded as outweighing, or even as equivalent 
 to, the general benefits conferred. Such, at least, is the 
 deliberate judgment of sober and competent inquirers 
 like Jevous^ and Newmarch ; ^ and the judgment does 
 not conflict, but accords, with a priori theory and 
 with attested fact. 
 
 1 In passages quoted above, pp. 68 and 140. 
 a "History of Prices," vol. vi., pp. 135, 192, 193, 216, etc., 235, 
 236. 
 
CHAPTER VI 
 
 THE FALL OF PRICES AFTER 1873 
 
 We have now reached the final stage of our inquiry ; 
 and, before we address ourselves to its consideration, 
 we may briefly review the conclusions reached in the 
 preceding chapters. We shall thus obtain a more 
 accurate conception of the kind of results that we 
 may reasonably expect to secure. That the precious 
 metals exert an influence on prices in the modern 
 commercial world, which is not unreal because it is 
 indirect ; that the movement thus occasioned is only 
 discernible over an interval of time, and must be 
 distinguished from the more frequent and obvious 
 fluctuations of credit; that the distinction can be 
 eflected by comparing the level of one credit cycle 
 with that of another ; that a change in prices conse- 
 quent on an alteratioii in the supplies of the precious 
 metals is not likely to be immediate, or uniform, or 
 universal; that it will probably set in operation 
 counteracting causes, which will serve at once to miti- 
 gate and to conceal its effects ; that the influence of 
 changes in prices on the welfare of the community, 
 and of particular classes, must be regarded as supple- 
 menting, rather than superseding, the action of other 
 causes ; that the beneficial consequences of a rise, and 
 the depressing influences of a fall, are more apparent 
 
 170 
 
 The Fall of Prices after 1873 171 
 
 and operative in a modern industrial and commercial 
 society, where the functions of the employer as the 
 initiating and directing agent in trading and manufac- 
 turing enterprise receive a new prominence, and the 
 presence and action of credit, with its sensitiveness to 
 real or sentimental motives, and its opportunities for 
 the play of the imagination, are more dominant— all 
 these considerations have been suggested by the in- 
 vestigations of the previous chapters, and they will 
 apply to the examination on which we are now 
 entering, when we approach the period embraced by 
 the years after 1873. 
 
 The fall in prices during that period is attested by 
 various index numbers. The general agreement of 
 the results, in spite of differences of detail in the 
 construction of the numbers, and of the precise degree 
 of fall indicated, is remarkable, and is adequate to 
 establish the fact of a noteworthy change. Mr. 
 Sauerbeck's number may be taken as a type. That 
 fall from a maximum of 111 in 1873 to 68 in 1893, to 
 63 in 1894, to 62 in 1895, and to 61 in 1896.^ It is 
 true that the first year was one of unusual business 
 activity consequent on the outburst of trade, which 
 followed the Franco-German War. But the number 
 68 was lower than any point in the century anterior 
 to the discoveries in California and Australia, and had 
 never been reached before the year 1887. The num- 
 ber 63 was quite unprecedented. The general inclina- 
 tion of the curve of prices from 1873 to 1896 was 
 steadily downwards, with brief upward oscillations at 
 periods of expanding credit. After the gold dis- 
 
 ^ Cf. Statistical Journal for March, 1895, vol. Iviii., pt. i., pp. 140, 
 154, and for March, 1896, and 1897. 
 
172 Money and its Relations to Prices 
 
 coveries the level reached at the highest point of 
 each succeeding credit cycle was higher, and the 
 owest point attained in each depression, which fol- 
 k)wed on the speculative activity, was higher also- 
 From 1873 to 1896 the position was reversed After 
 each recovery the curve of prices sank lower, and each 
 succeeding recovery failed to rise to the level of its 
 predecessor. By this failure to recover the old posi- 
 tion, and this tendency to fall to a lower level, the 
 underlying forces of the precious metals manifest 
 their influence on the more superficial fluctuations 
 ot credit. They do not supersede those fluctuations 
 but accentuate or modify them ; and credit-influences 
 no more set them aside than they nullify the opera- 
 tion of credit. * 
 
 The full significance, however, of the figures, which 
 we have quoted, can only be appreciated in the bVht 
 ot Mr. Sauerbeck's additional comparisons The 
 number 63 was, he observed in 1895, "37 per cent 
 below the standard period" (which is the average of 
 the decade 1867-77), "20 per cent, below the%en 
 years 1878-87, and 9 per cent, below the average of 
 he last ten years." The number 61, he remarked in 
 1897, was the - lowest on record," but " was principally 
 caused by the unprecedentally low prices in the 
 aggregate of articles of food." In 1895 the number 62 
 was also the lowest then on record, but some improve- 
 ment m an upward direction had taken place in the 
 monthly prices during a portion of that year; and in 
 
 JS ^Cf^7L f ^"' "°^^ ^^^^ ^^^^h^^> ^°d in 
 1898 that of 64. Taking decennial periods, again, as 
 
 the basis for a more general average, the averac^e for 
 
 the decade 1874-83 was 90, and for the decade ^884- 
 
 The Fall of Prices after 1873 i73 
 
 93 was 71. In the decade 1848-57 it amounted to 89, 
 and in the succeeding decade to 99. In 1886-95 it 
 was 68. Here, again, the most recent decade was the 
 lowest of the century. These results are in general 
 accord with those attained by other index numbers. 
 It is true that, so far as it went. Dr. Soetbeer's num- 
 ber showed a less extensive fall; but the difference 
 seems to be due, partly to the particular point from 
 which the calculation starts, and partly to the fact 
 that it includes a great number of commodities of 
 minor importance; and though the fall indicated 
 might be less in amount, the general direction of the 
 movement of prices was similar. About the fact of a 
 considerable decline after 1873 no serious question 
 can be entertained, so far as the index numbers are 
 reliable. 
 
 But it has been contended that they fail to afford 
 certain testimony of changes in general prices. Their 
 suflSciency is questioned, partly on the ground of 
 defects of construction, and partly of the alleged 
 inadequacy of the basis on which they are built. Of 
 defects of construction no more need be said than 
 that in recent years index numbers have undergone 
 the most careful scientific testing, with the significant 
 consequence that attention to certain ideal require- 
 ments has not been found to produce any commen- 
 surate or material effect on the general result. 
 Although differing in detail of construction, all the 
 well-known varieties furnish results which are gener- 
 ally similar. They rest, however, on a similar basis ; 
 and therefore, if there be a fault in the foundation, 
 its unimportance would not be proved by similarity 
 in the results reached by examining the superstructure. 
 
174 Money and its Relations to Prices 
 
 The fault would be common, and would issue in 
 similar consequences.' 
 
 From a dearth of reliable statistical material, index 
 numbers consist of wholesale prices, and for the most 
 part, of those of unmanufactured goods; and it is 
 urged that, to obtain a true measure of changes in the 
 general purchasing-power of money, retail prices, the 
 prices of manufactured goods, and the prices of services 
 or wages should also be included. The absence of re- 
 liable data is, in the last analysis, the final answer to 
 this contention in the case of the first two sets of 
 prices. But it is also highly probable that, when a 
 number embraces such important articles as those 
 employed by Mr. Sauerbeck, it may be taken as fairly 
 representative of the mass of commodities, and that 
 the prices, both of manufactured goods and of retail 
 transactions, move in general sympathy with those 
 of wholesale dealings, and of raw materials. In sup- 
 port of such a probability a considerable body of 
 experience can be brought forward, and the onus of 
 proof may be said to lie on the other side. It is 
 true that greater friction prevails in the retail than 
 in the wholesale market, and that the vis inertice of 
 custom delays inevitable change. But it is very im- 
 probable that the movement of retail prices should be 
 in the opposite direction to that of wholesale; and 
 therefore, although the measure of the general change, 
 as indicated by the index number, may be exaggerated', 
 the direction can hardly fail to be correct. With 
 regard to manufactured articles, the same general 
 
 in'rS;.^^''"^ ^^o^^^J^*';!?!^^**?^ °^ *he British Association quoted 
 
 T/ie Fall of Prices after 1873 175 
 
 considerations apply ; but, as the broad tendency of 
 advancing civilisation seems to be to diminish the 
 cost of manufacture compared with the cost of obtain- 
 ing the raw material, it is probable that, when prices 
 are falling, an index number based on raw materials 
 may underrate the fall, as, when they are rising, it 
 may exaggerate the rise. 
 
 The opposite would seem to be the case with wages. 
 It is an attested fact of economic experience that, like 
 retail prices, they are slow to change, and they do not 
 alter so rapidly as prices generally. On the other 
 hand, they difier from manufactured goods, and, we 
 may add, from retail prices, which relate also to 
 manufactured goods, because the broad tendency of 
 progress in the modern world inclines to an alteration 
 in the distribution of wealth in favour of the work- 
 men, and to an advance in wages. When prices, 
 therefore, are rising, the inclusion of wages in an 
 index number would probably increase the rise, and, 
 when they are falling, it would tend to diminish the 
 fall. A real change in distribution may thus obscure 
 the natural effects of changes in prices. Wages may 
 remain stationary, though the purchasing-power of 
 money has increased, because a change is simul- 
 taneously affecting the share of wealth falling to the 
 workman. For this reason a combination of wages or 
 incomes generally with the prices of commodities in 
 an index number tends to beget confusion; and it 
 seems to be more conducive to a clear appreciation of 
 the movement of economic forces to make distinct 
 inquiries into incomes and into prices. 
 
 It may be added that a regard for the importance 
 of the employer as the initiator and director of 
 
f 4S 
 
 176 Money and its Relations to Prices 
 
 industry would tend to increase the weight to be 
 attached to the prices of wholesale commodities, 
 and to prices generally, as distinct from wages ; but 
 such considerations may seem more apposite, when we 
 take into account tiie cause, to which the change in 
 the relative value of money and commodities during 
 the years after 1873 was due. 
 
 On this question an eager debate has been con- 
 ducted. Does the cause, it was asked, lie primarily 
 with the commodities or with the money ? As we saw, 
 in the first chapter, a mere inspection of the index 
 number will only eliminate the influence of .different 
 minor causes, acting on various commodities in opposite 
 ways, and of temporary causes, the effects of which 
 are transitory. Particular accidents of supply and 
 demand will disappear in the general average, unless 
 the change be very marked. This was the case with 
 cotton during the American war; but in such in- 
 stances the compensating circumstance is present tha 
 the disturbing influence is so considerable that it 
 cannot escape detection. It will attract notice, and 
 express allowance can be made, without impairing the 
 validity of the general conclusion. By taking a wide 
 survey of time, as well as of commodities, the more 
 transitory, and recurrent, fluctuations of credit can 
 also be eliminated. But, if some common cause be 
 aflecting commodities, its influence will not be re- 
 moved, or neutralised, by any enlargement of the 
 number of articles on which the calculation rests. It 
 will appear, and must be recognised, in the general 
 average. On the other hand, by extending the time 
 covered by the survey, it is often possible to deter- 
 mine whether such a common cause is a complete or 
 
 The Fall of Prices after 1873 i77 
 
 sufficient explanation of the facts. If it was present, 
 when the course of prices was tending in the opposite 
 direction, we are forced to conclude that some new 
 cause has been needed to produce the change. 
 
 It is very commonly asserted that the fall in prices 
 after 1873 was due to improvements in production 
 and transportation;^ and it cannot be denied that the 
 natural effect of such a cause would be an increase in 
 commodities, and a change in their relation to money, 
 if there were no corresponding improvement in the 
 production of the precious metals themselves. But 
 this process of improvement is a cause, which has 
 been continually in operation, and did not commence 
 with 1873. The question, to use the instructive 
 comparison of Sir Robert Giffen,2 must be conceived 
 "dynamically" and not "statically." As Jevons 
 argued 3 with regard to the fall of prices during the 
 first part of the nineteenth century, when a similar 
 cause was assigned, the same cause was operating 
 previously when prices were rising, and, therefore, the 
 change, which occurred, when prices, instead of con- 
 tinuing to rise, began to fall, must have been due to 
 some different cause. Taking a general survey of the 
 movement of prices during the nineteenth century, 
 we find that improvements in production progressed 
 throughout, but that prices rose at first, and th'en fell, 
 until, with the gold discoveries of California and 
 Australia, they rose again, again to fall after 1873. 
 
 ^Cf. Lord Farrer in evidence before the Commission on Agri- 
 culture, and Mr. W. Fowler in evidence before the Gold and Silver 
 Commission. 
 
 2 In a paper in the Statistical Journal for December, 1888, p 722 
 
 3 «• Investigations," pp. 110, 132. 
 
 M 
 
I'-^'' 
 
 178 Money and its Relations to Prices 
 
 The movement of improvements in production sets 
 steadily in one direction, while the movement of prices 
 inclines first upwards, and then downwards, and then 
 up, and down again. The only ground, on which these 
 opposite changes could be attributed solely to one and 
 the same cause — that of improvements in production 
 — would be a reversal of this movement of improve- 
 ment during the periods when the direction of the 
 curve was changed. The argument that the move- 
 ment of impi-ovement in production proceeded at an 
 accelerated speed during the periods of falling, and at 
 a slackened rate in those of rising prices, is insufficient; 
 for a positive reversal, and not a mere variation in 
 relative rapidity, of the movement of prices is the fact 
 to be explained. It may be allowed that part of the 
 fall after 1873 was due to improvements in production. 
 It may even be admitted — although the evidence seems 
 to be by no means conclusive — that those improve- 
 ments proceeded with accelerated speed. But, when 
 ample recognition has been given to these considera- 
 tions, the phenomena of prices are not explained. 
 Some other cause must still be sought. Some part at 
 least of the fall must be due to the absence of a cause 
 in operation when the rise was manifested, or to the 
 presence of some cause which then was absent. 
 
 Such a conclusion is reached by inspection of the 
 index number, and by consideration of the adequacy 
 of the cause alleged. We are led to seek for some 
 other cause ; and, if we can discover one, which can 
 be shown to have been in operation, and to be com- 
 petent to produce the effect, the probability that it is 
 the cause, for which we are seeking, is so great as to 
 amount to practical certainty. 
 
 The Fall of Prices after 1873 i79 
 
 The cause is to be found, not so much in the altered 
 circumstances of the production of the precious metals 
 as in the changes of demand. Or, perhaps, it would 
 be more accurate to say that the cause must be sought 
 in the combined action of the two factors. That an 
 alteration in the resi)ective volume of production of 
 gold and silver occurred coincidently with a change 
 in the respective demand for them as standard money 
 measuring prices is a complete statement of the case. 
 The production of gold had, until recently, de- 
 clined from the level reached at the time of the 
 Californian and Australian discoveries; and figures 
 quoted 1 by the Gold and Silver Commission from Dr. 
 Soetbeer showed that the average annual supply in 
 kilograms during the five years ending with 1885 
 was about 25 per cent, below the production 
 of the years 1856-60. The estimated annual value 
 for the later period was 20 millions, and for 
 the earlier 28. Since the Commission reported the 
 production has very largely increased; and the present 
 prospects, and realised results, of the new gold fields 
 of Southern Africa, Western Australia, and Northern 
 America point in the direction of a further, perhaps 
 considerable, increase. Sir Robert Giffen, \n evidence 
 given in 1894 before the Commission on Agriculture 
 quoting the figures of the Director of the United 
 States Mint, stated ^ that the production had again 
 reached the 28 millions, which was the high-water 
 mark of the discoveries in California and Australia. 
 More recent statistics ^ establish a much more con- 
 siderable advance. 
 
 1 Cf. Final report, sec. 33. 
 
 2 Q. 181,95. 
 
 3 Reports of the Director of the United States Mint. Bv 1898 a 
 production of upwards of sixty mUlions had been reached. 
 
 \ 
 
i8o Money and its Relations to Prices 
 
 The production of silver, on the other hand, steadily 
 increased throughout the period under review. The 
 Gold and Silver Commissioners, a^ain quoting from Dr. 
 Soetbeer, found ^ that the annual production in kilo- 
 grams for the quinquennial period endinjs; with 1885 
 was 2,861,709, as compared with an annual production 
 of 904,990 kilograms in 1856-60. The estimated 
 value, converting the volume at the ratio of the day, 
 which had already sunk from 15 J to 1 to 18-6 to 1, was 
 more than two and a half times as great at the later 
 as at the earlier period. Subsequently the volume of 
 production increased by more than two-thirds, 
 and became five or six times as great in 1891-5 as it 
 was in 1 856-60. * 
 
 Such were the chief features of the changes in the 
 volume of production. While in the period of the 
 gold discoveries of the middle of the century the pro- 
 portion of gold to silver in the total production had 
 risen as high as 18'4 to 81*6, by the time of the Gold 
 and Silver Commission it had sunk again to 5 to 95. 
 In the case of the total values from 7 7 4 to 22*6 
 it had fallen to 49'3 to 507 ; and it fell subsequently 
 to a yet lower level. At the time, however, of the 
 gold discoveries, changes in the volume of produc- 
 tion occurred in the opposite direction of as great 
 a magnitude; and yet, according to the authori- 
 tative statement of the Gold and Silver Commission, 
 the effect on the ratio was scarcely perceptible 
 throughout the whole course of the century up to 
 1873. After that date the alteration was astonishing, 
 and the ratio advanced in favour of gold until it 
 
 ^ Report, sec. 12: " Materialien," pt. i. 
 
 " Cf. appendix xii. to vol. hi. of evidence before Commission on 
 Agriculture. 
 
 The Fall of Prices after 1873 181 
 
 became, by the close of the period under review, as 
 much as 1 to 35. At the time of the Gold and Silver 
 Commission it was 1 to 18-63. In the light of 
 phenomena like these the conclusion that the rupture 
 of the bimetallic tie in 1873, by the suspension of the 
 free coinaore of silver at the mints of the Latin Union, 
 must have exercised some influence in causing the 
 divergence, would appear to be inevitable ; and to such 
 a conclusion accordingly the Gold and Silver Commis- 
 sioners gave their unanimous assent.!" 
 
 In the present inquiry we are not concerned so 
 much with the immediate and admitted consequences 
 of the suspension of the free coinage of silver in dis- 
 locating the par of exchange, as with its ulterior 
 effects, combined with those of other monetary 
 changes, upon the movement of gold prices. The 
 bimetallic system had exerted a steadying influence 
 on the market ratio between gold and silver— so im- 
 portant that, with opposite changes of revolutionary 
 extent in the volume of production, the divergence in 
 the ratio had been hardly perceptible. With the 
 removal of this controlling influence the ordinary 
 market forces were allowed free play, and the value 
 of gold measured in silver rose. This change necessi- 
 tated, if the real relation was to be preserved, some 
 readjustment between silver prices in countries where 
 silver was the standard, and gold prices, where that 
 metal was the standard, so far as they were engaged 
 in commercial intercourse with one another. Such 
 was the position of India and England ; and it was 
 inevitable that either silver prices should rise in India 
 or gold prices fall in England. Some expectations 
 
 ' Sees. 189, 192, 194. 
 
1 82 Money and its Relations to Prices 
 
 were entertained ^ that the adjustment would be 
 efFecte<i by the former process ; but there were d, 
 'priori reasons for thinking this unlikely, and the 
 evidence of actual experience confirmed these reasons.^ 
 Prices in an Oriental country, where custom 
 is powerful, and the spirit of business enterprise 
 inelastic, are rigid, when compared with the rapid 
 movement and constant stir of the industrial and com- 
 mercial economy of Western Europe. If, therefore, a 
 readjustment in relative prices becomes inevitable, it is 
 more likely to be effected in the country, where the 
 vis inerticB resisting change is weaker. The disloca- 
 tion, accordingly, of the relations of exchange, implied 
 in the removal of the steadying influence of the 
 bimetallic system, involved some readjustment of 
 prices between gold and silver-using countries in 
 articles, which formed the subject of their commercial 
 intercourse ; and, where the countries in question 
 were the slowly changing East and the restless West, 
 the readjustment was likely to be effected in the 
 latter rather than the former. This a priori proba- 
 bility was confirmed by actual experience. Until 
 recently, prices in India, which were silver prices, 
 had not apparently risen ; ^ and prices in England, 
 which were gold prices, had fallen. We have dwelt on 
 this circumstance, because it affords some indication of 
 the manner in which, with all that modern ex- 
 
 ^ Cf. Bagehot on the " Depreciation of Silver." 
 
 "^ Cf. Prof. Nicholson on "Money and Monetary Problems." 
 Essay on the " Causes of Movements in General Prices." {Cf. also 
 his article in the Economic Journal for March, 1894, vol. iv., no. 13.) 
 
 ^ Cf. Gold and Silver Commission Report, sec. 52 ; Sir R. 
 GiflFen in a paper in the Statistical Journal for December, 1888 ; 
 Commission on Agriculture, q. 23,094. 
 
 T/ie Fall of Prices after 1873 183 
 
 tensive development of credit, and that apparent 
 indirectness of the connection between the precious 
 metals and prices, which came under our notice in the 
 last chapter, it is possible for changes in the value of 
 the metals in countries like those of the East, where 
 the currency is preponderantly metallic, and the 
 metals are in direct contact with prices, to exercise 
 some influence on the course of prices in the case of 
 articles, which are the subject of commercial inter- 
 course, in the more elaborately organised business 
 communities of the Western world. 
 
 The removal, then, of the steadying influence of the 
 bimetallic system was likely to occasion some altera- 
 tion in gold prices; for it occupied a place in a series of 
 monetary changes, which tended to throw a greater 
 strain on the resources of the gold supplies. The full 
 importance of these changes can only be appreciated 
 by remembering that they began to operate, when the 
 production of gold was declining, and had fallen some 
 25 per cent, below the high-water mark of the Cali- 
 fornian and Australian discoveries. If the supply of 
 an article diminishes, while the demand for it increases 
 a rise in its value is inevitable ; and that after 1873 a 
 decline occurred in the annual supply of gold, accom- 
 panied by a series of extraordinary additions to the 
 demand, rests on the evidence of well-attested facts. 
 
 Before the Gold and Silver Commission in 1886, Sir 
 Robert Gifi'en estimated ^ these extraordinary addi- 
 tions at some 200 millions. They consisted of 
 80 millions obtained by Germany between 1871 and 
 1875 for the adoption of a gold standard, and the 
 iQq. 489, etc. (C/ also his "Essays in Finance," first series, 
 xiv. ; second series, i., ii.) 
 
184 Money and its Relations to Prices 
 
 execution of a simultaneous banking reform, ex- 
 tinguishing notes of small denominations, of 100 
 millions taken by the United States on the resumption 
 of specie payments in 1875 and the following years, 
 and of 16 millions raised by loan for the re- 
 sumption of specie payments in Italy. In evidence 
 given some eight years later before the Commission 
 on Agriculture, in 1894, Sir Robert Giffen stated^ that 
 the Italian demand had proved unreal, but that in 
 the interval an additional extraordinary demand of 
 perhaps 30 or 40 millions had been made by the 
 Austro-Hungarian Empire, ^ which was preparing to 
 resume specie payments on a gold basis, and of some 
 70 millions by Russia for the purpose of a military 
 war-chest. Such a large extraordinary demand as 190 
 or 200 millions, coming upon an annual addition to the 
 existing stocks of some 20 millions, could scarcely be met 
 without exerting an influence on the value of the metal. 
 And, even with the later increased annual production, 
 such a demand as 30 or 40 or 70 millions could 
 hardly fail to produce an appreciable eflPect. Sir 
 Robert GifFen believed that the period of extra- 
 ordinary demands was completed, and that, with the 
 further additions to the supplies which seemed to be 
 probable, a rise in gold prices would occur. 
 
 It must not be forgotten that the effects of these 
 extraordinary demands are, to some extent, cumulative. 
 By the very influence, which they exert on the value 
 of gold, they encourage repetition. They raise that 
 
 iQq. 18,173, etc. 
 
 2 He was unwilling to compute definitely the Austro-Hungarian 
 demand, which he himself did not regard as **ever likely to be so 
 serious " as that of Germany or the United States. Lower estimates 
 have been made by other authorities (e.gr., Prof. E. Nasse). 
 
 The Fall of Prices after 1873 185 
 
 value, and, in the absence of the controlling influence 
 of a bimetallic system, cause a greater divergence from 
 silver ; and the tendency of gold to rise, and of silver 
 to fall, disposes those who hoard, whether they be in- 
 dividuals, as in India, or governments in their war- 
 chests, as in Europe (for the position of Russia is 
 not singular in this respect i) to accumulate gold 
 rather than silver. The attempt— whether or not it 
 be finally pronounced or proved abortive — to introduce 
 a gold standard into India may be traced directly to 
 the divergence between the metals.^ In this way the 
 suspension of the free coinage of silver, both at a 
 previous stage in recent monetary history by the 
 closing of the mints of the Latin Union, and then by 
 the action of the Indian Government, tended to 
 increase the demand for gold. 
 
 It may be true — and statistical evidence points, 
 as Sir Robert Giflen has shown,^ in this direc- 
 tion, that, owing partly to the silver-purchase 
 Acts in the United States, and partly to the de- 
 mands for token and subsidiary coinages, and for 
 importation into India, the total consumption of 
 silver was larger after the suspension of free 
 coinage in 1873 than before that date; and the fact 
 
 o 
 
 that silver prices had not altered would furnish corro- 
 borative evidence of this. But it may still be argued 
 that, if the bimetallic system had been in operation, 
 the experience of the past points to the probability 
 that the place now occupied by gold in the currencies 
 of the world would have been taken to some extent 
 
 1 Cf. Dunbar : "Theory and History of Banking," p. 129, on the 
 action of the Bank of France. 
 
 2 Cf, Reports of Indian Currency Committees. 
 
 3 In evidence before the Commission on Agriculture, q. 18,222. 
 
n 
 
 1 86 Money and its Relations to Prices 
 
 by silver, and to that extent the drain on the supplies 
 of ^old would have been relieved.^ 
 
 For demands, which are extraordinary, may abate, 
 and yet leave an influence behind. Under ordinary 
 conditions,^ with the progress of population, and the 
 development of manufacture and trade, the demand 
 for money tends to grow, if values are to preserve 
 their nominal expression. Paper may indeed be used 
 on an extended scale, but only to the degree that it is 
 fiduciary, and does not rest on a metallic basis, does it 
 relieve the demand for bullion. This point is some- 
 times overlooked, both by those who regard the paper 
 as a substitute for the metal, and by those who con- 
 sider that an accumulation in a bank of a stock of 
 gold or silver is an idle hoard. In weighing, for 
 example, the arguments of Tooke at the beginning of 
 the century on the connection of the paper currency 
 with the rise of prices, and of the resumption of cash 
 payments with the fall, it must not be forgotten that 
 he is only occupied with the question of the effects of 
 the inconvertibility of the note ; that is, of the absence 
 of a metallic basis, and the enlargement of the fiduciary 
 issue. Again, it is sometimes urged that the pur- 
 chases of silver in the United States under the Bland 
 and Sherman Acts were useless accretions of idle 
 metal ; but, while those acts might be condemned on 
 other grounds, the accumulations were not idle, as they 
 formed the basis of silver certificates,^ and it is appar- 
 ently admitted by competent inquirers that the rapid 
 
 ^Cy. Prof. Foxwell in evidence before the same Commission, na. 
 23,932, etc. ^^ 
 
 2 Cf. Sir R. Giffen in a paper in the Statistical Journal for Decem- 
 ber, 1888, p. 762. 
 » Of. Lord Aldenham : " Colloquy on Currency." 
 
 T/ze Fall of Prices after 1873 187 
 
 growth of American business needs an expanding cur- 
 rency, and that there was no reason for holding that the 
 actual effect, at any rate of the Bland Act, was to make 
 the currency redundant.^ In the case, once more, of 
 some of the extraordinary demands for gold during the 
 years after 1873, the hoarded metal seems to have been 
 temporarily employed as a reserve against paper, and 
 in some cases it took the place, not, it is true, of 
 silver, but of inconvertible paper. Under these cir- 
 cumstances the extraordinary demand might itself pass 
 away, but leave behind an increase in the ordinary 
 demand. 
 
 It is true that, with the development of credit, 
 cheques and other substitutes for money— metallic or 
 paper — are used to a wider extent ; and that in the 
 degree in which they permit of a greater economy of 
 metal — in the degree, that is, in which a large fabric 
 of credit is raised on a narrower foundation of cash — 
 they relieve the strain on the precious metals. It 
 cannot be questioned that this development of credit 
 was advancing during the years after 1873 ; but there 
 are reasons for thinking that some changes in 
 the modes of conducting business may have increased 
 rather than diminished the need for cash— that tele- 
 graphic transfers, for instance, may have taken the 
 place of bills of exchange. It is certainly improbable 
 that the growth of credit substitutes for money kept 
 pace with the new demands for gold.^ 
 
 1 Gf. Professor Taussig in 1892 on "The Silver Situation in the 
 United States," with reference to the Bland Act ; and also Sir R. 
 Gififen in "Case against Bimetallism," viii., p. 180, and also Prof. 
 Taussig's article in the Economic Journal for December, 1893. 
 
 2(7/ Sir R.Giflfen in evidence before the Gold and Silver Commis- 
 sion, q, 556, also in ** Essays in Finance," first series, p. 337, and in a 
 
1 88 Money and its Relations to Prices 
 
 For there is also a constant demand for fresh metal 
 to replace the wear and tear of coins, and to meet the 
 requirements of the arts. Dr. Soetbeer some fifteen 
 years ago put the latter demand^ at 13 millions, 
 and at a later time, in 1889, Sir Robert Giffen stated '' 
 that about two-thirds of the annual production were 
 taken for the arts, and that, if the consumption of 
 India was included, the demand for "non-monetary" 
 purposes was then almost equal to the entire pro- 
 duction. If these estimates were correct, the import- 
 ance of the extraordinary demands of the years after 
 1873 was rendered yet more manifest, and the sequel, 
 left behind in the permanent addition to the ordinary 
 demand, cannot but have exercised a serious influence 
 on the value of the metal. 
 
 In view of this evidence, which, proceeding on 
 different lines, and issuing from different quarters, yet 
 converges to the same conclusion, it is impossible to 
 doubt that the fall of prices shown by the index 
 numbers was connected with monetary changes. The 
 progress of improvement may have worked towards a 
 fall, but by itself it is an insufficient explanation. If 
 the principles of supply and demand be accurately 
 conceived, and an increasing demand, coinciding with 
 a diminishing supply, tends to cause an advance in 
 value, then in the acknowledged extraordinary 
 demands for gold, followed, as they inevitably must 
 
 paper in the Statistical Journal for December, 1888, p. 763, Mr 
 Sauerbeck in evidence before the Gold and Silver Commission* 
 qq. 892, etc. Cf. contra the evidence of Mr. Birch before the same 
 Commission, qq. 1, 536, etc., and also that of Sir S. Montagu. 
 > " Materialien," iii., 3, 90,000 kilograms. 
 
 2 " Case against Bimetallism," p. 85; Commission on Agriculture 
 q. 18,205. ^ ' 
 
 T/ie Fall of Prices after 1873 189 
 
 be, and as they most assuredly were, by an enlarge- 
 ment of the ordinary demands, we have a cause com- 
 petent to produce the effect shown by the continuous 
 
 fall of prices. 
 
 Nor do the criticisms passed on the validity of the 
 evidence of the index numbers prejudice, but corrobo- 
 rate, this conclusion. Retail prices might not show so 
 large a fall, where particulars could be obtained. But 
 the admitted existence of greater friction in the retail 
 trade accounts for the phenomenon, while it is very 
 possible that in some particular cases an improvement 
 in quality might have concealed a reduction in price. 
 Wages, again, might have remained stationary, or 
 fallen to a small extent ; but, apart from the high 
 probability of a real alteration in distribution favour- 
 ing the wage-earner, we should expect the change to 
 be more gradual. Such is the lesson of historical 
 experience, and such is the inference to which a 'priori 
 reasoning would conduct ; for readjustments of wages 
 can only be effected with friction and delay. This 
 real rise of wages may also furnish part of the ex- 
 planation of the comparative absence of the fall in 
 retail prices, if that be true on a general view. They 
 are the prices of goods into which manufacture has 
 entered largely, and the difiiculty of comparison of 
 prices in their case may be partly ascribed to the 
 possibility that it may have entered more largely at 
 one time than another. The natural tendency of 
 civilisation is to improve the methods and reduce the 
 cost of the manufacturing process compared with that 
 of obtaining the raw material ; and, therefore, we 
 should naturally look for a greater fall in manufactured 
 goods. But, if there be a larger ingredient of labour 
 
190 Money ana its Relations to Prices 
 
 in their manufacture, and the distribution of wealth 
 inclines in favour of the workman, his stationary or 
 increased wages would tend to maintain the price, or 
 even to raise it, compared with that of articles where 
 the element of labour is less important. Nor, in any 
 ease, could we expect the change in prices to be 
 uniform or universal, as it is modified by, as well as 
 modifies, the environment in which it operates. 
 
 The more permanent effect on wages would pro- 
 bably be curtailed employment, though in a community 
 which was otherwise progressive, this might take the 
 form, not of a positive diminution, but an increase 
 relatively less than what would have occurred. For 
 it is not likely that falling prices should stop produc- 
 tion, but that they should retard its advance. If the 
 employer sustains a real injury through an increase 
 in the pressure of his obligations in consequence of an 
 actual fall, and the uncertainty and depression en- 
 gendered by the prospects of a further fall benumb his 
 imagination, and he becomes less confident and alert, 
 if business recovers from a period of shaken credit 
 and pressure in the money market with less rapidity 
 and completeness, if the burden of national and muni- 
 cipal indebtedness, so far as the interest is fixed, or 
 admits only of tardy diminution, grows steadily 
 heavier, these influences must tend pro tanto to 
 diminish the volume of production, and, in spite of 
 improvement in his relative economic position, the 
 wage-earner must so far participate in the loss that, 
 under other conditions, his improvement would have 
 been greater. 
 
 Such is the evidence that we may expect to find in 
 a modern community of the influence of falling prices 
 
 The Fall of Prices after 1873 191 
 
 due to comparative scarcity of metal ; and we shall 
 look in vain for any other. The operation of the 
 cause, and its connection with its effects, cannot be 
 detached from the surroundings, and submitted to 
 isolated observation. It will inevitably be mingled 
 with obscuring circumstance. We can rarely hope to 
 meet with facts so obvious as to exclude a second in- 
 terpretation ; and we must rather be prepared to ex- 
 tort from unwilling facts the lessons they contain. 
 All that we can reach is a high degree of probability ; 
 we shall be disappointed if we seek for unquestioned 
 certainty. This limitation of the character of our 
 conclusions, as we saw in the opening chapter, is inci- 
 dent to the moral and political sciences, because we are 
 debarred from instituting decisive experiments under 
 rigid conditions. We are compelled to observe the 
 course of events, and to watch experiments conducted, 
 not with a view to the pure attainment of scientific 
 truth, but with the object of advancing the public 
 utility, or avoiding an injury, immediate or threatened, 
 to the public welfare. But, if we do not discover 
 certainty, we ought not on that account to set aside 
 the evidence of high probability as inadequate to the 
 establishment of speculative conclusions sufficient for 
 guidance in practical policy. To acquiesce in an 
 attitude of such despondent indolence is to condemn 
 speculation to sterility, and practice to inaction. 
 
 We may now inquire whether in the case before us 
 there is this evidence of high probability. It is diffi- 
 cult, if not impossible, to return a negative answer. 
 On the one side there is evidence of a fall in wholesale 
 prices, and on the other of a series of extraordinary 
 demands for gold, which must have tended to increase 
 
I 
 
 ;■■ I 
 
 192 Money and its Relations to Prices 
 
 its value for the time, and to leave behind a permanent 
 addition to the ordinary demands. And these extra- 
 ordinary demands, and this consequent tendency to 
 an increase in the ordinary demands, occurred with a 
 production, which was declining from the level 
 reached at the Californian and Australian discoveries. 
 Here, then, we have a cause competent to produce the 
 effect, and we have the effect produced. Such is the 
 chief piece of evidence; and it is corroborated in 
 various ways. 
 
 In a progressive community we should expect the 
 volume of production to increase; and, in an address 
 to the Economic Section of the British Association in 
 1887, Sir Robert Giffen, taking^ the production of 
 coal and of pig-iron, the receipts from railway goods 
 traffic, the clearances of shipping in foreign trade, and 
 the consumption of tea and sugar, showed that a 
 decline had undoubtedly occurred in the ratio of in- 
 crease in the period from 1875 to 1885, as compared 
 with the two previous decennia. He was disinclined 
 to attribute this decrease to foreign competition, partly 
 because, as he urged, it was not in the foreign trade 
 that any " check worth mentioning " had occurred ; 
 and for similar reasons he dismissed as inadequate the 
 reduction of the hours of labour, the unfavourable 
 seasons in agriculture, and the partial loss of our 
 natural advantages in coal and iron. He observed, 
 indeed — and to this point we shall return — that the 
 growth of population, the diminution in pauperism, 
 and the increase of the deposits in the savings banks, 
 and of the assessments of houses, conflicted with the 
 supposition of a real and permanent check, and that, as 
 
 I Cf. Report of British Association for 1887, pp. 806, etc. 
 
 % 
 
 The Fall of Prices after 1873 193 
 
 the staple industries declined, the miscellaneous occu- 
 pations grew, and therefore statistics of diminution 
 based on these staple industries might be consistent 
 with a change, not in the rate, but in the direction, 
 of the total increase. In spite of these considerations, 
 he arrived at the general conclusion that some check 
 had been offered to the rate of material growth, that 
 the check, even if " too small to be measured by 
 general statistics," was sufficient to produce no little 
 "amount of TYialaise" and that the malaise was 
 "largely accounted for" by the fall of prices. Sir 
 Robert Giffen himself was inclined to attribute little 
 real importance to this fall ; but the degree of 
 importance, which different observers attach, must 
 depend on the amount of influence, which they think 
 that this feeling of malaise is likely to exert, and on 
 the rate of material progress which, in the absence of 
 such counteraction, might have been expected in a 
 progressive community. 
 
 Nor are the facts of the decline of pauperism, the 
 growth of population, and the increase of the deposits 
 in the savings banks, and of house assessments, in 
 conflict with what might have been expected. Ac- 
 cording to the census of 1891, indeed,^ the rate of 
 increase of population declined ; but this fact, which 
 is common to other communities, might be due to a 
 rise in the standard of comfort. This very rise, how- 
 ever, is but one illustration of the change apparently 
 proceeding in the distribution of wealth. In a pro- 
 
 1 Vol. iv., General Report, ii., 1 — '* Not only" was the "increase 
 absolutely less than in the previous decennium, 1871-81, but the 
 rate of increase was lower than in any previous decennial period in 
 the century." 
 
I 
 
 194 Money and its Relations to Prices 
 
 gressive community, where a real change of this 
 nature is being effected, we should expect to see a 
 decline of pauperism, a growth in the deposits in 
 savings banks, and an increase in the assessments of 
 houses. In most of the countries, where industry is 
 organised on modern lines, and the manufacturing 
 and commercial development of the age has been 
 fully initiated, statistical evidence supports the con- 
 ception of a real change in distribution — of a tendency, 
 as M. Leroy Beaulieu has put it/ to a diminished 
 inequality of conditions. And this tendency, which 
 may be said to be placed beyond the reach of serious 
 dispute, would lead, in the absence of some counter- 
 acting cause, to an increase of wages. That wages 
 had been stationary might, therefore, seem to tell in 
 favour of a fall of prices, due to some monetary 
 cause, rather than against it, and to be consistent 
 with the view that the position of the wage-earner 
 would have been better without the fall. Again, the 
 statistical evidence, as Sir Robert GifFen stated ^ it 
 before the Commission on Agriculture, shows that 
 between 1870 and 1880 there was a rise of wages, 
 and that between 1880 and 1893 in a few cases 
 there had been a fall, but that in the great majority 
 wages had remained stationary. It is, as we have 
 seen, in accord with the probable operation of the 
 cause for the effects to be manifest in wages only 
 after some delay. 
 
 Passing from wages to profits, Sir Robert Giffen, 
 
 1 In his " Essai sur la Repartition des Richesaes." 
 
 2 Q. 18,105, and appendix, table vi. (vol. ii.); cf. for more details 
 the paper in the Statistical Journal for Dec. , 1888 ; cf. also papers 
 by Mr. A. L. Bowley in the Statistical Journal, 
 
 ! 
 
 The Fall of Prices after 1873 195 
 
 in evidence given before the same Commission on 
 Agriculture, stated^ that, down to about 1875-9, the 
 assessment of profits for income-tax, taking the 
 nominal values per head, had increased ; that after 
 1875-9 it had remained stationary ; and that about 
 1890-3 it again exhibited a slight increase. This 
 evidence points to the conclusion of a relative decline 
 in profits from 1875-9 to 1890, as before 1875-9 the 
 assessment was growing faster than the population, 
 whereas in the subsequent period it was only growing 
 as fast. 
 
 Hitherto the matter has been considered from 
 what may be distinguished as the negative side. We 
 have been asking whether there is reason for sup- 
 posing that, if the cause had been absent, the effects 
 might have been different. If we now turn to the 
 positive side, we find it difficult to dispute the general 
 trend of the evidence. Within the quarter of a century 
 after 1873 four Royal Commissions were engaged on 
 the question of depression. The Gold and Silver 
 Commission was appointed eo nomine to investigate 
 the divergence between the values of the metals. It 
 was appointed because the previous Commission on 
 Trade Depression had, in the course of its inquiries, 
 suspected the operation of some deep-seated cause 
 connected with the metals.^ Besides the Depression 
 of Trade Commission, two Commissions inquired into 
 Depression in Agriculture — one under the chairman- 
 ship of the Duke of Richmond, and the other under 
 that of Mr. Shaw Lefevre and of Lord Cobham. The 
 very fact of the appointment of these Commissions 
 
 ^ Q. 18,101, and appendix, table iv. 
 
 2 Of. Final Report, sec. 722, and Third Report. 
 
196 Money and its Relations to Prices 
 
 
 may be taken as evidence of the reality of that 
 malaise, which Sir Robert Giffen described as the 
 natural consequence of falling prices. The feeling of 
 depression and uncertainty, and the opinion that 
 there was no agreed and obvious cause, may be taken 
 as testimony— quantum valeat— to the likelihood of 
 some underlying cause, such as a change in the 
 relation of gold to commodities. Nor is there any 
 serious question of the fact that the decline of profits 
 formed the burden of the complaint before the 
 Depression of Trade Commission ; and that the two 
 Commissions on Agriculture repeated the same tale — 
 and, in the case of the latter, in more urgent and 
 emphatic language — of the fall of rents and the 
 disappearance of farming profits. 
 
 This is as we should expect. That falling prices 
 should especially affect the margin of profits, and 
 that they should exercise a yet more destructive 
 influence on that "margin of a margin" which, as 
 Sir Robert Giffen has expressively put it, represents 
 the rent of the landlord, accords with a priori specu- 
 lation. It is true that other causes might also have 
 been operating both in trade and agriculture. The 
 period following the Franco-German war was one of 
 extraordinary business activity, and, it may be added, 
 of unhealthy excitement ; and some reaction was 
 inevitable. But the peculiar feature of the years 
 after 1873 was that the depression, unlike its prede- 
 cessors, seemed perpetual. Probably in part at least 
 for this reason some observers urged that the effects 
 of the notorious Baring crisis, by being extended over 
 a longer period, proved more injurious than might 
 have been the case, had the original crash not been 
 
 TAe Fall of Prices after 1873 197 
 
 averted. It was because they looked for a recovery 
 which did not come. 
 
 In agriculture also it is true that at the time of the 
 Duke of Richmond's Commission the influence of bad 
 seasons counted for something, and the growth of 
 foreign competition since counted for more. But the 
 opinion was widely entertained that, in view of the 
 depression in other countries, some more general cause 
 must also be in operation ; and on a priori grounds it 
 was not unlikely that the malaise should be more pro- 
 nounced in agricultural than in other industries. It is 
 an industry on which the burden of fixed charges, 
 which can only be altered at long intervals, bears 
 with especial weight. The obligations of an employer 
 are current for shorter periods, and, while a continuous 
 fall of prices may be repeatedly producing fresh dis- 
 turbances, and destroy the narrow margin of profit, 
 yet he is constantly entering into new obligations and 
 ridding himself of the old. The burdens upon agri- 
 culture do not admit of such frequent adjustment. 
 Rents may be lowered, but mortgages may bear an 
 interest, which cannot be changed without delay, and 
 yet has to be met from the diminished rental. The 
 disturbance also of exchange between silver-using and 
 
 O CD 
 
 gold-using countries necessitated, as we have seen, 
 some readjustment, which must be accomplished by an 
 alteration in the silver or the gold prices of the articles, 
 which formed the subject of commercial intercourse. 
 One of the competitors of the English farmer was the 
 Indian cultivator ; and it was agreed that until re- 
 cently no apparent change was manifest in silver 
 prices in India. There must, therefore, have occurred 
 — as undoubtedly there did occur, to whatever cause 
 
I 
 
 i 
 
 198 Money and its Relations to Prices 
 
 it be ascribed — an alteration in the ^old price of 
 wheat in E/igland. The via inertice resisting change 
 proved greater in the sluggish conservative East than 
 in the quick movement and active bustle of the 
 Western World; and, without discussing further a 
 controverted question, it seems to be impossible that 
 this change did not pro tanto impose some disad- 
 vantage on the English farmer.^ Of the general 
 hindrances to the development of trade with India, 
 presented by the difficulties of exchange, especially 
 in the case of the Lancashire cotton industry, no 
 more need be said than that it is unquestionable that 
 they exercised some prejudicial influence, and that, 
 while in their initiation they might be primarily due 
 to the suspension of the free coinage of silver, in 
 their aggravation they were connected with the rise 
 in the value of gold. 
 
 Nor, finally, must we be misled by the expression, 
 a " scarcity " of gold ; and lightly acquiesce in the 
 assurance 2 that no such scarcity was evident. The 
 testimony adduced in support of such a contention 
 admits of a different interpretation from that given 
 by those who advance it. The accumulation of gold 
 in bank reserves might be due to a desire to hoard the 
 more valuable metal, or, for a time at least, to stacr- 
 nating trade ; and the rate of discount seems to be 
 properly regarded as an index of the movement to and 
 fro of gold, ot its passage into and out of the country, 
 into and out of the channels of trade. Matters will, 
 and must, adjust themselves to the altered level of 
 
 1 Cf. Prof. Foxwell in evidence before the Commission on Agricul- 
 ture, q. 23,686. The influence of inconvertible paper on the supply 
 and price of wheat from Argentina was similar. 
 
 « Cf. Lord Farrer before the same Commiaiion, qq. 38,969, etc. 
 
 TAe Fall of Prices after 1873 199 
 
 prices, and, on a strict scientific view, a scarcity of 
 gold means no more than that it is relatively less 
 abundant than before. The fact that prices sank was 
 evidence that the relation between gold and com- 
 modities had altered — that the gold had become less, 
 and the commodities more abundant. 
 
 In the light of these converging lines of evidence it 
 seems impossible to doubt the existence of a casual 
 connection between the fall of prices and the monetary 
 changes of the years after 1873. The degree of 
 probability is so high as to amount to practical cer- 
 tainty ; and in such inquiries we cannot hope to pass 
 beyond this point. We must rest content with evi- 
 dence such as this, or we must dismiss such investiga- 
 tions as altogether futile and impossible. 
 
 Of events subsequent to 1896, and of the prospects 
 of the future, it does not fall within the scope of the 
 present inquiry to treat. The past few years have 
 witnessed a notable increase in the supplies of gold 
 from the mines, and, setting aside the possible re- 
 quirements of India, a comparative cessation of the 
 extraordinary demands. But those extraordinary 
 demands have left behind an increase in the ordinary 
 demands ; and the monetary position is so uncertain 
 that it is impossible to say that some fresh extraordin- 
 ary demand may not arise. The consumption in the 
 arts has been estimated to be a large proportion of 
 the supplies.^ The natural growth of population and 
 
 1 In his report for 1894 the Director of the United States Mint 
 computed that, taking into consideration the consumption in the 
 arts and the export to India, there was in 1893 about as much gold 
 available for coinage purposes as there was of both metals in the 
 years 1866-73. For succeeding years he anticipated a considerable 
 increase {cf, vol. iii., appendix xii., of evidence before Commission 
 on Agriculture). 
 
200 Money and its Relations to Prices 
 
 of production constitutes, so far as credit instruments 
 are not employed, and to some extent even when these 
 are used, a continuous increase in the ordinary demand. 
 Some backward nations like India pass on their way 
 to the development of credit through a period of 
 adseration, as it is termed, when they adopt cash 
 payments in lieu of barter, and require more and not 
 less metal than before. Nor were the effects of the 
 Californian and Australian discoveries, which had not 
 been paralleled for abundance since the mineral wealth 
 of Mexico and Peru was poured into the world, by 
 any means as great as had been confidently thought. 
 So soon indeed were they api)arently completed, that 
 it seems premature to look for a very considerable rise 
 of prices from the fresh supplies of Southern Africa, 
 and Western Australia, and Northern America.^ 
 Metallic mining is proverbially a lottery, though it is 
 true that in the course of history silver, and latterly 
 also gold, have become more fully subject to ordinary 
 commercial influences, and lend themselves more 
 readily to safe prediction. But the liability of 
 prophecy to err is not less common than the tempta- 
 tion to predict ; and the past history of the precious 
 metals supplies abundant evidence of the pertinence 
 of such considerations. The present inquir}^ is com- 
 plete when we have traced to our own days the tale 
 of the more notable changes in general prices, which 
 the modern world has aheady witnessed ; and we may 
 contentedly allow the prophet undisputed sway over 
 the uncertain region of the future. 
 
 ^ The application, however, of the cyanide process has also led to 
 an increased production from tiie older sources of supply. 
 
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 80. 
 
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