Money and its relations to prices, being an inquiry into the causes, measurements, and effects of changes in general prices

Front matter

RmHHRaE&.1

Money AND us Relations to Price:;

s

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 University 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 dispute. The present author's obligations to him may be discovered in many passages. To Jevons' Investigations 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 productions 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

431038 vi Preface.

the questions suo^gested by later movements of prices is impossible apart from an acquaintance with the Investigations of Jevons.

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 freedom 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 ma}'^ 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.

Contents

CHAI'.

PAGE

I. THE MEASUREMENT OF CHANGES IN PRICES I

Chapter I. The Measurement Of Changes In Prices

Scientific circles have been recently agitated over the discovery of a new element in the atmos|)here ; and the votaries of those moral and political studies, among which Economics claims a place, must have watched with interest, not unmingled with envy, the process by which the existence of that new element has been established. For the story of this latest 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 is associated, was attracted to the presence of some disturbing influence, to which a place could not be assigned in the recognised scientific order. When suspicion had been thus aroused, a series of experiments was instituted, with the co-opeiation of another eminent scientist;^ and those experiments were conducted, on the liypo-

1 Lord Rayleigh. -' Professor Ramsay.

A thesis 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 Januaiy, 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 experiment 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 unmoved while

^ Cf. Edinburgh lievkw for October, 1895, for a succinct account of the discovery. (No, 374.)

The MeasurcDicnt of Changes in Prices. 3

he observes them ; and they will most assuredly resent being subjected to a deliberate experiment. Even the biologist encounters obstacles when he wishes to ex- ])eriment on animal life ; and the statesman, who should introduce a measure, or initiate a polic}', not with a view to public utility, but with the single aim of establishing or disproving a scientific hypothesis b}'' means of a carefull}'^ conducted ex[ieriment, would soon be driven — and not unnaturally — from office, if not from public life. Even if his avowed object were the promotion of general utilit}', and j^et the experiment involved the possibility of a real injury to some one or other portion of the community, it is exceedingly doubtful whether he Mould 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 conditions. The subjects of his inquiry v/ould 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 efl^'ects 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 tliese 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 tlie kind of evidence we can alone hope to secure, and of the character of the conclusions we must be content to establish.

Yet, if discouraging reflections like these are suggested by a contrast between the moral and political and the physical sciences, there is another characteristic of the present situation from which — paradoxical as the inference may appear — we may derive encouragement. It is no exairgeration 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 patholog}^ 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 difficulties where its opulence is 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 lately instituted by the Indian Government, when it susjiended the free coinage of silver ; and economic students have been able to w^atch the coarse and observe the results of that experiment. They can see whether theories are verified or predictions unfulfilled. In both these instances — and parallels might be supplied from the same as from other departments of economic study — experiments are undoubtedly furnished for the instruction of the student, though even in these cases it is not easy, or indeed possible, to avoid the disturbing influences of

The Mcasiireiiient of Changes in Prices. 5

a plurality of causes and an intermixture of effects. But the experiments are sucli that all, who concern themselves with the welfare of the community, would be glad, if they were able, to dispense with them, whatever their scientific value or interest. Experiments, it is true, of a more beneficent character are sometimes stippliiMl 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 ordinary routine, men are averse to try experiments at all — while desperate or calamitous expedients force themselves 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 at the present time the monetary machinery is not working smoothly ; nor is it necessary to demonstrate formally the lively interest which has of late been aroused in questions of monetary theory and practice.^ The controversy between monometallist and bimetallist has been conducted with great vehemence, if not with great ability : and, difiicult as it may seem to reach and retain the truth amid the din of contending argument, it is not eas}^ to believe that such eager search for evidence, and such

^ Professor Foxwell (" Transactions of Political Economy Circle of National Liberal Club," vol. ii., p. 174) has called attention to the significant fact of the issue of 1768 publications on the monetary question between 1S71 and 1891 (according to Dr. Soetbcer's Bibliography).

persistent and incredulous examination of it, can have failed to result in some enlargement and improvement of scientific knowledge. Attention must of necessity have been directed to points hitherto unnoticed, and the weak links of a chain of argument could hardly have escaped 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 theor}^ which has not been called in question at some time or other during the controversy. 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 thcor3^ 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 Commission,^ to the " great improvement " which had been recently effected in monetary statistics. No doubt, as Professor Marshall urged before the same Commission,- there are important points on which we have as yet no statistical information of a reliable or adequate 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 unfortunately is, and doubtful as are some of the theoretical issues involved, certain broad conclusions emerge, and, even when obscured bv the assertions and denials of

1 Cf. Report, (jci. 465, etc. - Ibid., q. 9629.

controversy, appear to bave met with virtual admission, if not witli 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 ]iurchasing-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 this 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 this century,^ and the period,*" on the true explanation of which controversy is now raging, that, namely, which has elapsed since 1873. It will at least be conceded that the main characteristic of both these periods has been a fall in prices, although the particular cause of the fall may be stubbornly disputed. It will also perhaps be allowed — though this point may scarcely be granted so readily — that, if monetary changes have been the cause of the fall, those changes

1 In cliapter i. - In chapter ii. " Chapter iii.

* Chapter V. ' Chapter iv. "^ Cliaptei vi.

8 Money and its RelatioJis to Prices.

may 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 accomplished 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 artificial that, like the suspension of those payments, and the issue of inconvertible paper, it is the deliberate action of men. The fall in prices since 1873, so far as it has been due to the demonetisation of silver and the adoption of a o-old 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 distinction, 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 eflects of the changes. As we must diagnose the disease before we can venture to prescribe 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 tlie purchasing-power of money, it may be confidently atfirmed that the remark, which we previously hazarded, on the tendency of controversy to result in the improvement and enlargement of knowledge, finds abundant confirmation. A comparison of the methods pursued in the earlier and the later

Tlu Measiire7}i£nt of CJiaiiges in Prices. 9

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 reco^ised by those who investigrated the circumstances of the earlier periods, but that we are sen>ible of the particular respects in which it is likely to be deficient, that we are able to devise and apply remedies for s^me of those defects, and that we have satisfied ourselves that, in spite of defects, the instruiuent is adequate for the purpose in hand. It would, no doubt, be untrue to say that a later generation can claim the credit of discoverino^ the instrument ; but it may at least be affirmed that earlier investigators did not attain to any adequate recognition of its capabilities or apply it scientifically to the problem befcre them.

In economic text-books three functions are generally assigned to money. It is described ^ as (I) a medium of exchange, (^2) a measure or common denominator of value, and (3) a standard of deferred payments. To these three functions a fourth is sometimes 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 l^ecomes a convenient measure or common denominator of value. But, in the progress of society, as bargains are entered into » Cf. Jevons' " Money " ; F. A. Walkers " 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 durins; the interval. To discharge 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 stabilit}^ 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 constitutes 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. \ i

and, in the degree in which it fulfils this function, will furnish a gauge for testing the imperfections of the monetary standard, oi\ in other words, for estimating 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 b}'- which the value of all commodities 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 easy to ascertain ; and we need concern ourselves with it the less, because, admirable and perfect as he held this standard to be in theory, he considered 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 frequently taken notice of by historians and other writers. We must generally, therefore, content ourselves with them, not as being always exactly in the same proportion as the current prices of labour, but as being the nearest approximation which can commonly be had to that proportion." Accordingly, in a notable chapter,^ to which we shall have again to refer, Adam Smith measures the alterations in the

1 " Wealtli of Nations," bk. i., cli. v. - Ibid., bk. i., cb. xi., pt. iii.

12 Money and its Re/afions to Prices.

value of silver by the fluctuations in the price of corn. But, throughout the discussion, he is careful to remind his readers tliat 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 different stages of wealth and improvement, a more accurate measure of value than any other commodity or set of commodities." 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 comparison, 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 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 conclusions regarding the value of silver. " Bishop Fleetwood 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, though their opinions are so very different, their facts, so far as they relate to the price of corn at least, should

The M€asiirc7iient of Changes in Prices. 1 3

coincide so very exactly." Bishop Fleetwood, in 1707, in his anonj'mous " Chronicon Prcciosum," ^ had sought to ascertain the changes in the value of money by compai'ing the prices at different periods, not of one commodity alone, but of a larger number,^ includinof the wajjes of labour. His method was, no doubt, rough, and his statistical material deficient ; but the conception, which underlay his calculations, was identical in principle with that which has since been elaborated in the so-called " index number."

Various other anticipations of this modern 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, Portions, Day-labour, etc., in England for Six Hundred Years last past, showing from tlie Decrease of the Value of Money, and from the Increase 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 conscientiouslj' 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 tlie later edition.

2 Summarily enumerated as "corn, meat, drink, or cloth." Tlie method is thus described : " You must neither take a very dear year to your prejudice, nor a very cheap 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 wiiat proportion they will bear to one another ; for the proportion is to be your rule and guide." (Cy. chap, vi.) The inquiry into "stipends," etc., is made independently.

mg in 1822,^ and Scrope,- some eleven years later, the piiinary object in view seems to have been that of securing justice in the matter of deferred payments and ensuring stability in money contracts ; and Scro])e 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 table " 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 researches " ; 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 ascertainino- 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 corresponding 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

1 In his "Present State of Kngliuul in regard to Agriculture, Trade, and Finance," pp. 27G, etc., and Appendix to chapter ix. ^ " Principles of Political Econoni}^" p. 406.

desirable for commercial purposes, the variations in the value of money; and enable individuals, if they shall think fit, to rei^ulate their pecuniary engagements by reference to this tabular standard." ^

A similar method, with a similar object, was suggested in Porter's " Progress of the Nation " ; - but not until the occurrence of the Calif ornian and Austi-alian 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 apiilied 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 reserved 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 examination to be instituted into their defects and capa- ' bilities. The exhaustive Reports* of a recent Committee of the British Association on the " best methods of ascertaining and measuring variations in the value of the Monetary Standard," together with the elaborate memoranda of Professor Edgeworth appended to

1 Cf. "Principles of Political Economy," by G. Poulctt Scrope, M.P., F.R.S., etc., pp. 40G-407.

-' Vol. ii., pp. 23o, 2.3G (edition of 1838), sec. iii., ch. xii. 3 Cf. *' Investigations in Currency and Finance," ii. , pp. 15, etc. •* Cf. Reports for 1887, 188S, 1889, and 1890.

those Reports, have enabled the student to advance a stage beyond that attained by Jevons in the theory, if not in the ])ractice, of the index number ; and the subject has also received instructive attention in 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 newspaper may be briefly described. Twenty-two articles of a representative character have been selected for a comparison of the changes in their prices. A period has been chosen from which the comparison begins ; and, in the special instance of the Economist, the average prices of the years 1845-50 have been taken as the starting-point. The prices of each article on the 1st of January and the 1st of July are noted, and a mean struck, and the prices at the starting-point are regarded in each case as equivalent to 100. In every subsequent year the percentage of the rise or fall of each article is added to, or taken away from, the original 100, and the separate figures are then added together to form a grand total, and; according as that total exceeds or falls short of the original grand total of 2200 reached in the quinquennial period from which the calculation starts, so is 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 ilhistrate the tables of figures by a curve of prices, which ri.ses or falls in relation to a base line as the purchasing-power of

^ Cf. Professor Eilgcworth's article in Economic Journal for March, 1894, on " Recent Writings on Index Numbers."

TJie Mcasureuient 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 eas}' comprehension the meaning of the numerical record ; and no one, who has thus employed it, can have failed to appreciate its value.