Price Levels and the Gold Standard I 1

PRICE LEVELS AND THE GOLD STANDARD I 1. Concept of the general price level. 2. Index numbers. * 3.

Definition of the standard of deferred payments. 4. Increasing im portance of the standard. I 5. Defectiveness of the gold standard. I 6. Relative values of gold and silver. § 7. Gold production, 1800-1850. § 8. Gold production and price changes, 1850-1873. § 9. The great fall of prices, 1873-1896. 1 10. Nature and object of bimetal ism. § 11. The free-silver movement.

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1. Concept of the general price leveL The price of any good is some other good or group of goods given for it in The standard unit of money coming to be the most convenient expression for price (whether or not money be actually passed from hand to hand in any particular trade), prices usually are monetary prices, and more specifically are prices in gold, or in silver, or in whatever constitutes the standard money unit. But the price of each good is a definite, separate fact, which expresses the ratio at which that com modity is sold. The price of any particular kind of goods may fluctuate in either direction as compared with the prices of other goods at the same time. For example, iron and many other goods may rise while wheat and many other goods fall in price. There is, therefore, no such thing as an actual general change in the prices of goods in terms of money, but it may be seen that the prices of large classes of goods, often of nearly all goods, change upward or downward at the same time and in the same general direction. We thus have need to distinguish between changes in the valuations of particular kinds of goods in terms of each other and gen 1 See VoL I, p. 45 ff.

54 eral changes in the valuation of a number of different goods in terms of the monetary unit.

To get some idea of whether such a general trend occurs, the algebraic sum of all the changes in the particular prices of a selected group of goods may be taken, and for conven ience this may be reduced to an average price (by dividing the sum by the number of articles). Such an average is called a general price, and, when comparing it with the gen eral price of another time, we speak of changes up or down in general prices, or in the general scale of prices, or in the price level.

When gold is the standard unit, its value is the converse of general prices; as prices go up the value of gold goes down, and gold is said to depreciate. As prices go down the value of gold goes up, and gold is said to appreciate. Rising prices mean falling value of gold (and at the same time falling pur chasing power), and vice versa.

§ 2. Index numbers. The process of calculating general prices and changes in them has in it, inevitably, something of arbitrariness and incompleteness. For not all prices can be included, but only those of articles of somewhat standardized grades and those that are pretty regularly sold in markets where prices are publicly quoted. No list of articles that can be selected is of equal importance to different persons and classes of persons, at different places, at different times, and for different purposes. And yet the study of general prices as shown by any broadly selected list reveals changes that in some measure affect the interests of every member of the community.

General prices are conveniently compared from one time to another through the use of index numbers. An index number of any article is the per cent that its price at any certain date is of its price at another date (or of the average for a series of prices) taken as a base or standard. Thus if the average price of cotton in the base year were 10 cents (taken as 100) and the price rose to 12 cents, the index number would Fig. 1. INDEX NUMBERS OF PRICES. The four series of prices here shown begin at different periods: the American in 1840 (Aldrich re port 1840-1889 and Bureau of Labor from 1890 on) ; the English in 1846; the German in 1851; the French in 1857. We have adjusted each of these series to a base of the average prices for 1890-1899, in accord with the basic period used by the American Bureau of•Labor.