Cyclopædia of Political Science, Political Economy, and the Political History of the United States

Edited by: Lalor, John J.
(?-1899)
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1881
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New York: Maynard, Merrill, and Co.
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1899
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Includes articles by Frédéric Bastiat, Gustave de Molinari, Henry George, J. B. Say, Francis A. Walker, and more.
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PRICES

III.85.1

PRICES. The price of a commodity is its value in exchange, expressed in money. Courcelle-Seneuil rightly speaks of price as being one kind of value, as it is merely the value of any commodity compared with a certain quantity of a definite commodity. In a system of barter an article may have as many different prices as there are commodities with which it may be compared, as commodity is exchanged against commodity. But when the machinery of a monetary standard is employed, all values are measured and expressed in terms of that standard. Instead of exchanging a coat for a certain number of loaves of bread, of pounds of meat, or of days' labor, and thus roughly arriving at the value of the coat, its value is estimated in terms of the commodity which is at the time and place most current (money), and this is considered to be its value in exchange, its price.

III.85.2

—Adam Smith believed that every article had two prices, a real and a nominal price. "The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. * * Labor was the first price, the original purchase money that was paid for all things. * * Labor alone, therefore, never varying its own value, is alone the ultimate and real standard by which the real value of all commodities can at all times be estimated and compared: it is their real price; money is their nominal price." (Book i., chap. v.) He further discriminates between the natural and the market price of commodities. "When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labor, and the profits of the stock employed in the raising, preparing and bringing to market, according to their natural [i.e., the ordinary or average] rates, the commodity is then sold for what may be called its natural price. * * The actual price at which any commodity is commonly sold is called its market price. It may be either above, or below, or exactly the same with, its natural price. The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to the market and the demand of those who are willing to pay the natural price of the commodity. * * The natural price is, as it were, the central price, to which the prices of all commodities are continually gravitating. * * Whatever may be the obstacles which hinder them from settling in this centre of repose and continuance, they are constantly tending toward it." (Ibid., chap. vii.)

III.85.3

—These few extracts from the "Wealth of Nations" embody the principal doctrines regarding prices; and the labors of economists who have come after Smith, have only elaborated these heads. What Smith, terms the real price is nothing but the value of a commodity; the nominal price is what is now called the price, and the distinction he draws between natural and actual, is today expressed by the cost of producing the article and its market price. What he terms the nominal price, alone concerns us in this article, but this involves a discussion of natural and market prices.

III.85.4

—In an article of this kind it would be impossible to give even a superficial history of prices, as they have from century to century been altered almost with every advance in civilization. Such a history would have to include a complete examination of the growth and movements of population, the various improvements in agricultural and manufacturing processes, the gradual increase in the wealth of the people, its division among them, the opportunities for transporting and marketing commodities, the laws which favor or restrict the power of capital to combine and to create monopolies, the regulations of trades unions which restrict the markets, the systems of taxation employed, the state of the currency, and a thousand other conditions, all of which may influence the prices not only of a single commodity, but even of all commodities. Out of this complexity it would be almost impossible to frame general laws regulating the fluctuations of prices, which may apply under all circumstances. But in a theoretical discussion of prices, certain principles, definite and in the main general in their application, may be laid down. It should, however, be understood, that, whatever interferes with the free movement of labor or of capital, the free exchange of money or of commodities exerts an influence upon prices, preventing them from reaching their normal level.

III.85.5

—The price of a commodity is determined by the relation between demand and supply. It must be obvious that the price of a commodity may vary widely, not only in different markets, but even in the same market. In order to simplify matters, we will suppose that there is but one market, and in that market the competition among buyers, and also among sellers, is so free that there can be but one price for the same commodity at a given time. The price is determined by the struggle of interests between buyers and sellers, and is subject to constant variation, but always tending to such a rate as will equalize the supply to the demand. For example, a certain quantity of a given commodity is in the market, and at a given price a number of buyers sufficient to consume all of this quantity will be found. Should the quantity offered, or the supply, be increased, without any increase in the number of buyers, there will be a certain quantity remaining unsold, and, in their eagerness to dispose of their stocks, the holders will lower their prices, bidding for custom against one another. This reduction in price is usually (some exceptions will be noted hereafter) followed by an increase in the number of buyers, as the commodity is now placed within the reach of a larger circle of customers; so that at the reduced price the demand may be equal to the supply, and as in the former case the whole of the stock may be disposed of. Or another contingency may arise. There may be a greater demand for a given commodity than the market is able to meet. In their eagerness to satisfy their wants, the buyers will bid against one another, and prices will rise. But with every rise in price, there will be some among the buyers who will be unwilling to pay the increased price, so that prices will rise until there is only such a number of buyers as will take the quantity of the commodity offered. Again are the supply and demand equalized, and this is the general law of prices.

III.85.6

—But this supposes a market which has no existence in fact, an ideal market; and a somewhat cursory examination will show that there are an almost infinite number of circumstances acting and reacting among themselves to influence prices; that the commodities in a market do not possess an equal utility to man, some being necessary to his existence, others being consumed at pleasure, and therefore readily dispensed with; that a commodity may possess at one time a very different value from that which it has at another, and yet the conditions attending its production may have remained unchanged. For the present we will suppose that the value of money remains the same (which is by no means the case), and that any alteration in prices arises from some change in the commodity itself. Again, some variations in prices may be of a permanent and others of a temporary character.

III.85.7

—Instead of saying that price depends upon the equalization of demand and supply, we may say that it is governed by the conditions of the market. "Originally," says Mr. Jevons, "a market was a public place in a town where provisions and other objects were exposed for sale; but the word has been generalized, so as to mean any body of persons who are in intimate business relations and carry on extensive transactions in any commodity. A great city may contain as many markets as there are important branches of trade, and these markets may or may not be localized. The central point of a market is the public exchange, mart or auction rooms, where the traders agree to meet and transact business. In London the stock market, the corn market, the coal market, the sugar market, and many others, are distinctly localized; in Manchester the cotton market, the cotton waste market, and others. But this distinction of locality is not necessary. The traders may be spread over a whole town, or region of country, and yet make a market, if they are, by means of fairs, meetings, published price lists, the postoffice, or otherwise, in close communication with each other." In the United States these markets are known as exchanges. (See EXCHANGES.)

III.85.8

—These markets, standing between the producer and the consumer, and composed almost wholly of those whose sole occupation is to trade, tend to equalize prices. "The market price of many things is settled from day to day by the action of dealers rather than by that of producers. Many kinds of raw produce can only be produced at certain times of the year; and the immediate effect of a rise in the price of such things is not to increase the production of them, but simply to induce dealers to bring forward larger quantities for sale, and perhaps to import fresh supplies from distant places. If we go into any corn or wool or cotton market, we shall see dealers selling readily on one day, and holding back on another. The amount which each of them offers for sale at any price is governed by his calculations of the present and future conditions of the markets with which he is connected. There are some offers which no dealer would accept; some which no one would refuse. There is some price which will be accepted by those whose expectations of the future conditions of the market are least sanguine; but not by others. The higher the price that is bid, the larger will be the sales." The main purpose attained by these markets is to afford, as nearly as possible, a complete understanding of the relation between demand and supply at any given time; and prices are governed accordingly. In attempting, however, to anticipate a large demand or an increased supply, these traders are liable to error, and must suffer. They also may combine to buy up all the supply of a commodity, and then force prices up far above their normal level; but these attempts have no lasting effects, and although an abuse, are not sufficient to condemn these exchanges.

III.85.9

—These traders, however, are merely middlemen, and act upon prices only; they can not increase directly the supply, nor govern the demand. They are like a paper machine, which takes in at one end the pulp, and turns out at the other the paper. The machine can not increase the supply of pulp, nor can it make a greater amount of paper from the pulp; it can only work upon what is given to it. So that while exchanges exert an important influence upon prices, their action is rather determined by a set of outside conditions, which might exist were there no such localized markets.

III.85.10

—As extreme examples may be mentioned the sudden fluctuations in prices caused by a demand that could not be foreseen. The price of all black cloths may in a public mourning reach a sum far above what they usually bring, and yet it would not increase production, as the demand would be merely of a temporary character, and not likely to happen soon again. During an eclipse bits of colored glass may be in demand and command high prices. But that is an accidental circumstance. On the other hand, by a change in fashion the demand for a certain class of goods may almost entirely cease, and prices fall to a ruinous rate. Such an event has recently happened to Irish poplin.

III.85.11

—While ordinary variations in prices may be explained by the altered relations of supply and demand, yet in the long run the price of a commodity is determined by its cost of production. Below this cost the price may fall, but it at once sets in motion a series of events, which tend to raise it. As there would be an excess of supply in such a case, when the price fell the producers would take steps to curtail their production, as they could not afford to produce at a loss for any length of time, until this excess had been disposed of, and the competition of buyers had again sent the price up sufficiently high to cover the cost of production. An artificial scarcity is, as it were, made to clear the market. Nor is the result any different when there is a deficiency in the supply. The increased prices offer high profits to producers, who increase as far as possible their own output, and capitalists are tempted to invest their funds in the manufacturer by the hope of reaping the high profit, so that in time the supply is again equal to the demand, and the price has fallen to its former rate.

III.85.12

—In this discussion it has thus far been supposed that the supply is capable of varying indefinitely with the demand, which is not the case in fact. A new limitation must now be made. Commodities may roughly be classed, according to the manner of production, into three groups. The first will include all such as are strictly limited in quantity. In the second will be found those that are capable of being increased in number or in quantity, but at a continually increasing cost. The third group will include those that may be indefinitely produced at the same cost. Each of these classes or groups will require some notice.

III.85.13

—1. Where the supply of a commodity is strictly limited, and is not capable of being increased under any circumstances, it may be said that its value and price are determined by the demand. For example, the prices obtained for rare coins and curiosities, or the works of a deceased artist, may be enormous, but they are determined by what Adam Smith calls the higgling of the market, and are as legitimate as is the price paid for a bushel of wheat. That is to say, by the competition of the buyers they have been raised to such a point that the demand is limited to the supply. Mr. Fawcett, in such cases, divides the value of the article into two elements, absolute utility and difficulty of attainment, and both of these elements must be present whenever an article has an exchange value. "For an article, however difficult to obtain, can have no value unless it is capable either of supplying some want, or gratifying some desire; on the other hand, no article can possess exchange value, if it can be obtained without difficulty, although the article may be of prime necessity. * * Utility is, in fact, almost invariably only partially operative; this is the general rule, for the case may be regarded as a very rare exception when utility, as well as difficulty of attainment, both exert their full influence upon the price of an article. When such a case does occur, the purchaser of a commodity is guided in the price which he offers for it, solely and entirely by the consideration of the use he expects to derive from the article. This can only happen when the supply of a commodity is absolutely limited." (Book iii., chap. ii.) The same principle has been expressed by Marshall ("Economics of Industry") in what he calls the "law of demand": "The price of a commodity measures its final utility to each purchaser; that is, the value in use to him of that portion of it which is only just worth his while to buy."

III.85.14

—2. In commodities of the second class an increased demand can only be supplied at an increased cost. As representative of this group may be instanced agricultural products. In an old country where the land is limited in quantity, a new demand for wheat (as an example) can be met only by a resort to uncultivated lands, or by increasing the yield of those already under cultivation. It must be obvious, that at a given time all lands that are fitted to grow wheat and return the average profit to the cultivator, will be turned to that use. So that in resorting to new land, it must bring under cultivation land of an inferior quality, or situated remote from the markets, that will yield a less average product to the tiller. The cost of producing the wheat that is grown on these poor lands will determine the price of all wheat. That is to say, while wheat may have as many different costs of production as there are qualities of land, its price is determined by the cost of producing it under the least advantageous circumstances. To secure the fertility of a given piece of land already under cultivation, additional labor and capital must be expended upon it. But after a certain period the returns obtained are not commensurate with the additional expense incurred; after a certain amount of capital has been applied to land every increase in produce is secured by a more than proportionate increase of capital. Such an investment of capital must follow, just as a resort to an inferior quality of lands precedes and enforces a rise in the price of the product. The general tendency, therefore, of the prices of agricultural produce, is in the long run to increase. This same principle applies also to mining operations, as mineral deposits are limited. Of course the opening up of vast extents of unoccupied and fertile soil, or the discovery of new and productive mines, may not only counteract this tendency of prices to rise, but may even produce a fall, by offering very much greater advantages than existed before. The application of improved processes to agriculture, both such as enable the land to yield a greater absolute produce, without an equivalent increase of labor, and such as diminish the amount of labor and expense of obtaining a given produce, may prevent a rise in the price of the produce. Mining operations are more susceptible of mechanical improvement than agricultural, and therefore the antagonizing agency against a permanent rise in the prices of mineral products is more active than in agriculture. The law of diminishing returns, that natural agents that are limited in quantity are also limited in their productive power, but that long before that power is stretched to the utmost they yield to any additional demands on progressively harder terms, holds true, as it is only suspended, not annulled, by improvements in the arts of production. (Mill.)

III.85.15

—Agriculture has been able to profit least by the important advances made in recent times, and consequently there are not such active forces to counteract the tendency for the prices of agricultural products to increase, as there exist in purely industrial operations. The principle of a division of employments can be applied only to a limited extent in the cultivation of land, and the introduction of machinery is not followed by that wonderful increase which accompanies its use in manufactures. The land possesses a certain fertility, which becomes exhausted as successive crops are taken from it, unless it is renewed. At the beginning of the eighteenth century it was a common usage to grow successive crops of white corn until the land was utterly exhausted, when it was left to recruit itself by resting in a state of nature. while other portions were undergoing the same process. The practice of fallowing annually a portion of the arable land, and of interposing a crop of peas between cercal crops, was even then becoming common, and at a later period green crops, such as turnips, clover and rye grass, were alternated with grain crops. This rotation of crops increased the capacity of the soil, and the improvements in the breeding of live stock, the preparation of artificial manures, and the application of better methods to the cultivation of the land, were reflected in the increased productiveness of the soil. These steps have required a great outlay of capital, and if the laws prohibiting or restricting the importation of agricultural produce had not been repealed, England could not have obtained sufficient food for her population from her own soil, and what wheat she did grow would have sold at famine prices. In spite of these many advances in practical agriculture, the average yield per acre in England has steadily diminished. While it was 29.3 bushels during the decade 1849-58, in the following ten years it was 29.1 bushels, between 1869-78 only 25.6 bushels, and in 1879 it had fallen to but 16 bushels. Mr. Laird then wrote that, "In the United Kingdom we appear to have approached a point in agricultural production beyond which capital can be otherwise more profitably laid out than in further attempting to force our poorer classes of soils." It had become cheaper to take the surplus production of Russia, India and the United States, and the tendency of the price of wheat to rise was thus checked.

III.85.16

—It is said that rent does not enter into the expenses of production, because the price of a commodity is regulated by the expenses of producing that portion which is raised under the most unfavorable existing circumstances. For example, the price of wheat is governed by the cost of growing a bushel upon the poorest quality of land cultivated, so poor that it can not and does not pay rent. So that if rent, which is but the surplus produced by the better lands over this margin of cultivation as fixed by the poorest lands, were abolished, the price of grain would remain unchanged. This was Ricardo's theory, and, if properly understood, is true. That is to say, rent does not make price, but price, rent. If a demand for grain arises, and the increased price will enable lands hitherto not capable of growing wheat and returning the expenses of production to be cultivated, the rent of all other more productive lands will rise. The increased price of grain has extended the margin of cultivation, and rents have been increased. The same principle applies also to manufactures. But in estimating the cost of producing or manufacturing, or even selling, any product, rent must be included as a factor. When water power was chiefly used in manufactures, the sites where water power was to be obtained, were sought and commanded high rents. The most available business sites in a city are soon occupied, and may command almost fabulous prices. The farmer who pays rent for a certain piece of soil can not compete successfully with another who owns, or hires at a lower rent, land of a like degree of fertility; and for this reason, the wheat growers of England, who have to pay high rents for their land, can not contend against wheat grown in America by farmers who obtain rich lands for a mere trifle.

III.85.17

—But as land is limited in quantity, while population and the demand for land are continually increasing, the price of land and also the rent of land rise. An examination into the price of land in France showed that the average price per hectare had been quadrupled since 1789, tripled since 1815, and doubled since the first years of the rule of Louis Philippe. As regards rents, little that is definite can be said. In France it is estimated that in rural districts the rents of agricultural lands are about 3 per cent. of their value, being governed almost entirely by the returns the land will make to the tenants. In large towns and cities they may be as high as 20 per cent. of the value of the land, as the most available business sites may command that rent, and yet allow the full rate of profit to the tenant. Some agricultural lands, such as are fitted to produce certain vines giving a peculiar wine, may also command what appear to be exorbitant rents. It may even happen that the price of land and of rents diminish, as, for example, in small villages which are drained of their population by a neighboring large city. Such cases are, however, not so frequent as to affect the general tendency of prices with respect to land.

III.85.18

—Of commodities in the third group, that is, such as may be increased to an almost unlimited extent without an increase in their cost, manufactures may be said to form a large part. As most manufactures, however, consume articles that are the produce of the soil, it might be supposed that they would follow the laws governing the value of those articles. This is in a measure true, but only to a limited extent. The value of an agricultural or mineral product lies almost wholly in the value of the raw material, the labor expended being merely one of appropriation. Any increase in the difficulty of obtaining the raw material is added, to its full extent, to its cost. It is not so with a manufacture. Here there are three elements, or factors, which enter into the price of the finished product: 1, the cost of the raw material; 2, the plant necessary to carry on the process of manufacture; and 3, the labor employed. Of these three factors the cost of the raw material plays the least important part, and a fluctuation in its price must be a great one to be felt in the product. For example, a rise of 20 per cent. in the price of flax would not cause the price of linen cloth to rise as much as 5 per cent. An increased demand for a manufacture, as a rule, affects only the price of the raw material. There may be, and generally is, an increase in the price of the finished product when the demand is greater than the supply. But this increase is only temporary, and is corrected by the increased production which follows the extension of works by the introduction of new capital. There need not necessarily, therefore, result any permanent increase in the cost of production, and consequently in price, save as respects that which follows the rise in price of the raw material used in the manufacture, and this is generally so small as to be inappreciable. In this group of commodities the price more nearly approximates to the actual cost of production than in the first and second groups, as the competition among manufacturers is more active.

III.85.19

—It may even happen that in the face of a greatly increased demand the prices of manufactured products may fall. In our former position we assumed that no increase in the cost of the necessary plant or of the labor employed was occasioned by such an alteration in the demand. The cost of production may be lessened. This follows from the increased productiveness that may be caused by conducting manufacturing operations on a large scale, as it allows a more complete division of employments, thereby causing a greater degree of skill in the labor, a saving in the material, and an economy in many of the processes and methods. As the extent to which this saving process may be carried depends upon the extent of the market, and as the market is, in the case of commodities that are necessary or even of voluntary consumption, enlarged by a reduction in the price, which brings them within the reach of a wider circle of buyers, there is practically no limit to which the price may not attain. Through improvements in machinery and processes of manufacture the price of the product may fall as the enlarging of the market offers new opportunities for applying such improvements. Should, however, a marked rise in wages occur, the cost of production is increased and the price of the manufacture generally follows, but this is neither a usual nor a lasting result.

III.85.20

—General prices have their periods of ebb and flow, rising at one time and falling at another, according to the general conditions of trade and industry. These general movements have a certain periodicity, rising until checked by a financial or commercial crisis, and then falling until again raised by a new demand. Thus, the years 1837, 1847, 1857, 1866 and 1873 were marked by extremely high prices, but they were succeeded by years of falling prices. "When trade is good, a state of things is created in which a downward movement of prices is sooner or later inevitable. A great stimulus has been given to production in certain favorite industries; capital has been employed in creating new establishments, or in extending fixed works and plant; laborers have flocked into the trade, attracted by high wages; at a point the demand is found to be below the supply, the prices of the manufactured article become unremunerative, and in time the raw material and labor employed in the trade are at a discount. The fall is precipitated, moreover, by the inability of speculative holders of stocks to hold on in the face of falling markets. At each new stage of the decline new sales become necessary, till there is apparently no limit to the fall, just as before there seemed to be no limit to the rise. By sympathy almost all markets come to be affected, the low prices in one market attracting capital to it, and so weakening other markets, while speculators who are hit in one department of trade seek to cover their losses by sales of some commodity or stock which has not depreciated." (Giffen.)

III.85.21

—This course of events may be illustrated by an example. The year 1873 marked the culmination of an era of great speculation and inflated prices. During the following six years, or until 1879, the depression of trade and industry became more and more aggravated, and was accompanied by a gradual fall in prices. This will be shown by the following table:

III.85.22

Table.  Click to enlarge in new window.

III.85.23

It will be noted that the fall in the price of food products was relatively less than of manufactures and raw materials of manufactures.

III.85.24

—As 1873 was the period of maximum inflation, so 1879 was the year of greatest depression. In that year, however, a reaction occurred, and was marked in this country by a great revival in the construction of railroads, which resulted in a great increase in the demand for iron and steel. So great was the demand that production could not for some time meet it, and the course of prices in the iron trade during the last four years (1879-83) will afford a very good example of the manner in which the supply and demand are equalized, in accordance with the law we have already described.

III.85.25

—At the beginning of 1879, pig iron was selling at about $18 per ton. The sudden demand was such that neither domestic production nor importations of foreign iron were able to satisfy it, and in February, 1880, the price had risen to $41 per ton. This exceptional condition could not, however, continue for any length of time, as the promise of rich profits induced the blowing in of all furnaces that had remained idle during the long period of depression, and gave a stimulus to investments in new blast furnaces. In April, 1879, but 241 furnaces were in blast; one year later the number had increased to 431; at the same time in 1881, to 453, and in 1882, to 457. Meanwhile, however, the supply was being adjusted to the demand. During the years 1880-82 there were laid 27,875 miles of new lines, but the mileage laid down was already beginning to be less, and new enterprises were slowly taken up by capitalists. This decrease in the demand for iron and steel. While the price of pig iron was, in February, 1880, $41 per ton, the average price for the year was $28.50; for 1881, $25.12, and for 1882, $25.75; showing that the vastly increased production was bringing prices to a normal condition. During the first six months of 1883 the high rate of production was maintained, but in the face of a continually diminishing demand, so that prices fell to $20 per ton, and less. The producers then commenced to restrict their output, and furnaces were closed, so that while in April, 1882, there were 457 furnaces in blast, in April, 1883, there were only 375, and many others were on the point of shutting down. In time conditions will again be equalized and production resumed.

III.85.26

—The fluctuation in prices must vary widely according as they apply to commodities that are necessary to support life, or to those which may be dispensed with. For example, food is essential to existence, and any deficiency will produce an alteration in price out of all proportion to the amount of the deficiency. Men must have food and a certain quantity of it; it has been noted that the consumption of food of men in easy circumstances does not differ widely in times of abundance and of dearth. If the price of food rises, they curtail their expenditures in other directions, so that a scarcity of food is very apt to be accompanied by a general prostration of industry, and the only trade that thrives is that which deals in food products. The fluctuations that occur in the price of food have a very wide range, and are great even when there is no famine or real dearth. At the conclusion of the seventeenth century, Gregory King estimated that a deficiency in the harvest would raise the price of corn in the following proportions: A deficit of one-tenth would raise the price above the common rate three-tenths; a deficit of two-tenths would raise it eight-tenths; of three-tenths, one and six-tenths; of four-tenths, two and eight-tenths; and of five-tenths, four and five-tenths. (Quoted in Davenant's Works, vol. ii., p. 224.) In a famine there is no limit to prices of food save the ability of the consumers to buy. Whatever affects the supply of grain (taking this as a representative article of general and necessary consumption) will be reflected in prices, and prices will vary in a ratio very different from the variation in quantity. Mr. Tooke observes that the price of corn in England has repeatedly risen from 100 to 200 per cent. and upward, when the utmost computed deficiency of the crops has not been more than between one-sixth and one-third of an average. The cause of this is not difficult to determine. At the time he wrote, there were laws which prohibited, except under certain conditions, the importation of corn into England, and the home crop was chiefly depended upon. Agriculture is, however, most uncertain, and until the harvest is actually secured, it is as likely to be deficient or to fail utterly through meteorological influences which it is beyond the power of man to control. A deficiency, whether it really exists or is only apprehended, becomes under such circumstances a serious matter, and, being exaggerated, forces the price beyond what is justified by the facts. "The more the mere forces of nature preponderate in production, the less can the supply be increased or decreased at pleasure; the more frequently, as a consequence, do we find monopoly prices. Thus, the production of wheat is invariably connected with the order of the seasons. Between seed-time and harvest, there are a number of months which neither capital nor skill can shorten to any extent. The cultivation of land, to be very much greater and more lasting, supposes so many conditions precedent, increase of live stock, buildings, etc., that it can be attained only after a series of years. Hence it happens that wheat, much more than manufactured products, is subject to oppressively high and to oppressively low prices, during a long period of time. No matter what the influence of the forces operating in the opposite direction may be, the price of wheat depends most largely on the result of the last crop." (Roscher, "Political Economy," cxii.) These violent fluctuations are, however, corrected in proportion to the extension of the market. Wheat varies in price much less now when there are three great wheat exporting countries, Russia, India and the United States, than it did when there was but one.

III.85.27

—As regards manufactures, while, as we have already seen, there may occur violent fluctuations in price by reason of a sudden demand, yet they are soon corrected by an increased supply, as capital and labor may be had to almost any extent.

III.85.28

—It is hardly necessary to more than note the great influence which the cost of transportation has on prices, and how great changes have been produced by every improvement in the means of carrying commodities from the place of production to the place of consumption.

III.85.29

—Among the many circumstances that may artificially affect prices may be mentioned the attempt to determine them by law. "Fixed prices by governmental authority were soonest attempted after bad harvests." Nor was the attempt confined to articles of necessity. for the rate of wages has also been subject to such measures. As prices are governed by a number of conditions over which the law can have no control, such ill-considered efforts are worse than useless, because, by interfering with natural conditions, they may work great mischief. A curious survival of these laws, which are to be met with in the history of all nations, lies in the usury laws, which attempt to fix a limit to the rate of interest.

III.85.30

—There are, however, other circumstances that may artificially raise prices. For example, there may not exist free competition among producers, but one of a limited number may alone have the power of producing or of selling the commodity. A man may possess, say, all the available mines of a certain metal, and this will enable him to fix his own price; a patent may confer the same power upon an inventor or one who disposes of the patented article. In such cases the price depends upon the ability of the purchaser, and also upon the position of the vender. If he holds a complete monopoly, he may almost fix his own price; but if at a certain limit, competition may be called out, he must make his price below this limit if he intends to reap the full profit. In either case the price is a monopoly price. Caprice or fashion may for a time succeed in forcing prices far above their normal level. The price of false hair was enormously increased during the time when fashion dictated the wearing of enormous masses of hair grown by others than the wearer. In time of war the supply of some commodity may be partially or wholly shut off, and almost fabulous prices may be the result. The price of cotton was quadrupled during the rebellion, on account of the blockading of the principal southern ports, and for a time a veritable famine in cotton existed. Or the ravages of disease or of insects may produce a scarcity. The price of wine in France attained the highest limit when the oïdium ravaged the vines.

III.85.31

—It has been assumed that the value of gold and silver, the currency in which prices are expressed, remains unaltered. We must now consider the effects of changes in the value or purchasing power of the circulating medium. The value of the precious metals is governed by the same laws which regulate the value of other commodities, and in the long run depends upon the cost of production. Being, moreover, products of the earth, their supply is in any one district limited, and an increased quantity can be secured only with a greater expenditure of labor and capital, and consequently at a greater cost. They belong, therefore, in the second group of commodities. This tendency, however, of the value of gold and silver from time to time to increase, has been counteracted by the discovery of new and productive mines, and in some cases the supply has been so much increased that a marked fall in prices has resulted. The value of money is determined by comparing it with other commodities. If at one period a yard of cotton cloth is worth fifty cents, and at another only twenty-five cents, two things may have happened. Either the cost of producing the cloth may have been decreased to that extent, or the purchasing power of money has been increased. In the first case, the value of the cloth, as compared with other commodities and with gold, will have fallen; and in the second, the value of the cloth, as compared with other commodities, may have remained unchanged, and it has changed only as regards gold. In this latter case the value of gold will have been altered, and as it measures the value of all other commodities, their prices will also be changed. A general rise or a general fall in prices is due to a change in the value of money. Hence the value of money varies inversely with general prices, rising as they fall, and falling as they rise.

III.85.32

—The value of money varies with the supply, like the value of any other commodity. If the exchanges of a community remain unchanged in quantity, by doubling the amount of money in circulation, general prices would also be doubled; by halving it, prices would fall one-half. "The value of money, other things being the same, varies inversely as its quantity; every increase of quantity lowering the value, and every diminution raising it, in a ratio exactly equivalent." (Mill.) In order that this law may be true, we must suppose that gold and silver alone constitute the currency, and that credit in no form is used. Credit has, without regard to the form it may take, exactly the same purchasing power with money; and an exercise of the credit power has the same effect upon prices as would an equal amount of money, because prices depend upon purchases. "By far the most powerful influence exerted by credit on prices is caused by increasing the purchasing power of the country. If it were not for credit, the demand for commodities would frequently be much less than it is. In fact, when credit is freely given, the demand for a commodity may increase without any assignable limits; when the demand is so stimulated, prices may temporarily rise in a very striking manner. We lay particular stress upon the word 'temporarily,' because, as frequently stated, the price of all commodities, except those whose supply is absolutely limited, must always in the long run be regulated by their cost of production. But although cost of production determines a point toward which the prices of commodities must ultimately have a tendency to approach, yet the prices of commodities may temporarily either very much fall short of their cost of production, or be greatly in excess of it. These variations in price are due to sudden fluctuations in the demand and supply of any particular commodity; nothing exerts so powerful an influence in producing these fluctuations as an extended system of credit. If no credit were given, and if everything were consequently paid for by money directly it was purchased, there would be little speculation; commodities would generally be bought as they were wanted; everything connected with trade would be regular and uniform, and there would be no great variations in the demand." (Fawcett.) "Money and credit," says Mill, "are exactly on a par, in their effect on prices."

III.85.33

—Any event which largely increases the amount of money in circulation will alter its value, and cause prices to vary. In ancient times, when large stocks of gold and silver were hoarded by the state, or in the temples, or by private individuals, the opening of such reservoirs produced great revolutions in prices, but the effects were almost wholly local. In modern times such revolutions have been caused by the discovery and working of large deposits of gold or silver. Thus, about the beginning of the sixteenth century the mines of Peru, and later on, of Mexico, began to pour their products into the lap of Europe. Humboldt estimates that the annual export of gold and silver from America to Europe, between 1492 and 1500, amounted to 250,000 piastres; between 1500 and 1545 to 8,000,000; and from that time to 1600, to 11,000,000. According to the same authority, Europe, before the time of Columbus, had a circulation of 170,000,000 piastres; about 1600, of 600,000,000. A rapid depreciation in the value of money occurred in this period. The prices of rye in Saxony from 1525 to 1550 were twice as high as from 1475 to 1500. According to Garnier, the French prices of wheat, from 1450 to 1500, were on an average 4.08 francs of the present price per setier: from 1501 to 1520, 5 francs; from 1522 to 1540, 11.26 francs; from 1541 to 1560, 11.69 francs; from 1561 to 1580, 21.33 francs; and from 1581 to 1600, 82.51 francs. In England the price of wheat from 1560 to 1600 was 2.64 times as high as from 1450 to 1500. According to the French writer Mantellier, the purchasing power of silver, as compared with the average value of twenty-seven commodities, assuming it to have been 1.0 from 1750 to 1850, was 2.9 from 1350 to 1450; 2.8 from 1450 to 1550; and 1.5 from 1550 to 1650. Mr. Tooke says ("History of Prices," vol. vi., p. 232), that "no rise in prices can be discovered until 1570, fifty years after the entry, of the Spaniards into Mexico, and almost thirty years after the discovery of the Potosi silver mine in Mexico." But the figures we have just quoted show that the purchasing power of silver had begun to decline even before the supply from America could have produced any effect. Roscher attributes the fall in the value of money to the fact that at this period in many nations there was a "transition from a sluggish circulation of money, made still more sluggish by the custom which everywhere prevailed of hoarding treasure, to a rapid circulation, which was made still more rapid by the use of all kinds of substitutes for money. Adam Smith believed that till 1570 the value of silver did not fall, but an historical table of English coins would show that a great change occurred between 1546 and 1551; for while the ratio of gold to silver in the former year was as 1 to 5, in the latter it was 1 to 11, and in 1626 had become 1 to 13.3. It is known that from 1570 to 1640 the purchasing power of silver fell rapidly, and the ultimate range of prices was reached in 1640. Alison ("History of Europe") sees important consequences attending the increased supply of money. "The annual supply of the precious metal for the use of the globe was tripled; before a century had expired, the prices of every species of produce were quadrupled. The weight of debt and taxes insensibly wore off under the influence of that prodigious increase; in the renovation of industry, the relations of society were changed; the weight of feudalism cast off; the rights of man established. Among the many concurring causes which conspired to bring about this mighty consummation, the most important though hitherto the least observed, was the discovery of Mexico and Peru." And Mr. Cairnes declared that the new supplies of gold and silver "supplied and rendered possible the remarkable expansion of oriental trade, which forms the most striking commercial fact of the age that followed." ("Essays in Political Economy," p. 110.) On the other hand, it was followed by much misery and hardship. "So rapid was the fall, so great the disturbance of trade and industry that followed, so wholesale the reduction in the value of fixed incomes and permanent charges, that widespread distress and much permanent pauperism resulted. * * Mr. Jacob attributes to the overwhelming changes in the purchase power of money, at this period, that sudden increase of pauperism which gave occasion for the establishment of the English poor laws, and those financial embarrassments of Charles I. which led to the great rebellion. Instead of a slow and gradual diminution of the weight of indebtedness, debts were, in many cases, almost confiscated by the rapid depreciation of the money in which they were to be paid. The creditor class was very generally impoverished, if not hopelessly ruined." (Walker, "Money," p. 136.)

III.85.34

—From 1640 the value of money appears to have been quite stationary. During the seventeenth century the annual export of gold and silver from America to Europe was, according to Humboldt, about 16,000,000 piastres; during the first half of the eighteenth century it was 22,500,000, and during the second half, 35,300,000. He estimated that in 1700 Europe had a circulation of 1,400,000,000 piastres; and in 1809, 1,824,000,000. But in spite of these increased supplies the variations of price are rather to be attributed to alterations in the commodities themselves, and not to changes in the value of money. Mr. Jevons believed that the value of gold did undergo extensive variations during the latter part of this period. "Between 1789 and 1809 it fell in the ratio of 100 to 54, or by 46 per cent. From 1809 to 1849 it rose again in the ratio of 100 to 245, or by 145 per cent." ("Journal Statistical Society," June, 1865.) And there are other facts which would prove that there was an extensive disturbance of values at that time. Roscher attributes the fall in value to the restrictions imposed by the war upon the free circulation of commodities, and the rise which occurred 1818-48 to the removal of these restrictions.

III.85.35

—In 1848 large deposits of gold were discovered in California, and three years later in Australia. The Mexican and Peruvian deposits were chiefly of silver, but the produce of these new mines was largely gold. At about the same time the Russian gold mines became very productive. At once a panic arose in Europe over the results that must flow from such a vast increase in the supply. M. Chevalier in France recommended the adoption of a single standard of silver in that country, and his work was translated by Mr. Cobden in England. But the best examination into the effects of the new discoveries is to be found in Mr. Cairnes' "Essays on Political Economy," to which we must refer our readers. Mr. Rogers says that it is calculated that, between the years 1848-68, gold valued at £657,000,000, and silver at £345,000,000, were added to the stock of the precious metals of the world. A goodly share of the silver has been absorbed by India and China, the "London Economist" estimating that, between 1858 and 1872, upward of £90,000,000 was sent to those countries. As to the real effect of these discoveries on general prices little is known. Mr. Jevons believes that the value of gold fell at least 20 per cent. between 1849 and 1874. As compared with silver, its value did not materially alter between 1850 and 1866. The discovery of large deposits of silver in the United States caused the price of silver to fall, and the fall was accelerated by its demonetization in Germany and the Scandinavian countries in 1872-3. So that, while the ratio of gold to silver was, in 1867, 1 to 15.57, in 1878 it had become 1 to 18. Such was the expansion of trade and the increase in the uses for money during the period that has elapsed since the Californian and Australian mines were opened, that it may be doubted if there has been so great a variation in prices as Mr. Jevons imagines. And as a proof of this, it may be noted that during the last few years a number of economists have raised a cry of a scarcity of gold, that its value is appreciating, and prices of commodities are tending downward. (See Giffen, "Essays in Finance," and the files of the "London Economist" during the last four years.) An exceedingly valuable essay upon the "Distribution and Value of the Precious Metals in the Sixteenth and Nineteenth Centuries," by Prof. T. E. Cliffe Leslie, will be found in "Macmillan's Magazine," August, 1864.

III.85.36

—Prices under an inconvertible paper currency, whose value is always purely arbitrary, may reach almost any limit.

III.85.37

—Of prices in the United States, little study has ever been made. In colonial times prices fluctuated widely, and indeed until long after the revolution. This was due, not so much to the scarcity of money, as to the almost total absence of a market, which is at once an incentive to production and a regulator of price. The scarcity of money led to the regulation of prices of labor by law, and also to a resort to wampumpeag, or shell money, and a barter currency. Silver prices fell enormously, and there were many complaints. The crops were limited and uncertain, and until 1641 there was little or no trading. In that year New England commenced to build up her carrying trade, and in 1652 was enabled to establish a mint, the pine tree shilling then coined becoming the standard of value. The barter currency was still maintained, as was also the wampum, so that silver was exported. In time, paper issues were resorted to, at first under such limitations as to prevent depreciation, but later excessive issues were made. Every change affected prices in the same way that like restrictions affect them to-day. Numberless laws were passed with the intention of preserving a balance between the prices of labor and merchandise and the currency, but to no purpose. "Whereas there hath bene divers complaints made concerning oppression in wages in prizes of commodyties in Smith's worke, in excessive prizes for the worke of druaghts and teames and the like, to the great dishonor of God, the scandell of the Gospel, and the griefe of divers of God's people both heare in this land and in the land of our nativity," etc. (Mass., 1638.)

III.85.38

—The elder Winthrop wrote about 1640, that "the scarcity of money made a great change in all commerce. Merchants would sell no ware, but for money. Men could not pay their debts, though they had enough. Prices of land and cattle fell soon to one-half and less, yea, to a third, and after to one-fourth part." In that year the price of Indian corn was fixed by law at four shillings, of summer wheat at six shillings, of rye and barley at five shillings, and of peas at six shillings a bushel. The interest of money was fixed at 8 per cent. The prices of corn, cattle and other produce were continually falling, and the wages of labor was made to follow. In 1646 the law determined the rate at which cattle should be taken in payment of public dues: cows of four years old and upward, £5; heifers and steers, between two and three years old, 50s., and between one and two years, 30s.; oxen of four years and upward, £6; horses and mares of four years and upward, £7, etc., etc., and such estimations were frequently made. In 1693 the rate of interest was reduced to 6 per cent. Prices were in great confusion by reason of the many currencies then used. Madam Knight gives this sprightly account of a bargain: "They give the title of merchant to every trader, who rates his goods according to the time and specie they pay in; viz., pay, money, pay as money, and trusting. 'Pay' is grain, pork and beef, etc., at the prices set by the general court. 'Money' is pieces-of-eight, ryals, Boston or Bay shillings, or good hard money, as sometimes silver coin is called; also wampum, viz., Indian beads, which serves as change. 'Pay as money' is provision aforesaid one-third cheaper than the assembly set it; and 'trust,' as they agree for the time." A knife, worth in hard money six pence, would cost twelve pence in pay, and eight pence in pay as money. In 1712 a régime of depreciated paper money existed, and a few years later banks were resorted to. Between 1712 and 1716 the price of silver rose from eight to twelve shillings per ounce. In 1720 a long list of commodities receivable for public dues at prices determined by the general assembly, was issued, but was repealed in 1723, only to be renewed as occasion seemed to require. In 1727 silver was at seventeen shillings per ounce; good merchantable beef at £3 per barrel; pork, £5 10s.; winter wheat, eight shillings; summer wheat, seven shillings; barley and rye, six shillings; Indian corn, four shillings per bushel; and other commodities in proportion. The condition of affairs became worse in spite of numerous financial expedients for bettering them. In 1741 Gov. Shirley stated that exchange between sterling and Massachusetts paper was 450 per cent. in favor of the former. As showing the condition two lines may be quoted from an almanac of 1749:

"The country maids with sance to market come,
And carry loads of tattered money home."

III.85.39

In 1748 the price of silver was forty shillings per ounce, and one year later had risen to sixty shillings per ounce, the prices of commodities following. Then began the oppressive measures of the English parliament, which ended in the revolution. The issues of continental currency deranged values everywhere.

III.85.40

—In 1776 monopolies and extravagant prices in the necessaries of life were important questions, and in 1777 Massachusetts passed a law fixing the price of labor and of commodities: Farm labor in summer shall not exceed three shillings per day; wheat, 7s. 6d. per bushel; rye, 5s.; wool, 2s. per pound; beef, 3d. and 4d. per pound; cotton, 3s. per pound by the bag; flannel, 3s. 6d. per yard; flour, 25s. per cwt.; bloomery iron, 30s. per cwt. at the place of manufacture, etc., etc.

III.85.41

—Much the same course of events was experienced in the other colonies. In Rhode Island, for example, rum, which sold for 13s. per gallon in 1746, brought £1 in 1748, and £1 8s. in 1754; molasses, £1 3s. per gallon in 1746, and £2 11s. in 1765, salt, 14s. per bushel in 1746, £1 16s. in 1748, and £2 13s. in 1765; flour, £18 1s. per barrel in 1748, and £45 4s. 9d. in 1769. In 1779 a convention fixed the price of rum at £6 15s. per gallon; of molasses at £4 16s. per gallon; and of salt at £10 per bushel. Tea was worth £5 17s. per pound; cotton, £1 17s. per pound; wool, 18s. per pound; Indian corn, £4 10s. per bushel; and bloomery iron, £27 per cwt. The wages of a common laborer was fixed at £2 8s. per day, and other labor in proportion.

III.85.42

—It must be obvious that little would be gained by a more extended study of these prices. They show a period of enormously inflated prices, induced by excessive issues of an irredeemable paper currency. When in 1781 the legislature of Virginia by law fixed the scale of depreciation of the continental currency at 1000 to 1, values were no longer measured in this medium. Throughout this period congress passed legal tender acts, laws determining the prices of labor and of commodities, and laws against "forestalling" and "engrossing," but all to no purpose. The currency was subject to higher laws than those of a legislative assembly, and prices were governed by the currency. As illustrating the effects of an over-issue of an irredeemable currency, the period is most instructive; but as regards prices, it is almost barren of results. After 1781 specie began to come into the country, and a more normal régime of prices was established.

III.85.43

—For the subsequent period there exist few data for any complete history of prices, and before attempting to summarize what material is at hand it will be well to look at the conditions of production and the means of marketing the results. The farmer himself was the principal consumer of the produce raised on his farm, and his few and simple wants were almost wholly satisfied by his household. In 1809 Gallatin estimated that about two-thirds of the clothing (including hosiery) and of the house and table linen, worn and used by the inhabitants of the United States not residing in cities, was the product of family manufactures. What few things could not be supplied in this way he obtained of the village tradesman or mechanic, between whom and the surrounding farmers a limited amount of exchanges took place. But everything was local. The roads were bad, the cost of transporting produce was such as to prohibit any resort to a distant market, and confined as he was to a limited territory there was little inducement for the farmer to grow more than was sufficient to supply his own wants. Prices also were local. In the neighborhood of cities, farm produce was higher in price than in the interior, and the further one went from the city the lower fell the price, because there was no market for it. Moreover, prices fluctuated widely; wheat might be very low one year, and at famine prices the next; it might be superabundant in one county while very scarce in a neighboring district, the difficulties attending its transportation prevented an equalization of conditions. Nor were there the means for marketing the produce, as the merchant class were rather engaged in a foreign and not in a home trade, the former being the more profitable. As the markets were limited, manufactures were in their infancy. In fact, everything was primitive, and prices also were in a rudimentary condition. "Where the economic life of a people is still undeveloped, and the production of one enterprise is not from the first based on the estimated consumption of another, the circulation of goods brings with it great profits and great losses; whereas, profits and losses grow smaller, but at the same time more uniform and regular, in proportion as the circulation of goods increases in rapidity and regularity." (Stein.)

III.85.44

—Such was the condition at the beginning of the revolution. Laws not only restricting their power of manufacturing, but also their power of trading, had been imposed on the colonies by parliament, so that they were forced to depend upon their own exertions, both for the munitions of war and the necessary articles of consumption, which had previously been chiefly imported from Great Britain. Exhausted by the long war, and without funds or credit, with no regular markets for their produce, jealous of one another on account of commercial regulations, and pressed with taxes, some of the states had recourse to paper money and legal tender laws. It was a period of great suffering and depression, and the range of prices differed in each state according to its currency, and in each district according to its natural characteristics and the means of access. On the formation of a stable central government, confidence was restored, and with the year 1795 one of our tables of prices begins. Already the chief industries of the country were agriculture and commerce. The European wars, which began in 1793, gave a great impetus to both, a great proportion of the carrying trade of the world being thrown into the hands of the neutral Americans. The wars lasted until 1807: in that period the registered tonnage increased from 367,734 to 848,306, and while the exports of domestic produce increased barely one-fifth, the export of foreign products increased nearly 125 per cent. In years of scarcity in England the export of grain would expand, and the export of cotton show some growth; but generally speaking, the country had only a small foreign market, and was content to do the carrying trade for other nations. Pitkin says of these years: "We have before us a table giving the price of flour at Philadelphia from 1785 to 1828, a period of forty-four years, the accuracy of which, we believe, may be relied upon. The average price of flour, from 1785 to 1793, according to this table, was $5.41 per barred, while the price from 1793 to 1807 (excluding the years 1802-3, when Europe was at peace under the treaty of Amiens), being twelve years of war, was $9.12, making a difference of $4.71 per barrel. * * By adverting to the price from 1820 to 1828, after Europe had again settled down in peace, it was reduced to $5.46, being only five cents more than in the first-mentioned period. The advanced price of agricultural productions, during the long wars in Europe, was accompanied by a great advance in the price of lands in the United States."

Table.  Click to enlarge in new window.

III.85.45

—In November, 1807, the Berlin decree and the British orders in council led to the withdrawal of the larger part of the foreign commerce of the country from the ocean. The value of the total exports fell from $108,343,150 in 1807 (of which $48,000,000 were of domestic produce), to $22,130,960 in 1808 (of which but $9,500,000 were of domestic origin). Shut out from foreign markets for the time, prices naturally fell sharply, and this our table shows. In 1809, however, the export of domestic produce rose, but was not so large as in 1806-7, and was seriously interfered with by the war of 1812-14, and fell in value in the latter year to less than $7,000,000, although our table shows that prices ruled high. The carrying trade was for that year nil. This compelled a greater attention to the development of the internal resources of the country, which had up to this period remained almost unnoticed. By shutting off commercial relations with the outer world the embargo acts, non-intercourse laws, and, finally, the war, gave an impetus to domestic manufactures, by creating, as it were, a market for their products. During the war prices ruled high, and in some of the states were further inflated by redundant paper issues. In 1812-13 silver flowed to New England, being displaced in the other colonies by the paper currency. In 1814 business was brisk and prices rapidly advancing, when the bubble burst, and all banks outside of New England suspended. The paper issues increased, and prices continued to rise. "Money lost its value. The notes of the city banks depreciated 20 per cent., and those of the country banks from 20 to 50, and specie so entirely disappeared from circulation, that even the fractional parts of a dollar were substituted by small notes and tickets, issued by banks, corporations and individuals. The depreciation of money, enhancing the prices of every species of property and commodity, appeared like a real rise in value, and led to all the consequences which are ever attendant upon a gradual advance of prices. The false delusions of artificial wealth increased the demand of the farmer for foreign productions, and led him to consume in anticipation of his crops. The country trader, seduced by a demand for more than his ordinary supply of merchandise, was tempted to the extension of his credit, and filled his stores, at the most extravagant prices, with goods vastly beyond what the actual resources of his customers could pay for, while the importing merchant, having no guide to ascertain the real wants of the community, but the eagerness of retailers to purchase his commodities, sent orders abroad for a supply of manufactures wholly disproportioned to the effective demand of the country. Individuals of every profession were tempted to embark in speculation, and the whole community was literally plunged in debt. The plenty of money, as it was called, was so profuse, that the managers of the banks were fearful they could not find a demand for all they could fabricate, and it was no unfrequent occurrence to hear of individuals solicited and urged to become borrowers, under promises as to indulgences the most tempting. Such continued to be the state of things until toward the close of the year 1815." (Quoted in Gouge.) As in New England specie payments were maintained, this speculative mania was not reflected in our table. The abuses of "banking," which at that time was considered to be issuing notes, were the main cause of the fluctuations in prices from this period even down to 1860. Almost every state had a circulation of its own, and the scale of depreciation differed in each state. To make the currency more uniform, congress established a national bank in 1816, and the state banks resumed specie payments in 1817. In the next two years banks were greatly multiplied in the west, nearly all issued circulating notes, and conducted their operations in a reckless manner. The national bank speculated in its own shares, forcing the price up to $156.50 per share in September, 1817, but in December, 1818, it had fallen to $110 per share. In 1819 the crisis came, and a period of stagnation and depression succeeded. Land in Pennsylvania was worth, on the average, in 1809, $38 per acre; in 1815, $150; in 1819, $35. "The newspapers of 1819 contain numerous accounts of riots, incendiary fires, frauds and robberies. The house committee spoke of the 'change of the moral character of many of our citizens by the presence of distress.' The distress extended to New England, but was less severe there than elsewhere. In the west it was intense. * * Stagnation and distress lasted throughout 1820. Prices were at the lowest ebb, and liquidation went slowly on. Wheat sold at twenty cents per bushel in Kentucky. A man in western Kentucky stopped "Niles' Register" because one barrel of flour used to pay a year's subscription; now three barrels would not. At Pittsburgh flour was $1 per barrel; boards, 20 cents per hundred; sheep, $1. Imported goods were at the old prices. * * * Rent of a given house in Philadelphia fell from $1,200 to $450; fuel from $12 to $5.50; flour from $10 to $4.50; beef from 25 cents to 8 cents per pound. * * Wages were low on half time." (Sumner and Gouge.) In 1821 occurred a slight reaction, but prices fell again in 1822. Stop laws, stays of execution and execution acts were passed, in the hope of relieving the distress. Briefly summarized the course of events was as follows: 1821, business was dull in the beginning of the year. The effects of an expansion, apparently commenced in the spring, began to be felt in June or July, and by October the spirit of speculation was tolerably active. In 1822, a reaction commenced in May; some kinds of imported goods fell 15 per cent. in Philadelphia; and United States bank stock which had been held at 115 in February, was sold in New York on the 1st of May at 102, and before night had fallen to 98½. The effects of the reaction were felt throughout the year. In 1823-4, banks extended their operations, increased their issues, and the spirit of speculation was excited, resulting in the crisis of 1825. In April (1825) news came of a great rise of prices in English markets, and excited great speculation here. Twenty-seven cents were offered for upland cotton, and refused, though the holders would, a week before, have been happy to obtain 20 cents; cotton yarn, No. 15, rose from 35 to 45 cents; Muscovado sugars advanced a dollar on a hundred, and St. Domingo coffee rose from 17½ to 21 cents per pound. The rise in the prices of tobacco, drugs and spices was very considerable. The mania applied chiefly to cotton, and lasted through May and June. The "Charlestown Patriot" mentioned that "the same parcel of cotton had changed owners six or seven times within a week without leaving the hands of the factor." Corn was uprooted in order that cotton might be planted. In July the news of a fall of 3d. a pound in the price of cotton in Liverpool pricked the bubble and precipitated a crisis. The effects of the reaction continued through 1826, in a general dullness of business. "In the southern states the consequences were most trying, as the high price of cotton had led to an over-extension of the culture of that article, and as the planters, encouraged by the demand for their staple, had plunged themselves in debt to support a splendid style of living. The manufacturers of cotton were, also, great sufferers. Cotton cloth, which it cost 18 cents per yard to import in 1825, was imported in the spring of 1826, at 13 cents." (Gouge.)

III.85.46

—We must now retrace our steps, and note two important influences which were beginning to be exerted on prices in this period. During the war large amounts of capital were invested in manufactures, especially in woolen and cotton mills. On the return of peace there occurred, as we have seen, an era of speculation, and enormous important were made without regard to the condition of the markets and the ability of the purchasers. During the first three-quarters of 1815 the value of imports was $83,080,073, and from October, 1815, to the same month in 1816, the value amounted to the enormous sum of $115,302,700, of which but $18,000,000 were re-exported. About $70,000,000 of the imports represented woolens and cottons. The domestic manufacturers could not make any progress in the glutted markets, and appealed to congress. The tariff act of 1816, having especial reference to cotton and woolen manufactures, was passed, and as the first really protective tariff it marks the beginning of that long course of legislation which has materially affected the prices of manufactured goods. Hence forward this must always be taken into account,

III.85.47

as it artificially raises prices and introduces a disturbing influence. The fact may be noted, without attempting to trace the effects of the many tariff laws on prices. Manufactures began to extend as population increased, as their demands became enlarged, and as the great natural resources of the country were developed. The introduction of machinery supplanted the household industries, and the growth of a market for manufactured goods allowed the concentration of processes in large establishments, where a more minute division of employments could be carried out; the rise of manufacturing towns, and the wider cultivation of the raw materials of manufactures accompanied these altered conditions. This resulted in a gradual fall in the prices of manufactured goods, as improvements in processes were introduced, or a wider market, both to buy and to sell in, arose. From this time on, prices of manufactures became steadier, and followed, in a general way, the economic condition of the markets.

III.85.48

—Another important influence consisted in the improved means of transportation and of marketing goods, which brought the producer near to the consumer, reduced the cost of transporting products, and thus extended the markets, while at the same time equalizing prices by allowing a freer and more rapid interchange of commodities in all parts of the country. As early as 1790 Pennsylvania undertook to construct canals, but the attempt was abortive, and ended disastrously. It was not until the completion of the Erie canal, in 1825, that extensive schemes of internal improvements were laid out. In ten years (1822-32) the amount of tolls collected on the Erie canal had increased from $44,486 to $1,196,008. "By means of this extensive water communication through a country naturally extremely fertile, the farms of the west are placed nearly upon an equality with those of the east, in the vicinity of the great market towns and cities." (Pitkin.) The success attending this canal aroused a spirit of emulation in the neighboring states, and the construction of canals in Pennsylvania opened up the coal fields, thus bringing to the market a most important factor of production. Delaware, Maryland and Virginia also constructed canals, and the spirit for canal improvement passed into Ohio, nearly 400 miles of artificial inland navigation being completed before 1835. Pitkin estimated, that, in 1835, upward of 2,867 miles of canals had been built, at a cost of $65,000,000, and the expenditure had been made chiefly during the previous fifteen years. Steam navigation was being introduced on the rivers, and, beginning with 1826, railways for the transportation of passengers and merchandise were being built, and their rapid extension, superseding in a great measure all other modes of conveyance, has resulted in making the country practically one market. The two important factors in making prices were a vast increase in production, and a greater degree of accessibility to markets. The population, or market, at each decade since 1830, is in the following table compared with the growth of railroad facilities.

III.85.49

Table.  Click to enlarge in new window.

III.85.50

—From 1831, with which year our second table of prices begins, it may be said that the prices follow almost regular cycles of raise and fall, following closely the periods of speculation and subsequent depressions. Commercial crises occur periodically about every ten years, and the course is pretty much the same in every case. The extension of credit may occur under a redeemable, as well as an irredeemable, currency, but the consequent prices are higher, and their fluctuations greater, under the latter. In 1825, as we have seen, there was a crisis, which had been preceded by inflated prices. The years 1837, 1839, 1857 and 1873 were each marked by great financial disturbances, which were reflected in the industry of the country.

Table.  Click to enlarge in new window.

Table.  Click to enlarge in new window.

Table.  Click to enlarge in new window.

III.85.51

—Returning to where we left off in our examination of prices, in the year 1827 money was plenty, but in 1828 there was an alarming scarcity of money in May and September, and this continued until July, 1829, when great distress was felt. Prices ruled low. In Rhode Island "the embarrassments which have been realized in this immediate neighborhood for the last ten days, have had no parallel in the history of the republic. Men of reputed capital, who have withstood the shock of former changes and times; men who for the last forty years have stood firm, erect and undismayed before the tempests of the times that have assailed them, are now tottering on the verge of bankruptcy and ruin. Their fall bears excessively heavy on the poor and laboring classes, who, by the way, are in reality the principal sufferers. * * Within the last ten days, within the circle of the ten adjacent miles (Providence), upward of 2,500 people have been suddenly and unexpectedly thrown out of employment, and the distress that such an event has produced can be far better imagined than described." In the next two years money was plentiful, and prices began in 1830 to rise. "In 1831, which was a year of great expansion, rents rose enormously in many parts of the town (Philadelphia), store goods advanced in price, and such fresh provisions as are sold in the market were higher than they had been at any time since the resumption of specie payments; but the money rate of wages was hardly affected." (Niles.) In 1834 there was distress, incident to the fear of results attending the withdrawal of public deposits from the United States bank, and in the same year prices were influenced by an alteration in the coinage laws which practically changed the standard from silver to gold. In 1835 the government was out of debt, and possessed a surplus, and the expansion of bank issues began. A speculative period followed, and speculation in cotton was especially marked. Whereas the price of upland cotton in 1834 was 12.5 cents per pound, in 1835 it was 16.7 cents, and in 1836, 16.6 cents per pound, when its price was suddenly lowered by the stringency in the money market. Thousands of persons had been tempted by the high prices to embark in the cultivation of this staple, and when the fall came, it proved disastrous. Speculation had extended in every direction, and even to western lands, an unlimited quantity of which might be had at a fixed price. The revulsion ran through the whole speculative system. In May a delegation of the merchants of New York represented that real estate in New York had in six months shrunk $40,000,000: in two months 250 firms had failed, and stocks had shrunk $20,000,000; merchandise had fallen 30 per cent., and within a few weeks 20,000 persons had been thrown out of employment. (Quoted in Sumner.) The banks throughout the country suspended, and the distress was increased by a failure of the wheat crop, grain being imported from abroad. In 1835 wheat was selling at $1.22 per bushel, in 1836 at $1.78, in 1837 at $1.69, and in 1838 at $1.90. The next year it had fallen to $1.24 per bushel. In 1838 a great number of the banks resumed, but in 1839 came a bank crash, chiefly due to speculation in cotton. Cotton (upland) in 1838 sold for 10.6 cents per pound, in 1839 at 13.3 cents, and in 1840 at 8.7 cents. In 1843 it had fallen as low as 6.6 cents per pound, nor did it recover until 1847. Prices were falling until 1843, when they began to rise again under the more improved conditions, the banks having resumed in 1842, which allowed a new and healthy development of industry and credit. The prices reached in 1843 have rightly been called the "low-water mark of the century," as the limit has never since been reached. "The fall of prices from 1839 to 1843 was not due to any forced contraction of the currency. The more correct explanation of the phenomena is that the destruction of the banking system brought with it a collapse of the industry of the country. * * The year 1843 was one of the gloomiest in our industrial history. The grand promise of ten years before was now entirely obscured. Mortgaged property was passing into the hands of the mortgagees. Factories were idle. Trade was dull, investments slow." (Sumner.) In 1844 prices began to mend. In 1847 the exports of breadstuffs were very large, owing to a partial failure of the crops in England, and the abolition of the British corn laws opened up a market for the agricultural produce of the country. Immigration commenced to flow into the country on a larger scale, and the internal development of the country kept up with these improved conditions. The discovery of the California mines in 1847 aided this growth, and in the following year large sums of foreign capital were sent here for investment. The rise in prices was very rapid between 1850 and 1853, and continued until 1857, aided by an expansion of bank issues. Cotton sold for 9 cents in 1852; in 1856 for 10.6, and in 1857 for 14 cents per pound. In 1857 the crisis came, banks suspended, and prices dropped, reaching their lowest limit in 1861, after which time they were unnaturally increased by the changed conditions forced upon the country by the rebellion. All banks suspended in 1861, and in 1862 an era of irredeemable paper currency was entered into, which lasted until 1879. The financial policy pursued, only aggravated the disturbance. In 1863 gold was at 140-150, and the paper dollar was worth only 65 or 70 cents; under further issues gold rose to 200-220, making the paper worth 45 or 50 cents. A tariff, higher and therefore more restrictive, than the country had ever before experienced, was built up between 1861-6, the duties collected in 1865 being 54 per cent. of the dutiable imports. An onerous system of internal taxation was adopted, under which a commodity and its various parts were subject to many different taxes, thus vastly increasing its price. The special commissioner of the revenue (Mr. David A. Wells), in his report for 1866, says that a somewhat extended investigation respecting the advance in the prices of the leading articles of consumption and of rents, indicated an increase of nearly 90 per cent. in the year 1866, as compared with the mean of prices during the four years 1859 to 1862. The price of cotton varied from 300 to 500 per cent. above the price in 1860. The price of labor, however, did not advance in an equal ratio with the price of commodities, being but about 60 per cent. The effect of the great increase and disturbance of prices thus noticed, he summarizes as follows: a decrease of production and consumption, and a partial suspension of national development.

III.85.52

—At the end of the war the country showed a wonderful recuperative power. In 1868 over-production was complained of, and prices continued to fall until 1871. Some of the burdens to which the industry of the country had been subjected by the war were removed in these years, and, although prices were low, the country was being prepared for a period of great speculation and inflation, which culminated in 1873. During the next six years the country experienced one of the most, if not the most, severe periods of commercial and financial depression it ever felt, and one of its marked characteristics was the great shrinkage everywhere felt in values. In 1879 there again occurred a great revival in business, marked by a rapid increase in prices; but this led to such an enormous production in the great industries, notably in iron, woolen and cotton manufactures, and paper industries, that in less than three years prices had nearly touched the low level they had reached in 1878.

III.85.53

—Such, in brief, has been the general course of prices in the United States. Each commodity, however, has its own history, and ought to be studied carefully, not only by itself, but also in connection with all other commodities. This, however, the limits of the present article would not permit, and this "sketch" must be sufficient. The first of our tables shows the prices of leading commodities in Boston, and was prepared by Mr. John Hayward. Our second table is taken from the report of the director of the mint for 1881; all gold prices.

III.85.54

—AUTHORITIES. The works of Rogers (Agriculture and Prices in England, 1259-1582, 4 vols.) and of Tooke and Newmarch (History of Prices, 1793-1856, 6 vols.) are two of the most valuable contributions ever made to economic science. The essays of Felt, Phillips, Bronson, Gouge, and Raquet, on American currencies, are valuable and Sumner's History of American Currency is the best work that has yet appeared on this subject. The same author's Life of Jackson should also be studied. Niles' Register contains much that throws light upon the course of prices. Walker's Money shows the changes that have occurred in the value of the precious metals, and the reports of the various international conferences on silver should be consulted. The French economist A. de Foville has made a special study of prices during the present century, and the results of his studies were published in L'economiste Français. Giffen's Essays in Finance and Grosvenor's Does Protection Protect? contain suggestive special studies of prices, as does Cliffe-Leslie's Essays in Political and Moral Philosophy. The reports of Mr. David A. Wells while special commissioner of the revenue should be carefully studied.

WORTHINGTON C. FORD.

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