Irving Fisher

“ XI.71 It has been pointed out that, with trade international, the rise of prices, resulting from expansion of deposits, is also international. Even if, in some of the countries, deposits should not expand, a rise of the price level would nevertheless occur. The expansion of deposits even in one country of considerable size would, by tending to raise prices there, cause the export of gold. Thus, in other countries the supply of money would increase and prices rise also. This would tend to stimulate expansion of deposits in these other countries and bring about a further rise. ”

“ The paper money experiences of France during the French Revolution, of England during the Napoleonic wars, of Austria, the American colonies, the United States, and the Confederacy have been briefly reviewed. We have noted that in these cases, as in others, prices depended on the quantity of money, its velocity, and the volume of business. We have seen that the apparent exceptions due to lack of confidence in paper money are not really exceptions, because lack of confidence works itself out through the magnitudes in the equation of exchange. ”

“ In such a case there need not be any speculation or any immediate rise in value until the date of redemption drew near enough to make itself felt. On the other hand, when, during the war, the government announced a further issue of a paper currency already depreciated, the public anticipated its further depreciation by releasing such hoards and stocks as were available; in other words, by accelerating the circulation of money. Each man hastened to spend his money before an expected rise of price, and his very action hastened that rise. ”

“ Virtual interest—that is, the interest in terms of commodities—was exceedingly low during the years immediately preceding 1907, because prices were rising so fast. This is shown in column nine, where the nominal interest (measured in money) is corrected by the rise or fall of prices to give interest as measured in actual purchasing power. With the culmination of the cycle in 1907 and the resultant fall of prices, we find virtual interest suddenly becomes very high. No wonder that borrowing enterprisers often found it hard to make both ends meet. ”

“ It must be remembered that it is the stock of gold and not the annual production which influences the price level; and that the stock will probably continue to increase for many years after the production has begun to decline,—as long, in fact, as production keeps above consumption. ”

“ Distrust increases the velocity of circulation, and decreases the trade performed by the money. We have shown that the general effect of irredeemable paper money issues, which are almost always in large quantities, despite pledges to the contrary, has been to raise prices.
XI.87 Finally, our study of deposit circulation and crises has afforded further illustration. Preceding a typical crisis, there is, in general, a tendency for deposits to increase and also for their velocity of circulation to increase, while prices tend to rise. ”

“ When paper money is redeemable, its possible increase is restricted by that fact and, what is more important, the effects of the increase are dissipated over so large an area as to have little perceptible effect on prices. This dissipation takes place through the export of specie from the country in which the paper issues occur. Though the paper cannot be itself exported, it can displace gold or silver, which amounts to the same thing so far as spreading out the effect on prices is concerned. ”

“ The crisis of 1893 was exceptional and largely confined to the United States, being chiefly due to the fear as to the stability of the gold standard without much reference to currency and deposit expansion.*117 Whereas in the typical speculative cycle the ratio of deposits to reserves gradually increases until it reaches a maximum just before the crisis, as it did in 1873, 1884, and 1907, this did not happen in 1893. ”

“ It may be, however, that only by such a calamity can the nations of the world be aroused to the necessity of getting rid of metallic standards altogether.
§ 7 XI.36 We have briefly summarized the history of price movements since the discovery of America and shown their relation to the stock of the precious metals. But, as we have emphasized in previous chapters, the precious metals do not include all forms of circulating media. Paper money and bank deposits have come during the nineteenth century to occupy very important places in currency systems. ”

“ In the period 1809-1849 prices fell presumably because of a falling off in gold and silver production and a continuing increase of business; while between 1873 and 1896, although the world's stock of precious metals was increasing slowly, prices in gold countries fell, because in addition to the increasing volume of business there was a stampede of nations to adopt the gold standard and demonetize or limit the coinage of silver. ”

“ That for many years, however, gold will outrun trade seems probable, for the reason that there is no immediate prospect of a reduction in the percentage growth of the gold stock, nor of an increase in the percentage growth of trade. Not only do mining engineers report untold workable deposits in outlying regions (for instance a full billion of dollars in one region of Colombia alone) , but any long look ahead must reckon with possible and probable cheapening of gold extraction. ”

“ XI.5 But, though the new supplies of the precious metals distributed themselves very gradually through Europe, and the rise of prices was consequently in some regions delayed, there can be no doubt that they rose or that the rise was great. The rise between the discovery of America and the beginning of the nineteenth century was several hundred per cent. This rise was simultaneous with an increase of the stock of the precious metals, because production outran consumption. ”

“ The rise of prices is often still further aggravated by the gradual substitution of other and better money or resort to barter, which further restricts the sphere in which the paper is used and within that sphere makes it the more redundant. ”

“ XI.69 A crisis is, as Juglar in fact defines it, an arrest of the rise of prices. At higher prices than those already reached purchasers cannot be found. Those who had purchased, hoping to sell again for profit, cannot dispose of their goods.*113
XI.70 Our previous analysis has shown us that, before a crisis, while prices are ascending, there is a great increase in bank deposits; and that these, being a circulating medium, accelerate the rise. ”

“ XI.38 But when the paper is irredeemable, after specie has been expelled from circulation (whether by export, melting, or hoarding in anticipation of disaster) there is no such spreading-out effect. The effects on prices are then entirely local and therefore greatly magnified.*81
XI.39 The consequence is that the most striking examples of price inflation are cases of irredeemable paper money. ”

“ In other words, the expectation of a future rise or fall of prices causes an immediate rise or fall of prices.
XI.60 These anticipations respond so promptly to every sign or rumor that superficial observers have regarded the rise and fall of the greenbacks as related directly and solely to expected redemption and as having no relation to quantity. These observers overlook the real mechanism at work; they fail to see that these effects, though quick, are slight and limited. ”

“ The cyanide process has made low grade ores pay. If we let imagination run a little ahead of our times, we may expect similar improvements in the future whereby still lower grades may be worked or possibly the sea compelled to give up its gold. ”

“ XI.14 The foregoing parallelism between monetary stocks and prices is somewhat remarkable in view of the in completeness of the data.*61 In the table there are lacking, not only exact statistics as to the volume of trade and all statistics whatever of velocity of circulation, but also statistics of the volume of bank notes, government notes, and deposit currency. We know, however, that modern banking, which had scarcely developed at all before the French Revolution, developed rapidly throughout the nineteenth century. ”

“ XI.85 We have observed the recent continual increase of gold production and found reasons for the tentative prediction that the gold production of the future would continue excessive and probably cause the present rise of prices to continue for some time in the future. ”

“ The result has been to aggravate both the fall of prices from 1873 to 1896 and the present rise, although the later effect is mitigated by the previous extension of the gold standard.
§ 6 XI.32 The outlook for the future is apparently toward a continued rise of prices due to a continued increase in the gold supply. To-day almost as much gold is produced every year as was produced in the whole of the 16th century.
XI.33 The most careful review of present gold-mining conditions shows that we may expect a continuance of gold inflation for a generation or more. ”

“ This, we know, must have come with increased population and with progress in the arts—especially the arts of trade—and with development in transportation. As to changes in the velocity of circulation of money we know absolutely nothing.
§ 3 XI.10 During the last century the price movements have been more carefully recorded and show many ups and downs. The most complete statistics (those of Sauerbeck) are for England. They are represented in Figure 11.*59
As is well known, English prices were inflated by the issue of irredeemable paper during the Napoleonic wars. ”

“ And naturally the greenbacks could not circulate in the South. These restrictions alone would confine their circulation to a population of about 20 millions out of a total population in 1860 of 31 millions, that is, to less than two thirds of the entire population. Therefore the volume of trade for which the greenbacks were used must have been greatly reduced. The total circulating currency during the war is not known with certainty ”

“ Between 1849 and 1873 (although with two notable interruptions) prices rose. They rose, according to Jevons's figures supplemented by Sauerbeck's,*67 from 64 to 86, and according to Sauerbeck's alone, from 74 to 111. That is, in 24 years prices increased, according to one calculation, by one third; according to another, by one half. This rise was presumably in consequence of the gold inflation following the famous California gold discoveries in 1849 and Australian discoveries in 1851 and 1852. ”

“ By December 14 of 1792, thirty-four hundred million francs had been issued in assignats, of which six hundred millions had been burned, leaving twenty-eight hundred millions in circulation. Laws were enacted to fix maximum prices, but were evaded. By 1796, forty-five billion francs had been issued, of which thirty-six billions were in circulation. In February of that year the gold louis, of 25 francs, was worth 7200 francs in assignats; and the assignats were worth 1/288 of par. A new kind of paper money, the mandats, was next issued, but soon fell to 5 per cent of its nominal value. ”

“ Index numbers of prices show the same general trend.
XI.73 Thus,*115 for the United States, the crisis of 1837-1839 shows that circulation of state banks increased each year from 61 millions in 1830 to 149 in 1837 and fell to 116 in the next year; that individual deposits rose each year from 55 millions in 1830 to 127 in 1837 and fell to 84 the next year; that from 1844 to 1848, the date of the next crisis, circulation rose from 75 millions to 128, falling back to 114 the next year, and that the deposits rose from 84 millions to 103, falling back to 91 ”

“ The figure for 1900 is given as 125 as a compromise between widely conflicting results. Leber, Hanauer, and D'Avenel agree fairly well and D'Avenel (writing in 1890 to 1894) finds (p. 32) the "present" price level in France to be double what it was for 1776-1790, which would make the required figure 200. ”

“ The figures are taken from 37th Congress, 3d Session, 5 Ex., 210.
117. Lauck, Causes of the Panic of 1893, Boston (Houghton, Mifflin) , 1907, p. 118. O. M. W. Sprague, in "History of Crises under the National Banking System," National Monetary Commission Report, Senate Document 538 (61st Congress, 2d Session) , points out that in the runs on banks there was no special demand for gold, and is inclined to think that the influence of the currency expansion has been exaggerated. ”