New-York tribune., 1918-04-19
Gold Initiation

In his letter which we print this morn
ing Mr. Eeles questions the influence
of "gold initiation" upon prices and the
cost of living. "Surely," he says,
"prices depend more upon the cost of
production than the quantity Of money"
Do they?
In broad way the level of general
prices from shortly after the close of
the Civil War fell steadily for almost
exactly a quarter of a century-that is,
from about 1868 to 1893.
They were still practically at bed
rock in the famous Bryan campaign of
'96. And it was this extremely low
level of prices which gave body and
force to Mr.. Bryan's demand for the
unlimited coinage of silver money.
Since the Bryan year" the general
level of prices has been steadily rising,
and at the opening of the war in Europe
it was little over half again as high
as in 1S93-'96 Does Mr.. Eeles or ''The
Journal of Commerce" or any one who
thinks that the volume Of money has
nothing to do with prices believe that
the "cost of production" was falling in
the twenty-five years of falling prices,
and has been rising ever since? And
do they think that it has gone up nearly
hundred per cent in the four years
of the war?
There can be no such fuctuation.
"Real Values" that is, the labor cost
of things, tend to fall steadily, but very
slowly, through the steady improvement
of methods of production and labor-sav-
ing machinery.
A survey of wage scales reveals that
they follow rather than precede changes
in the general price level. Therefore,
wages and 'the cost Of production" can
not be the determining factor in whether
the kvel of prices rises or falls.
Mr.. Eeles is quite right in supposing
that money or currency may circulate
faster at one time than another, and
. therefore may affect prices. But as a
statistical fact the variation is not
large. This has been gone into very
carefully by Professor Irving Fisher,
Professor Kemmerer and others, and
their investigations have shown that the
rate of turnover tends slowly to rise,
very slowly for actual coin and paper
currency and more rapidly for bank
check money.
The only remaining great variable
which over period of fifty or sixty
years can effect great changes in the
price level is the volume of the cur
rency, or, more strictly, the volume of
credit outstanding.
This outstanding credit is chiefly in
the form of bank deposits, which in turn
are largely created by bank loans. With
checks drawn against these advances by
the banks more than 80 per cent of the
business of the country is done.
The volume of this outstanding bank
credit is determined by the amount of
legal tender holdings. That is, prac-
tically of gold.
That is why heavy increase in the
gold holdings Of the country leads to
much greater increase of bank credits
and therefore to heavy increase in
the predominant money" or "cur-
rency' Of the nation. And this explains
why we can have "gold imitation" now
just as easily as "paper initiation" half
a century ago, or in Russia at the pres
ent time.
There is practically not an economist
or financier living who would not admit
that II the government were to print
overnight five billions or ten billions
OF unsecured paper money and force this
into circulation prices would go soaring
to the skies.
What very few people yet realize is
that the addition Of a billion of gold
to the bank holdings may actually now
have an even greater effect on prices
than five or ten billions of fiat money
because each dollar of bank gold NAV
now become the basis of ten or fifteen
or even, legally, twenty to thirty dollars
of bank credit.
And every dollar Of bank credit as
Professor Fisher has shown, is statisti-
cally about equal to $3.50 of actual coin
or note money.
That is, actual printed or minted
money circulatcs about twenty times a
year, while the average bank deposit
is turned over, on the average, fifty
times or more.
The only kind of imitation which the
economists OF the period after the Civil
War thought about was paper imitation
A new generation IL learning Of more