View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Publications
OF THE

American Economic Association
Vol. XI.

No.

Pages 331-442.

4.

Appreciation and Interest

A STUDY OF THE INFIvUENCE OF MONETARY APPRECIATION AND depreciation ON THE RATE OF INTEREST,

WITH APPLICATIONS TO THE BIMETALLIC

CONTROVERSY AND THE THEORY OF INTEREST.
BY

IRVING FISHER,
Assistant Professor of Political Science in Yale University.

AUGUST,

1896.

PUBLISHED FOR THE

American Economic Association
BY The Macmii,lan Company

NEW YORK
LONDON SWAN SONNENSCHEIN &
:

Hi
^ta--,.*/api^

CO.

Q-

537

Copyright 1896 by

American Economic Association

PRESS OF

Andrus & Church,
ithaca, n.

y.

^

APPRECIATION
AND

INTEREST.

Digitized by the Internet Arciiive
in

2010 with funding from

The

Library of

Congress

http://www.archive.org/details/appreciationinteOOfish

CONTENTS.

Part

Thkory.

I.

PAGE.

Chapter
li.

Introduction.

I.

Does appreciation necessarily aggravate debts?
"just" standard

.

...

i
i

§2. Efforts to find a
I 3.

Invariability of standard not essential

I 4.

Bearing of the rate of interest on the subject

Chapter

One year

II.

3

....

3

contracts.

I 3.

Foreseen and unforeseen appreciation or depreciation,
One year contract, numerical illustration
Formula connecting interest and appreciation ....

§4.

Money

I I.

I 2.

Chapter

as standard

and

More than one

III.

as

medium

6
6
8
11

year.

I I.

Confusion in separating interest and principal

I 2.

Compound

....

12

interest, five years

12

I3

I 5.

General formula
payments, seven years
General formula

I 6.

Special case

? 3.

I 4.

i4

Partial

Chapter

16
^^

•

Present value.

IV.

modes of payment do not aflfect present value,
when interest is paid annually and princiredeemed at maturity

19

I I.

Different

I 2.

Illustration

I 3.

Case of perpetual annuity

21

^ 4.

Formula

^^

pal

Chapter
I I.
§ 2.

V.

Varying rates of appreciation.
23

Numerical illustration
Average rate of interest

24
26
26
28
28

for varying rate of interest

I 5.

Formula
Formula
Formula

I 6.

Practical application

? 3.
^ 4.

Chapter
I I.
I 2.
I 3.

I 4.

VI.

20

for average rate of interest
for average rate of appreciation

Zero and negative

interest.

Limits to rates of interest and appreciation
Effect of hoarding
Negative interest possible
Investment not necessarily checked by zero interest

3°
3^

32
.

33

Contents

vi

Part
Chapter

VII.

II.

[338

Facts.

Introduction.

§ I.

Objections

§ 2.

Existence of foresight in general

Chapter
§ I.
^ 2.

f 3.
? 4.

VIII.

Gotd

35
36

atid paper.

General evidence
United States currency and coin bonds
Extent of foresight in gold premium
Dangers of preceding method

Chapter IX.

Gotd and

38
39
41

44

stiver.

I 2.

India "rupee paper" and gold bonds
Extent of foresight in Indian exchange

§3.

Upper

^ 4.

Bearing of a rupee debt on Indian finance

? I.

Chapter X.

limit of gold borrower's loss in

Money and

England

46
49
.

.

.

52

commodities.

§ 5.

comparing successive periods
Rate of interest as related to high and low prices
Rate of interest as related to rising and falling prices
in England
Rate of interest as related to rising and falling prices
in Germany, France, and the United States ....
Rate of interest as related to rising and falling prices

^ 6.

Measurement of

§ I.

I 2.
§ 3.

§ 4.

51

Difficulties in

.

in silver standard countries

foresight for short periods

Error of Jevons, Price, and others
Measurement of foresight for long periods, in England
I 9. Lower limit of borrower's loss in England
§ 10. Loss on contracts made before 1873, ^'^ England ...
§11. Measurement of foresight for long periods, in America,
§ 12. Theory as to mode of adjusting rate of interest to
price movements

54
54

56

60
63
66

I 7.

67

^ S.

70

I 13.

Credit cycles

XI.

III.

The bimetallic

§ 2.

controversy.

? 3.

Bimetallism
Bimetallism
Fallacy that
Bimetallism

80

Index numbers

§ 5.
^ 6.

Chapter
\i.

XII.

75

Applications.

§1. Magnitude of debtor's loss

§ 4.

74

76

Part
Chapter

71

73

81

could not correct losses

82

would

violate contracts

83

we can

predict further losses

85
86

to secure stability in standard

The theory of

interest.

"Real" and "nominal"

interest,

inadequate terms,

88

vn

Contents.

339]
I 2.

An

individualistic

90

I 3.

Interest varies with length of contract

91

§ 4.

Multiple theory of interest

91

absolute standard

Appe;ndix.

is

StatisticaIv Data.

I 2.

Table of interest rates each year in seven countries
References to other statistics of the rate of interest

I 3.

Index numbers of prices and wages

§ I.

.

93
96

.

.

.

98

STATISTICAI. TABLES.
Rates of interest realized on United States "coin" and " currency " bonds from dates mentioned to maturity
Rates of interest realized on United States "coin" and "currency " bonds from dates mentioned to January i, 1879,

39

42

(date of Resumption)

Rates of interest realized on India gold and silver bonds from
dates named to maturity or in perpetuity

47

Rates of interest realized on India gold and silver bonds for
periods specified

5^

Market rates of interest in seven
and low prices

London

countries, in relation to high

...

rates of interest in relation to rising

and

Berlin rates of interest in relation to rising

and

falling prices

Paris rates of interest in relation to rising

and

falling prices

New York

rates of interest in relation to rising

55

falling prices,
.

.

"^

Average bank rates in gold and silver standard countries before
and after the breakdown of bimetallism
Rates of interest in relation to rising

and

65

Number of cases in seven countries favorable and unfavorable
to the theory that rising and falling prices are associated
respectively with high and low interest
prices,

New York
prices

rates of interest in relation to rising

wages and incomes

for

for

and

7°

and

falling

74

long periods

Yearly average rates of interest

on

tries

Index numbers for seven countries

"money"

66

falling

long periods

rates of interest in relation to rising

and wages

64

falling prices in Cal-

Tokyo and Shanghai

London market

61

and falling prices

and wages

cutta,

59
61

in seven coun-

94

99

;

PREFACE.

connection between monetary appreciation and the

The

rate of interest has received very scant attention

The

omists.

has somewhat retarded the progress

of

economic science and

—in particu-

the successful interpretation of economic history
lar the monetary history of the last twenty years.

here put forward were

The views

first stated in brief before the

at Indianapolis,

can Economic Association

They
many

from econ-

writer has been led to beUeve that this neglect

Ameri-

December, 1895.

differ radically from those expressed by Mr. Giffen and

other eminent economists.

necessary

to make a statistical

For

this reason

it

has been

examination of all available facts

Such a study could not be properly

bearing on the subject.

conducted without a definite economic theory as a starting

The

point.

idea on

which

this theory is

founded appears to

have occurred independently to several writers, of
Jacob de Haas,
realized

its

tative form,

With

To

fully to

have

develop the theory in a quanti-

some simple mathematics have been employed.
illustrations at each step, it is hoped

whom

mathematics are distasteful will find few,

any, impediments to easy reading.

reader,

too

Amsterdam, seems most

Mr.

numerical

that those to
if

Jr., of

importance.

whom

on the other hand, may

much encumbered by

feel that

The mathematical
the discussions are

numerical illustration and detail

but these presentations are usually in such a form that they

can easily be passed over by those who find them superfluous.
The gist of the theory is contained in Chapter II, but its
statement would not be complete, nor the apparent objections
to

it

fully answered, without the discussions of Chapters

III-VI.

X

Preface.

The
names

writer

is

[342

many persons whose
who have supplied him

greatly indebted to the

are mentioned in the text,

with important facts and references

;

also to Professor

Sum-

ner for the privilege of consulting his collection of works on

banking

to Professor

;

criticisms

to

;

Hadley, for valuable suggestions and

Mr. Horace White for pointing out the im-

portant pamphlet of the eighteenth century mentioned in

Chapter

I

;

tical tables

New

and

to

Mr. Sakata for translating several

from Japanese.

Haven, August,

1896.

statis-

PART

THEORY.

I.

CHAPTER

I.

INTRODUCTION.
§1.

The

chief issues in the bimetallic controversy center

about the question of justice between debtor and creditor.
The bimetallic propaganda succeeds just so far as it
spreads a belief that an injustice has been done by the
adoption of the gold standard, which the re-adoption of

bimetallism would correct.

The
gold

question therefore arises, does the appreciation of
Are contracting
necessarily aggravate debts?

parties powerless to forestall the gains or losses of

upward
if

or

downward moving currency ?

the unit of length were changed and

an

It is clear that
its

change were

foreknown, contracts would be modified accordingly.
Suppose a yard were defined (as once it probably was) to

be the length of the king's girdle, and suppose the king
Everybody would then know that the
to be a child.

"yard" would

increase with age and a merchant

who

should agree to deliver i,ooo " yards " ten years hence,

would make his terms correspond to his expectations.
To alter the mode of measurement does not alter the
actual quantities involved but merely the numbers by

which they are represented.
§2.

Hitherto monometallists have usually replied to the
argument "gold has appreciated, therefore the debtor

American Economic

2

Association.

[344

has been robbed " by challenging, not the inference, but

Thus

the premise.

the discussion has been shunted

off

from economic theory and turned into a controversy
over the fact of "appreciation."

This controversy has

been, to a large extent, a mere war of words, because, by
" appreciation " the monometallists

No

the bimetallists, another.

meaning

for that

parties.

The

by the fall
wages have

mean one thing and

one has

much abused word

provided a

^-et

acceptable to both

bimetallists prove the appreciation of gold

in prices.
risen,

The

monometallists reply that

and hold that the

to progress in the arts.

Some

fall

in prices

bimetallists,

e.

g.^

is

due

Leonard

Courtney,^ accept the distinction between a

fall in prices

through causes connected with gold and a

fall

through

causes connected with commodities, but most of them
assert that a " fall of prices "

are

synonymous

and " appreciation

expressions, and that,

if

"
of gold

progress cheap-

it ought justly to cheapen gold
Generally speaking, bimetallists set up the " com-

ens other commodities,
also.

modity

standard "

and

the

monometallists,

" labor

standard."

Others attempt to find the "just" standard in "mar-

On all sides

ginal utility," " total utility," and so forth.

is tacitly assumed that a "just" standard must
that is,
some sense be an " invariable " standard
it

;

in
a

when due
way to the original loan.
" All writers on the subject of money have agreed that
uniformity in the value of the circulating medium is an

standard such that the principal of the debt

should be equivalent in some

object greatly to be desired

—a currency

to

should be absolutely invariable in value."

"

be perfect,
Proposals

1 Report
of the Indian Currency Committee, 1S93, p. 39; also,
Nineteenth Century, April, 1893.
^ Ricardo,
"Proposals for an Economic and Secure Curreuc}',"

Sees.

I,

II.

Appreciation

345]

and

Interest.

3

and secure such invariability have been made
by many writers. Within the last few years, the problem has become a favorite one and scarcely an issue of
to define

the economic journals appears without discussions on
"

The

ultimate standard of value," "

of deferred payments," "

measurement

The

just standard

Has gold appreciated ?

"

"

The

money," and kindred sub-

of the value of

jects.^

§3.
It is not prosposed to deny that the terms appreciation
and depreciation may have an " absolute " as distinct
from a " relative " meaning.^ But such definitions and
distinctions can throw no light whatever on the question

of justice in contracts.

We

shall see that a standard to

What

be perfect need not be invariable.
simply that
parties

their

it

may

is

required

is

shall be dependable^ so that contracting

be able to forecast

economic future in terms

ately as in terms of

any

other.

required elements of

all

of that standard as accurIf

a standard

is

thus de-

pendable, the terms of the contract will be as "just" as

they could possibly be under any system.
§4.

At

a later stage the general question of " justice " will

Here the effort will be to show that losses
due to " appreciation," however defined, will tend to be
forestalled.
For this, it is not necessary to scale the
be discussed.

principal of a debt.

The

principal

is

not the only or

even the chief element in a loan contract.
element
^See,

e.

is

the rate of interest.

g., the

Academy of

It is

The

other

an astonishing

fact

connected discussions in the Annals of the Ameri-

and Social Science, 1892-95, and the fournal
of Political Economy, 1893-95, by Ross, Merriam, Fetter, Commons,
Newcomb, Cummings, Orton and Taylor.
* See Chapter XII.
can

Political

A7nerica7i Economic As,sociation.

4
that

tlie

[346

connection between the rate of interest and ap-

preciation has been ahnost completely overlooked, both
in economic theory and in

bearing upon the bime-

its

tallic controversy.

Of the few writers who have conceived
apparentl}^ the earliest

this connection,

was the anonymous author

remarkable pamphlet entitled

:

"

of the

A Discourse Concerning

the Currencies of the British Plantations in America."
Boston,

1740 (Reprinted in the

1857).

He

writes

"

Overstone Tracts,"

:

The ArgU7nents current atnongst the Populace in favour of Paper
Money, are,
I. lu most of the Paper Money Colonies one of the principal Reafirst Emissions
was, to prevent Usurers imposing high Interest upon Borrowers, from the Scarcity of Silver Money.

sons alledged for their

;

It is true, that in all Countries the increased Quantity of Silver, falls
the Interest or Use of Money but large Emissions of Paper Money
does naturally rise the Interest to make good the sinking Principal for
Instance, in the Autumn, A. 1737, Silver was at 26 s. to 27 s. per Ounce,
;

:

but by a large Rhode Island Emission, it became in Autumn 1739, 29 s.
per Oz. this is 7 per Cent. Loss of Principal, therefore the Lender, to
save his Principal from sinking, requires 13 per Cent, natural Interest
(our legal Interest being 6 per Cent.) for that Year. In Autumn A.
1733, Silver was 22 s. per Oz. by large Emissions it became 27 s. in
the Autumn, A. 1734 is 22 per Cent, loss of Principal
and the
Lender to save his Principal requires 28 per Cent, natural Interest
Thus the larger the Emissions, 7iatural Interest befor that Year.
;

;

;

comes the higher ; therefore the Advocates for Paper Money (who are
generally indigent Men, and Borrowers) ought not to complain, when
they hire Money at a dear nominal Rate.
If Bills were to depreciate after a certain Rate, Justice might be
done to both contracting Parties, by imposing the Loss which the
Principal may sustain in any certain Space of Time (the Period of
Payment, upon the Interest of a Bond or Price of Goods biit as Depreciations are uncertain, great Confusions in Dealings happen.
:

John Stuart Mill expresses the same view,^
^

"Principles of Political

single paragraph.]

Economy," Book

3,

Chapter

as

do

23, \ 4.

[A

347]

Appreciation

and

hiterest.

5

also Jacob de Haas^

and Professor John B. Clark.^
principle which apparently has been independently

A
dis-

covered by each of these economists and quite possibly by
others, is likely to be of some importance.
It is the object of the present essay to develop the theory in a quantitative form, to

bring

to current problems,

it

^

it

to a statistical test,

and

and

to

apply

to the theory of interest.

" AThird Element in the Rate of Interest." Journal
of the Royal
March, 1889. [A more extended discussion, with

Statistical Society,
statistics.]

2 " The Gold Standard in the
Light of Recent Theory." Political
Science Quarterly, September, 1895. [Applied to the current bime-

tallic controvers}'.]

CHAPTER

11.

ONE YEAR contracts/
§1.

We

must begin by noting the distinction between a
foreseen and an nnforeseen change in the value of money.

Only the

A

sudden and unexpected

States in 1862,

far foresight in

be discussed in Part

what

losses to creditors

while

equally harmful to debtors.

is

such matters actually exists will

At present we wish

to discover

will happen, assumiJig this foresight to exist.

a debt

If

II.

the United

inflation, as in

works enormous

an unforeseen contraction

How

former can be forestalled.

losses or gains of the

is

contracted optionally in either of two

standards and one of

them

expected to change with

is

reference to the other, will the rate of interest be the

same in both ? Most certainly not. Only a few months
ago the Belmont-Morgan syndicate offered the United
States government the alternative of taking some 65
millions at 3/^ in gold or at

one

knew

3^/^

that this additional

^^

possibility of free silver coinage.

If

mere
the alternatives had

been between repayment in gold and
actual

—repayment

in

silver,

the

Every-

in "coin."

was due

to the

—not possible

additional

would certainly have been much more than

but

interest

3/^ f/c

.

§2.

To

fix

our ideas,

let

the two standards be gold and

wheat, and, while today a bushel of wheat
' More properly
speaking, in place of
" one interest interval."

"one

j^ear "

is

worth a

should be put

:

Appreciation and Interest.

349]

worth bnt 96
or

known that one year hence it will be
One hundred dollars (gold standard)

be

dollar, let it

7

cents.

equivalent one hundred bushels (wheat standard)

its

are borrowed today and are to be repaid with interest in

one year.
8

'fo

If

what

,

We

the rate of interest in the gold standard

wheat ?

will be the rate in

note that the repayment,

if

$100 but $108, and our problem

what
end

will be the equivalent of this

This

of the year.

96 cents gold
"
i dollar

"

loS dollars

Thus

i

—
—

^i-

The

wheat

in

at the

from the ex-

X

bushel wheat.
"
bushels
i.

1.04I bushels

"

e.,

i.

\.o\\\>Vi.

e.,

112^ bu.

2^ bushels will be equivalent
alternative contracts would tl\erefore be

the repayment of

to $108.

solved by finding

sum

:

=«=

loS

is

^

pected price of wheat, thus
Hence

in gold, will be, not

easily obtained

is

is

1 1

:

\

For 100 dollars borrowed today, 108 dollars are due one year hence.
"
"
" "
112 J bushels "
For 100 bushels

Hence 8 fo

12^%

to

Now

interest in the gold standard is equivalent

wheat standard.
change in the two standards may be

in the

the relative

an appreciation of gold relatively to

spoken

of either as

wheat

or as a depreciation of

We

are not compelled to

lute" change.

wheat relatively to gold.
inquire which is the "abso-

we speak

If

in terms of appreciation,

say $1 changes in value from

i

bushel of wheat to 1.04%

bushels and hence has appreciated 4}i'/o
also say,

Our
I.

while we

may

wheat has depreciated from ^i to $.g6 or 4^.
can be stated in either of two ways

If

the rate of interest in one standard

which depreciates 4 fo

will be 12 }4fo

by an increase
1

]

results

in another,
it

we

The symbol "

;

that

is,

=0=

"

is

4}^

8^, then

relatively to the

a depreciation of

of interest of

is

fo.

used for " are equivalent to."

4^

first,

is offset

American Economic

8
2.

If

[350

the rate of interest in one standard

12)^ %, in
relatively to the first,

which appreciates 4 ^-^ /^
that is, an appreciation

another,
it

Association.

will be 8 ;%

by a decrease

of

;

is

^

4 )^

is offset

of interest of 4j^ /^.

§3.

Leaving

this

we may state

numerical case,

the problem

more generally. Suppose gold is to appreciate relatively
wheat a certain known amount in one year. What
will be the relation between the rates of interest in the
two standards ? Let wheat fall in gold price (or gold
rise in wheat price) so that the quantity of gold which
would buy one bushel of wheat at the beginning of the
year will buy 1 -\- a bushels at the end, a being therefore
to

the rate of appreciation of gold in terms of wheat.

Let the rate of interest in gold be
y,

and

let

equivalent

Our

D

D

and our problem
will

dollars or its

B bushels.

alternative contracts are then

For
dollars borrowed D-\-D i or
"
For ^bushels
i5 f 5/ or

which

and in wheat be

z,

the principal of the loan be

make

:

D

{

i-\-i)

^

(

i+y) bushels "

dollars are

+

the Z>(i

2) dollars

the

=g=

one

yr.

"

in

"

"

between

to find the relation

is

due

i

and/,

B (1

-]-j)

bushels.

D

At first,
dollars
"
At the end of the year Z>
"
"
Hence "
"
Z>(i+?)

Since Z)(i

+

i) is the

liquidate the debt,

number

its

number

equivalent

=0=

i?

i-f rt) (1

(

result, therefore, is

this

:

bu.

+ /)

"

of dollars necessary to

B {1 +

a) (i

of bushels necessary to liquidate

have already designated

Our

-B
^ B {\+a)

number

of

+ 2)

it.

is

the

But we

bushels by

Appreciation and Interest.

35 1]

Bushels.

Dollars.

At the end of

yearZ?(r

i

which, after

B is

9
Buishels.

+ /) ^ B {\ -^j) = B {\

a) {\

-\-

^ i)

canceled, discloses the formula

:

i+y=(i+«) (i+o
or in words

The rate of

:

preciating standard

is

(3)

interest in the (^relatively) de-

equal

to the

sum of

three terms^

the rate of interest in the appreciatittg standard.,

vis.^

the rate of appreciation itself

two

(2)

j=--^^-a-\-ia

or

(i)

and

the prodicct of these

elemeiits.

Thus, to

offset appreciation,

the rate of interest must

be lowered by slightly more than the rate of appreciation/

We may

introduce depreciation in a similar manner.

Instead of saying, gold appreciates at the rate
tively to wheat,
rate

(f,

we may

relatively to gold.^

sunk in terms

say,

«, rela-

wheat depreciates

at the

This means that wheat has

of gold in the ratio

i

to

i

—

^,

and

rea-

soning similar to the foregoing shows that
i4-^

Equations
thus

(2)

and

= (i-^)(i+y).

(4)

may be

(4)

conveniently combined,

:

i

+

«

I

^^'

i—d'

'Professor Clark, {Political Science Quarterly, September, 1895),
i
appreciation is offset by less than i
reduction of

implies that

%

%

But in making his calculation he has failed to "compound."
The numerical illustrations of the eighteenth century pamphleteer
{supra) are also erroneous. E.g., instead of 28 %, should be 29.32
%. Professor Marshall, (" Principles of Economics," Vol. T, 3rd ed.,
His example is designed to show
p. 674), gives a correct example.
the losses from a fluctuating currency and not the effort to offset these
losses.
He appears, however, to have in mind this effort when he
postpones to the next volume the discussion of " the influences which
changes in the purchasing power of money do actually exert on the
terms on which loans are arranged," (p. 673).
^
The relation between rfandais (i+a) (r— ^)
i, which is evident from equation (5) or can be easily shown independently.
interest.

=

)

Amej'icaji Economic Association.

lo

Since

'

—

the ratio of the vahie of gold at the end

is

of the year to its vahie at the

wheat), that

is,

beginning

—d

I

of divergence expressed in gold,

is

" of $1

amount
the " amount

(5) as follows

The

(all

in terms of

the ratio of divergence of the two stand-

ards expressed in wheat, while

"

[352

is

the

and since

i

same

+

one bushel

we may

;

the

i is

put at interest for one year while

" of

ratio

i

+7

state equation

:

ratio of divergence betiveen the standards equals

the ratio between their " ainoiints^

This
relation

perhaps, the simplest

is,

and

upon

stress is laid

mode

it

of

conceiving the

because

it

brings into

prominence the " amount," or ratio of future payment to
present loan, a magnitude which in most questions of interest plays a

more important

role

than the rate of in-

terest itself/

Equation

(5)

terms of a or
either of i

gives the relation between i and

From

d.

and a or of

i

and

d^

and

terms either of y' and a or of y' and
I

+

whence

^

-\-

a

-\-

i a -^
I

or

i

in

also the value of i in
<^,

1

I

j =:i

/

follows the value of/ in terms

it,

thus

—

a

—d

=j — d —j d ^~-^
I

:

-r a

(6)

(

7

In fact, except for convenience in computation, the conception of
the rate of interest might well be dispensed with, giving place to the
conception of a year's "amount" or "ratio of accumulation." In
^

his "Positive

Theory of Capital," Professor Bolim-Bawerk expresses

(English Translation, p. 296). We should then speak,
not of a 6
rate of interest, but of 1.06 as the " ratio of accumulation."
In like manner " rate of appreciation " would give place to
" ratio of appreciation." Denoting the ratio of accumulation, i -\- j,
by r^ and i
^ by r, and the " ratio of appreciation," i -p a, by />, our
the same view.

%

+

theorem becomes simply

-

r

=/>.

Appreciation and Interest.

353]

It follows that

appreciation,
preciation,

{i.

j

exceeds i by more than the rate of

which

in turn

is

— i^ ay>

e.^j

II

more than the

rate of de-

d).

§4be noted that

It is to

as a standard of value

we have been

regarding

and not as a medium

of

money

exchange.

In either contract the actual liquidation need not be

made either in gold or wheat but in some other medium,
The speculator who sells wheat " short,"
as bank notes.
really uses

wheat

as a standard

and not necessarily

as a

medium.
In consideration of value received today
(which, though reckoned by the speculator in money,

may

readily be thought of as measured in wheat) he

promises to deliver, at a later date, so
wheat,

it

many

bushels of

being perhaps understood that he need not

ually deliver the wheat so long as he delivers
alent in money.

its

act-

equiv-

This operation, as actually practiced,

involves great uncertainties, and therefore occurs as a

gambling

Moreover

transaction.

usually paid for in advance.
reliable standard, selling

it

But

the
if

wheat

is

not

wheat were a more

" short " in consideration of

present advances might be a true

method

of business

borrowing, and would then exactly exemplify the case

we have

supposed.

in form with those

In

fact,

such contracts are identical

which would be made under the

oft-proposed " multiple standard."

CHAPTER

III.

MORE THAN ONE YEAR.
§1.

A

prominent bimetallist in conversing with the writer

on the subject

and appreciation, raised the

of interest

following objection: "Interest and principal are separate

;

the one

is

paid regularly in installments

remains to the end

;

hence appreciation must

in totally different ways.

by a uniform reduction in

I

do not see how

see,

is

and principal."

the other

it is

them

possible

interest applied to contracts

the appreciation of both

of different periods to offset

interest

;

affect

This view, as we shall soon
from the habit

quite erroneous and arises

of

separating in thought interest and principal.

First consider the case in

end

until the

of the

for instance, a savings

which no

term of years.

bank which

interest is paid

Let us suppose,

receives $ioo, gold

standard, and repays the depositor in five years at 5 ^
there were an alternative
compound interest.
If
standard, say wheat, in terms of

appreciate

^

constantly by

i

^

which gold is known to
per annum, what would

be the rate of interest in this standard ?
pose for convenience that at

first

We

shall sup-

the price of wheat

is

$1 per bushel.
^

Or what

is

equivalent, wheat depreciates

ygx^

relatively to gold.

be understood that there are always these two modes of expressing the relative change of two standards, we shall hereafter
adhere to "appreciation."

As

it

will

Appreciation and Interest.

355]
If

the repayment were to

from Chapter

I,

§ 3,

come

13

in one year,

we know

that the rate of interest in wheat

is

given by the formula
j^i-{-a-\-ta
.05 + .01 +.0005

=

= .060^

This result

as truly the

is

series of years as

for

answer

to

our problem for a

The

one year.

proof consists

simply in separating the contract into several contracts
of one year each.
Thus, by Chapter II, we know if we
deposit today 1 100 or

amount

in

i

its

equivalent, 100 bushels,

year to $105 at 5;^ or

its

will

it

equivalent, 106.05

6^^o. We may now regard these equivamounts as withdrawn but immediately redeposited

bushels, at
alent
for

Then, with the same rate

one year.

of interest in

gold and the same rate of relative appreciation,

we

shall

obtain the same rate of interest in wheat, so that $105.00
or its equivalent, 106.05 bushels, will

or

to I110.25 ^t

6-^^.

5^,
way each

its

In this

including the

last,

similar.

(i).

Chapter

Dollars due.

D{i

i

year

will be equivalent.

The principle employed

formula

in

equivalent, 112.47 bushels at
successive pair of " amounts,"

in

§

2 is to resolve the contract

The

into a series of one year contracts.

precisely

amount

For

the

first

general case

we

year

have,

is

by

II,
Bushels due.

Bushels due.

+ i)<^B{i+j)=B{i + a){i-\-i)

In the second year the same formula applies except
that in place of Z?, the principal
in place of B,

B (i +/)

or

is

now

^ (i + a)

these substitutions in the formula,

we

(i

Z> (i

+ i).

obtain

+ 2),

and

Making

iV

l>[\
A\\<\

similuK

aiul

sv» vMi.

1\\

§$ J

-^ /.\i

,/y

,

/*(i

I

aY

[i

!

i'Y

in tlu- thli\l year,

Kach

i\iv*.l

^^>

of the results discloses the priuoiple

we began

which the debt
The most general
in

is

for simplicity

with the case

allowetl to accmuulate to the end.

ease,

however,

is

one in which the

re-

|x^yn\ents are in installments.

Suppose, as in
that gold is

tively to wheat.
oar

its

the interest in gold

§ 3, that

known

A

to appreciate

i

%

is

5

and

'/c

annum

per

rela-

fanner mortgages his land for $i.ckx>

then e<jnivaleut, i>ooo bushels of wheat, and agrees

to pay annually the interest

and such parts of the principal

as he can save, tnaking the repayment complete in 7 years.

Our problem is to find
which will make the

that rate of interest in

wheat

and wheat

contracts in gold

e<^uivaleut iu every respect.

The

solution of this problem is precisely the

that of § 2, viz., 65^

For. at the end

%,

of

same

as

one year, the

farmer's debt amounts to $1050 or its then equivalent,

Let us suppose that he finds himself
aUeto pay, not only the ^4nterest>" $50, but also $50 of
io6<X50 bushels,

the

^'

lent of this iu

Hence he
pay
or

$100 altogether.
ici. 00 bu.

principal,' * that is

wheat

is

The equi\^

cart either

$ic>o,<x>

101,00 bu,

oa $1,050,00,
Qu.

leavnng

1,060^50 bu., leaving

$95aoo
959^ 50 bn.

aod, since the ^"amounts" $1,050 and 1,060,50 bu, are
e^ilu\^ilent

and the deductions; $ioo and ioi,oo bu, are

1

Appreciation and Interest.

557]

15

equivalent, the remainders $950 and 959.50 bu.

be equivalent
since,

950

with gold appreciating

bu.,

Thus
first

;

may

and, in fact, this

becomes worth

i

^

i

^

,

must

also

be seen directly

$950, originally worth

more, or 959.50 bu.

the farmer's remaining debt at the end of the

year

is

the same whether measured in wheat or

gold and since the same reasoning applies to the second
year, third year, etc., the equivalence

remains to the end

of the contract.
It is

worth noting here that the $100 payment in gold

will be regarded as consisting of half interest
principal,

and half

whereas the equivalent payment in wheat,

101.00 bu., consists of 60.50 bu., interest and 40.50 bu.,
principal.

The

may

liquidation of the contract during the 7 years
be supposed to take place in either of the following

equivalent ways

:

GOLD STANDARD.
I

Interest.

1

Amount.

Paj-ment.

At beginning
In
In

I

2

year
years

"

I50.00
47-50
45.00
40.00
34-50
27.50

"

15.00

':\i
"6
"7

::::.

^1,050.00
997-50
945.00
840.00
724-50
577-50
315-00

|ioo.oo
97-50
145.00
150.00
174-50
277-50
315-00

Prixicipal.

|i,ooo.oo
950.00
900.00
800.00
690. 00
550.00
300.00
0.00

WHEAT STANDARD.
Interest.

Amount.

Paj-ment.

At beginning
In
In

I

2

"3
"4
'•5

"6
"7

year
years
"
"
"
"
"

60.50
58.05
55 54
49-87
43-44
34-97
19.27

In these two tables ever}-

1,060.50
1,017-55
973-63
874-

1

761.46

61303
337-73

entrs" in

101.00
99.46
149-39
156.09
183.40
294-57
337-73

one

is

Printripal.

1,000.00 bu.
959-50 "
91S.09 "
824.24 "
718.02 "

57S.06 "
318-46 "
0.00 "

equivalent to

American Economic

i6

Association.

[358

the corresponding entry in the other except those in the
interest columns.

We

thus see that the farmer

in gold

if the interest

is,

and no better

than

off

if

is

who

contracts a mortgage

properly adjusted^ no worse

his contract were in a "

wheat

"

standard or a " multiple " standard.

§5-

The

principle involved in

ments subtracted from
equivalent remainders.

4

§

equivalent "

We may

of the first year

we have

by

amounts

The payment

the same fractional part of the
standards.

that equivalent pay-

is

"

in

" will leave

any year forms
" in

amount

the two

designate this fraction at the end

y^ the second year

the following results

by

and

etc.,

_/',

:

END OF FIRST YFAR.

f D {\^i)

Paym't
R'md'r

(I-/) Dii^i)

.

^ (1+^)
f B ^a

^(i+y)=

i?(i+/)*

Amount.

Bushels.

Bushels.

Dollars.

(

i-|./)

=
(i+z)
<^ (i-/) B{i^j
= (i-/) B{x^a) (1+/)
-^

fB{i-^j)

{

\

)

)

In like manner the unpaid remainder at the end of the
second year can be shown to be
Dollars.

(I-/') (I-/)

and so on

D (1+0= *
for

Bushels.
Bushels.
(I-/') (I-/) B (i+y)2= (I-/') (I-/) B (i+ar- (1+02

any number

yields the formula (i

This includes,

+/)

of years.

= (! + «) (i +

of course, the case of §

payments are made,y^y"',

partial

Each

etc.,

result again

z).

i,

in

which no

being then zero.

§6.

One

special case

eration.

may seem

Suppose the

to require separate consid-

interest alone is annually paid

and

the principal redeemed at the end, as in the case of a

bond not subject to a sinking fund. What correspondence between the two standards is then possible ? The
following tables answer this question, the

first,

for the

Appreciation and Interest.

359]

case

where the wheat

gold interest

17

the second, where the

interest,

annually paid.

is

TABLE

I.

Interest.

Amount.

Payment.

60.50

1,060.50

60.50

1,000.00
1,000.00

1,060.50

0.00

At beginning (Bushels^
In
"
"

I

year

•
.

.

2 years.

3

4
5

"

6

<<

"

7

.

'«

"
«

'

"

«'

.

Principal.

"
"
"
"

"
"

8
9
" 10

'

At bep^inning
In
'
'

"
"
"
"
"
"

year
2 years

I

3

4

.

.

"

.

50.00
49-50
49.01
48.53
48.05
47-57
47.15
46.63
46.17
45-71

'

.

'•

5
6
7

.

"

"
"

.

"

8
g

.<

" 10

"

<<

59-90
59-31
58.72
58.14
57.56
56.99
56.43
55.87
55.32
960.08

1,000.00
990. 10
980.29
970.58
960.97
951.46
942.04
932.76
923.52
914.37
0.00

(Doll^i's^
'

.

•

1,050.00
1,039.60
1,029.30
1,019.11
1,009.02
999.03

989.19
979-39
969.69
960.08

TABI,E

II.

60.50
61.10
61.72
62.32
62.96
63.59
64.22
64.86
65.51
66.17

1,060.50
1,071.10
1,081.82
1,092.62
1,103.55
1,114-59
1,125.73
1,136.98
1,148.35
1,159.84

50.50
51.00
51.52
52.03
52.55
53-08
53-61
54.14
54.68
1,159.84

1,000.00
1,010.00
1,020.10
1,030.30
1,040.59
1,051.00
1,061.51
1,072.12
1,082.84
1,093.67
0.00

50.00

1,050.00

50.00

1,000.00
1,000.00

1,050.00

0.00

At beginning (Busilels)
year
2 years.
"
"
"
"
"
"
"
" 10
"

In
"

I

.

"3
"4
"5
"6
"7
"8
"9

.

.

'
'

'

•

.

'

•

.
'

.

.

.

.

At beginning (Del lars)
In
"

year
2 years.

I

"3
"4
"5
"6
"7
"8
"9
" 10

.

"
"
"
"
"
"
"

"

.

.

' '

<
•

.

•
.

.
.

.

(
.

((

8

America7i Economic Association.

1

From Table

I, it

will be seen that

[360

the case in the

wheat standard, in which only the interest is annnally
paid and the principal redeemed in ten years is equivain the gold standard to a series of

lent, step for step,

small partial payments.

Thus, instead

the annual interest of I50, the

sum

of

paying merely

paid the

first

year

is

At the end
by $9.90.
principal and $45.71 of interest,

$59.90 reducing the principal

due I914.37 of
making $960.08 in all, which at that date
there

is

is,

of course,

precisely equivalent to the 1,060.50 bushels, the final

payment

On

in wheat.

the other hand, the case in which the gold interest

payments are kept up, corresponds

payments

less

than the annual

to a series of

interest, so that the un-

paid interest accumulated to the end makes the
due, 1,159.84 bu., of
It is

wheat

which 1,093.67 bu. are

sum then

principal.

thus clear that the case in which in one standard

the interest

is

paid annually and the principal at the

end, can be exactly

matched

in the other standard either

by minute partial payments or minute arrears of interest.
Without such partial payments or arrears in one of the
standards, the two would not be equivalent step for step.
We shall see, however, that they would still be equivalent as a whole.

CHAPTER
"

IV.

PRESENT VAI^UE."

In practice, of course no such minute partial payments
of principal or

Any

made.
tions of

even

if

trifles

we

minute remissions

of interest

would be

advantages to be derived from such calcula-

would not be worth the

But

trouble.

destroy the precise step-for-step equivalence

between the wheat and gold

tables,

The

their equivalence as a whole.

we do

not destroy

'•^present values

"

remain exactly equal.

The ordinary definition
sum due at a future

to

" Present value "

and " amount " are

at interest today will

that future date."

of the " present value " of a

sum which put
the given sum at

given

'

date

is

amount
In fact

thus correlative terms.

'

" thai

we may extend

the pre-

ceding definition to include the present value of past

sums

as the

accumulated

sum put at interest then.
The literal meaning of
it is

This

"

amount " today

of the past

" present value " implies that

the actual market price today of a future
is,

We

in fact, the case.

in theory, for

we

sum

due.

need not stop to prove

are all familiar with

it

it

in practice.

Elaborate tables are constructed on this principle for the
practical use of insurance

premiums, and

companies in calculating their

for brokers in

determining the compara-

tive merits of various

bond investments.

here concerned with

is

problem.

What we

are

applying the principle to our

"

A7ficrican Ecoyiomic Association.

20

[362

§2.
If

5^,

a debt of $1,000

is

contracted today, interest being

the "present value" of

by which that debt

interest,

payments, principal and

all
is

to be liquidated is exactly

$1,000.^

Again, the debt's present value, reckoned at a

later date

than the time of contract,

is

the "

amount

" of

$1,000 at interest from the time of contract to that date,

and this

is true,

whether or not any

Thus

ready been paid.
of contract are

if

computed

of the debt

has

al-

the present values at the date
for the gold

and the wheat

debts of the last chapter, they will be $1,000 and 1,000
bushels,

which

are then equivalent.

If

the present val-

ues one year later are taken they are $1,050 and 1060.50

bushels which at that date are also equivalent, gold hav-

ing appreciated

From

these

i fo

.

familiar principles,

it

follows that the

present values of the two debts, reckoned at any date

whatever, are identical whether the individual payments
correspond or not.
to,

Thus,

to take the case first referred

suppose the wheat debt to be discharged as in Table

and the gold

debt, as in

Table

The

II.

I

present value, at

the date of contract, of the interest and principal, separately computed, will be

•?

Dollars.

Present value of all interest payments
"
"
principal due in 10 years
.

"
If

"

total

.

Bushels.

.

,

386.09

<

444.24

.

.

613.91

>

555.76

1000.00 "^ 1000.00

the present values (including " amounts " of past

This and the other general theorems on present value are not proved
here because their proof is accessible in most treatises on interest, annuities, insurance, etc.
See, e.g., the "Encyclopaedia Britannica,"
" Annuities."
The symbol
is here used for "is less than the equivalent of
for "is more than the equivalent of."
and
'

<

'^

>

Appreciatio7i

363]
interest)

and

were computed 5 years
would be

contract, the items

21

Interest.

after the date of the

:

Bushels.

Dollars.

<
783-53 >

492-75

Interest

Principal

745-5°

1276.28-1341.38

Total

We
to

595-88

thus see that

would be

it

just as

pay the high interest in wheat

much

a hardship

pay the more

as to

onerous principal in gold,
§3-

The

case of a perpetual annuity

consideration.

As

perpetual annuity

is

may be

given special

well known, the present value of a

is its

" capitalized " value.

Thus,

if

taken at 5 ^ the present value of
a perpetual annuity of $50 per annum is $1,000. Applying the same principle to the wheat annuity of 60.50

the rate of interest is

,

bushels and extending the previous reasoning,

we

find

two annuities are equivalent.
At first sight this seems impossible since 6-^ ^ is a
higher rate of interest than 5^. This is true in the
that the

numerical sense, and

it is

also true that the early pay-

ments

of 60.50 bushels are actually

$50.

But

reverse

more valuable than

time (in this case 19 years) the
19th payment of $50 in gold is

after a certain

is true.

The

worth 60.40 bushels while the 20th

is

worth 61.01 bush-

the recipient of the wheat annuity has at
gold
first a slight advantage over the recipient of the
disadvantage
annuity which ceases and becomes a slight
els.

That

is,

after 19 years.

§4.

To

derive the formula for the time at

tive values of the

two annuities become
be z, in wheat,/;

rate of interest in gold

which the

rela-

reversed, let the
let

the two an-

:

American Economic

22

D i and Bj^

nuities be

and

B

[D

^ at

=c=

D

Associatio7i.

[364

their capitalized values being

the beginning) and

BJ is

ber of years in which

uable than

'

:

let

x

D

be the num-

as valuable as or

more

val-

Then

i.

Bushels.

Dollars.

B j > Di
of
B j < Di
+ years,
and since we know that in x years, D ^ B {\ ^- a)' and
hence Di o- Bt(i ^ a)'] and likewise in
+ i years,
Di B i{\ + cl)""^^ we see that the previous inequalAt end
At end

of

x

years,

.r

-

-

i

-

-

.r

=0=

ities

^

become
Bushels.

of

x

years,

of

At end
At end

;i;

+

-

i years,

Bj
Bj

Bu.shels.

> Bi(i ^ aY
< Bi{i <^)-^+
-\-

which may be combined in the formula
i (i

+aK^y <i (i +«)^+

^<log/^log^

—

That

is,

X

log(i+a)

log J
log

Thus,
then

if

2^.05, a

logy

(8)

number

— log
+«)
t

(I

= .01,

and hence also/ =.0605,

— log z_ 2.7818 — 2.6990 .0828 ~
"~
.0043
+ a)
.0043

log

Hence x

^_^^_

the integral part of the

is

I

( I

=

ig.

:

CHAPTER

V.

VARYING RATES OF INTEREST AND APPRECIATION.
§1.

we have assumed

Hitherto

that the appreciation pro-

ceeded (during the period of the contract) at a constant
percentage rate per annum, and that the rate of interest
(in

one standard, and consequently in the other) remained

The more

constant also.

general case

one in which

is

these elements are changing.

Beginning with a numerical
the United States government

case, let us

offered

is

suppose that

an alternative

loan, not in gold or " coin," but in gold or silver.
it

be

known

first

year, but in

lars,

that

50 ^

is,

We

two years

worth 150

it

;

will appreciate 10 fo

Our problem
in silver.

silver dol-

also that in the third

and

5^

It is

is

^

and

respectively.

shall suppose that the rate of interest,

tract be in gold, is 3

if

the con-

for each year of the contract.

to discover

what

will be the interest

perhaps already evident that

different rate for each year.
for

will be

gold will " appreciate," in the second year,

relatively to silver

fourth years

Let

that lOO gold dollars will remain at par the

If

it

will be a

the contract were

made

one year only, the rate of interest in silver would

also be 3

^

,

since silver remains so far at par with gold.

If the contract (or any unpaid part of it) were then
newed for a second year, the rate of interest would
by formula (3)

j

= a-\- ai
= .03 + .50 + -015
=
.545
=
54i%
z -\-

re-

be,

American Economic

24

In like manner,

Association.

we may deduce

[366

the rate of interest in

each year, with the following results

:

Gold

Silver

Appre-

Standard.

Standard.

ciation.

......

istyear
2d year
3d year

3%

%

3

0%

3

50

3

4ttiyear

54^

13^

10

SyVj

3

5

Etc.

question arises, can a single " average " rate of

The

interest be substituted for the

We

debtor has the option of
If,

above irregular

answer that such an average

is

series ?

not possible

arbitrary partial

if

the

payments.

were 20^, and the governat any time, it would evidently be

for instance, the average

ment could pay

ofi

tempted to refund the debt at the end of the second
year, to
If,

which the lending syndicate would not

agree.

however, the conditions as to repayment are stipulated

an average can easily be computed on the

for in advance,

principle of present values.

Suppose the government agrees

extinguish the

to

debt in four years by paying at the end of successive
years 20, 40, 30, and 10 millions (these to include " interest ").

The

millions,

which

sums

present value of these
is

therefore the

ceived from the syndicate.

adding the present values

amount

is

obtained by

The

payments.

present value of 20 millions, due one year hence,
^°

66.321

of the loan re-

This sum
of several

is

is

= 19.418 millions.

1.03

and

of

40 millions, due two years hence,
•

~

is

= 25.136 millious,

(1.03) (1.545)

for evidently

if

this be

put at interest for one year at

and

Appreciation

367]

Interest.

25

amount to 40 millions.
Likewise the third and fourth payments have present

3^, and

the next at 541-%

will

it

values of
^°

,,

-.

= 16.639 millions

r

,,

(i.03)(i.545)(i.i33)

5.128 millions.

(i.03)(i.545)(i.i33)(i.o8i5)

The sum

of these four present values is 66.321 mil-

Now

lions.

if

we compute

the present values of the

four payments on the basis of a uniform rate of 20.26%
interest,

we obtain

the same sum, thus
r= 16.631 millions

(1.2026)

40

27.659

(1.2026^

30
(

1.

^
2026)''

= 17-250

^°
(r.2026)*

"

=66.321

"

separate present values are here fictitious, that

them
future payment
no one

offset

4-781

Total,

The

=

of

is

to

is,

the actual present selling price of the

which

it refers,

sum

each other that their

selling price of the

whole

but the deviations so
is

the actual present

set of future

follows from principles already stated

payments.
that

It

the debt,

66.321 millions, can be liquidated by precisely the same

payments
terest is

(20, 40,

30 and 10 millions) whether the

reckoned separately at

or uniformly at 20.26%.

3,

54^,

i3to",

in-

^^^ ^tot^

In fact the details of the book-

keeping in the two cases are

:

American Economic

26

At

3,

54i

i3T^ff.

Association.

At 20.26% uniformly.

StVc^-

(In Million.?.)

(In Millions.)

I'^ter-

^^o„„t

Pay-

Principal.

We

1.99,

.

26.33
4-6i

.

.

.75

.

68.31

74-64
39 25
10,00

Pay-

Inter-

ment.

est.

Date
In I year
In 2 years
In 3 years
In 4 years

66.32
48.31
34-64
9-25
0.00

20.00
40.00
30.00
10 00

thus see that 20.26^

[368

13-44
12. II

645
1.

68

133^ and S^^^^s in the sense that, by
ments will cancel the same debt. It

with the arithmetical average, which

is

cipal.

66.32
59-76
3t-^7
8.32
0.00

20. on

79-76
71.87
38-32
10.00

40.00
30.00
10.00

the "average" of

is

Prin-

Amount. ment.

3,

54^,

the same pay-

it,

not identical

is

19.74^.

§3-

Let ns suppose that the rate of appreciation of one
standard in terms of the other
first

on

;

year,
also,

a.^

to

the second year,

is
a.,

foreknown

to be a^ the

the third year, and so

be as general as possible, that the rates of

interest in both standards are variable, being in the ap-

preciating standard

i^

the

first

year,

and in the depreciating standard,

i.,

the second,

etc.,

Let the

y^, y^, etc.

Then, as in

we

final

settlement occur in n years.

may

regard the contract as equivalent to a series of one-

§ 2,

year contracts successively renewed in whole or in part,
the difference being only that the terms are

advance.
tracts,

As

all

made

in

equation (2) applies to each of these con-

we have
I

+yx =(!

+ «,)

(!

+ ?,)
(9)

To

obtain an expression for the average rate of inter-

est in either standard,

series of

payments Z?^,

z

i. <?.,

Z>^,

.

(ory J,

„
.

.

we

require a given

Z>„ in the

gold standard

.

and

Appreciation

369]

(or their equivalent B^,

iiorjnJ,

.

l+i,

.

.

27
in the silver

B^^

.

present

value

(I

'

+

i,)

I

(

+ /J

.

interest,

yjis

.

^ (I + Zj (I + tj

^

these

of

reckoned by the separate rates of

payments,
^i^'^2^

B.^^

The aggregate

standard).

Interest.

.

.

.

(I

+ 4)

(or the corresponding expression in terms of j^'sand/'s).

Now

the " average " rate i

same

to the

of present values

1

+4

(1

'

must be such that

^^

payments

set of

that

;

it

is, i^ is

+ 4)-

make

will

if

applied

sum

the same

determined by

'

(i

+ 4r
(10)

i

+ 4^(i + 4)(i + 4)^

and

is

j\^

^'s and

^(i + 4)(i

+ /j

•

(i+?j

•

determined by the corresponding formula in

y 's.

This equation has only one real and positive root or
value of i ^.

can readily be obtained by Horner's

It

Method/ We
age" of ?„ ?„

and

shall call z^
•

z;

.

/^^

the "actuarial aver-

and of /„ /„

re-

/„

.

.

spectively.^
'

For,

h\ substituting

for

-,

1

1

+4

,

etc.,

the letters x^,

In the example of

I 2,

20 .ar

* I

^^

+ 4 reduces to the
Z?,

= Z>, =

.

•

gives

.ar^

+ ID

.ar*

o.

+ 4>

:

.

.

x^.

:

= 66 321,
.83155,

j\^=^

.2026.

"geometrical average " of

= D.-, =

for

+D^x^x^

.

x=

is

,

and

the equation becomes

+ 40 ;r^ + 30

I+7a

x

I

the equation becomes

the required root of which

when

.tr„ etc.,

the single letter

+D^x'^ = D^x^-{-D^x^x^+

D^x + D^x""-^

which, applied to

+4

i

+ 4» + 4) ^^c.
i

American Economic

28

Association.

[37°

§5.

We may define

average rate of appreciation of one

tlie

two standards in terms of the other as that rate
which would connect the two average interest rates if
of the

the latter were actual (instead of averages of actual) rates.

That

is,

the average appreciation,

is

a,_^^

^

given by the

equation

-^iiJZ^?

a

or

Thus

in the

example

20.26^ and gold

is

of

.2026
I

or

16.76^.

3^

— .0^

+ .03

i^ it

^^*^^

=

so that
r„i,

1676,

,

This average

arithmetical average of

be 16.25%,

the average silver interest

§1,

interest

«a=

(11)

is

o, 50,

not identical with the

10 and 5^s, which would

which

identical with that rate

if

uniform would result in four years in the same divergence between silver and gold as was produced by the
four successive rates

14.70%.

For the

ever, the latter

10 and 5/^s; this would be

o, 50,

statistical

method

is

purposes of Part

II.,

how-

adopted for simplicity and

is

doubtless correct within the limit of error.
§

It

may seem

6.

that the subject of this chapter can have

no practical application.

A government

this is not the case.

we

In Part II

shall see that

bond, for instance,

is

a promise to pay a specific series of future sums, the
price of the
^

It

bond

may be proved

is

that this definition of

condition of au average,
latter are all equal,

or not.

the present value of this series and

viz.,

whether

a^, satisfies

that a^ reduces to
z,,

i^,

etc.

{and

the general

a,, a^, etc.,

j\.j\, etc.,)

be

when
all

the
equal

Appreciatio7i

37 1]

and

hiterest.

29

the " interest realized by the investor " as computed by
actuaries is nothins: more nor less than the " averao-e "
rate of interest in the sense above defined.

Of course

the investor puts no specific values on the individual
yearly rates of interest of which the "interest realized "
is

the average, but that this interest

is

attested both

of interest

is truly an average
by the comparative stability of the rate
realized on long time bonds as compared with

the fluctuations of the rate of interest in the short time

money market

(

a stability

which the

rate realized on the

bonds does not possess when near maturity^ ) and by the
fact that interest realized on a very long bond, say 50
years, is often lower than on a 25 years' bond.
This is
explainable by the prevailing opinion that interest tends
to

fall,

so that

if

the 50 years' investment were in two

successive bonds of 25 years each, the interest realized
in the second

would be lower than

" actuarial average " of the

realized

two

is

in

the

first.

The

equal to the interest

on the 50 years' bond.

abundantly verified by market quotations, as is also the
the interest realized to him who buys a bond and sells it
again in a short time is even more variable than rates on money.
'

This

is

fact that

Thus, if in a fortnight ( in which no interest falls due ) the bond advances y%, the speculator realizes at the rate of about 3% per annum
if the rise is %, he realizes over 12%.
The investor who holds a bond
along time realizes an interest which is an "average " of the oscillating rates of those who speculate during the interim.
;

CHAPTER

VI.

ZERO AND NEGATIVE INTEREST.

established the truth and generality of the

Having
principle
limits,
y,

rt-,

(

i

+

(i

<^)

+

we next

z"),

any, are imposed on

The

i.

when

+/ =

i

if

inquire

what

the three magnitudes

foregoing equation seems to require that,

the appreciation

rapid, the rate of

is sufficiently

upward moving standard should be zero
Thus if a =j\ the equation gives us i= o.

interest in the

or negative.

iVgain

if

«

>y

then

z

< o.

of interest in wheat, is 8

For instance,

^

and

if

we have

tively to wheat 20^/0 per annum,
(i

+

interest in

Now
Any

it

+

i)

which can be
possible

it

;

that

$100

the rate

is,

i

-J-

rela-

.08 :=

the rate of

I

clear that negative interest

is

possessor of

than lend

—

whence i=
.10
minus 10 fo
gold would be

.20) (i

if /,

gold appreciates

is

impossible.

of gold (or its equivalent in

goods

would hoard the gold rather
That is, the relation z < o is imalso « >/ is impossible.
Thus

sold for gold)

at a

loss.

and therefore

our magnitudes are restricted within certain limits,
z

viz.,

>o
(12)

or, in

words, the rate of interest in a

money which can

be hoarded (without trouble, risk or expense) can never
sink below zero and the

money

itself

an expected appreciation (relatively

can never undergo

to another standard)

greater than the rate of interest in that standard.

Appreciation and Interest.

373]

31

§2.

This
flect

seem mysterious when we resame cause, viz., hoarding, which prevents
from being negative also checks the expected

last result will not

that the

the interest

An example

rate of appreciation.
It is

will

make

a familiar fact that the expected rate of appreciation

money) can never be more

of real estate (relatively to

rapid than the rate of interest (in money).
is

this clear.

faster

If

the latter

the (money) value of land can never advance

5^,

annum

than 5 ^ per

except

when

that advance

is

unforeseen.

The

explanation

is

certain land values

make

able to

simple.

would

If it

rise

were foreknown that

10^, owners would be

much by holding as by selling
proceeds at 5^.
The land would be

twice as

and investing the

This decreases the supply and sends up the
price until it is within at least sfooi the expected sellhoarded.

ing price one year hence.
city lots for speculation

It

thus happens that holding

comes

to be regarded as a regular

investment from which the same return

is

to

be ex-

The

pected as from investing in a productive enterprise.

same could be said of wheat, cotton, or other speculaHoarding money is but a particular form of
tion.
"holding

for a rise."

lessen the rise

—not

In

all

cases the process tends to

to obliterate

it

but to

to the rate of interest (in the standard in
itself is

make

it

equal

which the

rise

measured).

In the case of appreciating

money we saw

that, of the

two conditions i~ o and a ^j\ the first was the more obvious, while in the case of appreciating real estate the
second was the more obvious.

both cases

money.

we

are accustomed

We say,

The
to

reason

is

that in

think in terms of

" the rate of interest cannot be nega-

American Economic

32
" the

tive,"

expected

new

It

[374

estate cannot exceed

we have

statements implies another.
a

real

rise of

the rate of interest," but, as

Association.

seen, each of these

may strike

the reader as

idea that land speculation presents an actually

existinp- case of zero interest.

And

yet this

undoiibt-

is

we take as our standard an acre of speculative
The land speculator is " making money " but not
land.
" making land."
His 100 acres remains 100 acres. We
edlv

so, if

could even imagine

all

loan contracts translated from
still keeping money as
100 " acres " would be liquid-

" dollars " into " acres " (though

K
the mcdiitni).
ated one year hence by 100 " acres " and interest would
be nil. There is no intrinsic reason why this same zero
debt of

interest (for absolutely safe loans)

be true of
in the

money, and

abundance

this

might not sometime

without implying any change

of capital.

§3.
It is

important to emphasize the fact that these limits

imposed on the magnitudes i and a come from the possibility of hoarding money without loss. If the money were
a perishable commodity, such as fruit, the limit would be

pushed into the region

One can

of negative quantities.

imagine a loan based on strawberries or peaches contracted in summer and payable in winter with negative
Or, again,

interest.^

we may

define a " dollar" as con-

sisting of a constantly increasing
gold.^

If

number

of grains of

the weight doubles yearly, such " dollars"

cannot be hoarded without growing fewer with time,
and if interest was previously 5 ^ it will now be minus
^iVz^oy for he
iCf.
2

who borrows $100

(2580 grains) to-day

Bolim-Bawerk, " Positive Theory of Capital," pp.

Such a

definition for either the gold or silver "

252, 297.

pound"

in Professor Foxwell's proposal for a " climbing" ratio.

is

implied

s

Appreciation a^id Interest.

375]

33

pay back I52.50 (2709 grains) one year hence.
Again we find a real example by recurring to land
will

Since to hold land usually involves paying

speculation.

upon

taxes

" acres"

is

it,

the rate of

interest in terms of

such

often, in actual fact, negative.

§4.

In this connection, an apparent difficulty needs to be
explained.

mum

gold should appreciate up to the maxi-

If

limit so that the interest rate

loans,

would not

would a

capitalist

all

were zero

investment cease

?

for safe

What

object

have in investing when he could gain

much by hoarding ?

Nothing could be more natural
than the fallacy here involved and we ought not to be
surprised on finding it among the arguments of certain
bimetallists.
For example, the Free Coinage Convention at Memphis, Tenn., a year ago, adopted the follow-

as

ing resolution
gold means a

:

"

fall

The demonetization

of either silver or

in the prices of commodities, a dimi-

nution of the profits of legitimate business, a continuing
increase in the burden of debts, with consequent hard
times, idle labor

and

idle capital., the increasing value

of money promising a surer rettirn
than to an invested oney

The
capital

a hoarded dollar

error here contained is the ancient confusion of

and money.

gold would be

of

to

It is true that

a limited^ amount

withdrawn and hoarded, but

would not check the investment

of capital

this

any more

than the similar withdrawal of so much copper. If a
hoarded dollar yields a " sure return," a hoarded dollar^
As in the case of land, the hoarding would reach its limit when it
had raised the value (marginal utility) of present money up to the
present value of future money. Hoarding beyond this point would
'

bring

3

loss.

American Economic

34

worth of goods as surely

Association.

[.37^

The

possessors of

bri?tgs loss.

stocks of cotton or grain, machinery or ships, the prices

which are

of

unemployed.

falling,

A

have no disposition

keep them

to

retail dealer fills his store

with carpets

and gives the wholesale dealer his note for three months.

He

said to

is

borrow " money" but he really borrows

He may pay

carpets.

no (money)

wholesaler gains by the loan.

interest

He

is

and yet the

saved a loss in the

(money) value of the carpets which he would have incurred had he failed to get rid of them.

In terms of

may be making 5^. Similar considerations
when the loan is negotiated through a third party,

carpets he

apply

and apply in

as a bank,

investments.

^

that no further treatment of

However turned

here.

point of
cent,

But the case supposed

ble transaction.

it

seems necessary

"

money"

at

no per

certain circumstances be a very profitaIt

conclusions

interest.
risk,

so highly hypo-

or twisted and from whatever

view examined, lending

may under

going

is

and

and the error involved has been so often ex-

thetical

plained

fact to all forms of loans

goes without saying that the fore-

apply

That part

of

only to

market

"

pure"

interest

and that part representing commissions

or

" net"

representing
for transact-

ing the business of lending and borrowing would not
disappear.
^E. g. F. A. Walker, "Money.." (New York,

187S), p. 94.

PART

FACTS.

II.

CHAPTER

VII.

INTRODUCTION.

No

study of the relation between appreciation and inwould be complete without verification by facts.

terest

In imaginary illustrations, such as those used in Part
it is

make

easy to

place

;

we

but the figures in which

are really interest-

ed must come from actual market quotations.
these alone can

I,

calculations agree to the last decimal

we

test

Through

our assumption that foresight in

regard to the appreciation or depreciation of

money

ac-

tually exists.

At the

how

outset the question arises,

can a merchant

be said to foresee the appreciation of money ?
ation

inition,

Few

a subtle conception.

is

any clear ideas about it.
and

business

Appreci-

men have

Economists disagree as

statisticians as to its

to its def-

measurement.

If

you

ask a merchant whether he takes account of appreciation,

he will say he never thinks
a dollar as a dollar.
of

money, but money

of as the

of

it,

that he always regards

Other things
itself

one fixed thing.

he

is

may change

in terms

accustomed to think

But though we do ordinarily

regard the value of a dollar as a fixed magnitude, this
does not really prevent our taking account of

In our daily

life

we think

its

changes.

of the earth as fixed,

but

we

its rotation whenever we speak
During a period of inflation the

virtually take account of
of sunrise or sunset.

ordinary

man conceives

the

premium on gold

as a rise of

American Economic

^6

gold not a
rising
sults

fall of

money.

But

if

[378

he takes account of

wages and rising prices he arrives at the same reWe need
as if he had thought of falling money.

ascribe to the

not

Association.

practical

man any knowledge

of

" absolute " appreciation, but whatever absolute appreciation

is, it is

included, though unseparated, in the practical

man's forecast in terms of money of all the economic
elements which concern him prices of his product,

—

cost of living,

wages

of his

workmen, and

so forth.

If

he expects falling prices and rising wages, as is often the
case, he may be said to foresee an appreciation of gold
as defined by the ordinary bimetallist and at the same
time a depreciation as measured by difficulty of attainment.

What

is

more, he takes account of the relative

importance, as affecting himself, of the various changes

which he

expects, and not of their relative importance

in the elaborate averages of the statistician, averages

which may emphasize some commodity or some labor
whose fluctuations have absolutely no concern for him.
His effort is not to predict the index numbers of Sauerbeck or Conrad, but so

to foresee his

own economic

fu-

make reasonably correct decisions, and in particular to know what he is about when contracting a loan.
If gold appreciates in such a way or in such a sense that
ture as to

he expects a shrinking margin of profit, he will be cautious about borrowing unless interest falls and this very
;

unwillingness to borrow, lessening the
"

money market,"

will bring interest

explanation of this process

is

emphasize the broad

down.

in the

Further

postponed to Chapter X.

Before proceeding to specific
to

demand

statistics, it is

important

fact that in general, business fore-

sight exists and that the accuracy and

power

of this fore-

Appreciation and Interest.

379]

sight

is

greater today than ever before.

37
It is

distinguishing marks of modern business.
of trade journals

and

investors' reviews

one of the
Multitudes

have their

sole

reason for existence in supplying data on which to base

Every chance for gain is eagerly watched.
active and intelligent speculation is constantly going

prediction.

An

on which, so

far

as

it

does not consist

and gambling transactions, performs

and provident function

for society.

to believe that foresight,

an exception
if so,

it

known

reasonable

the general rule, has
Or,

can the academic bimetallist assume himself pos-

incapable
It is

see.

which

?

he who

first

practical

man's business

man

to fore-

gathers the facts and statistics on

must be based. It is he who watches
past price movements and notes the slight-

forecasts

the trend of

we

which he says the

It is the practical

est signs of a change.

that

is

Is

as applied to falling or rising prices ?

sessed of a foresight of
is

which

of fictitious

a well

And

it is

in his trade journals

find the first discussions of the probable effect of

gold discoveries or silver legislation on prices and trade.

The

theorist can aid in these predictions only

by sup-

plying or correcting the principles on which they are
constructed.

CHAPTER

VIII.

GOLD AND PAPER.
§1.

General evidence that an expected cliange in the value

money has an

of

effect

on the rate

tained from several sources.

they can

sell

of interest

gold bonds at better terms than currency

The very

or coin bonds.

desire of lenders to insert a

gold clause in their contracts

is

strong proof that they

are willing to yield something for

ingly

shown

period,

where

can be ob-

Municipalities often find

in

California^

it.

This was

strik-

during the war inflation
be en-

for a time, gold contracts could not

forced and in consequence interest rates were very high.

During a period
true that interest

of progressive
is

paper inflation

it is

also

high even when the contract

is

drawn on a paper basis. As we shall see at a later stage,
this was partially true during the civil war, though its
effect was not very pronounced owing to the over sanguine hopes of an early termination of the war and a
It was also true during the
return to a specie basis.
currency troubles in the thirties. Raguet wrote " "In
the six months before the suspension of ^2>7i although
the amount of the currency was greater than it had ever
:

been before in the United States, yet the scarcity of

money was

so great that

per month."

ence on these

It

it

commanded from

would be unsafe

facts.

to

i^o to 3

^

much infermay be partly

found

Their significance

Bernard Moses, " Legal Tender Notes in California," Quarterly
Journal of Economics, October, 1892, p. 15.
-" Currency and Banking," (1839), p. 139; alsoSumner, " History; of
Banking," (1896), p. 264.
^

9
2
6
9

,

Appreciation a7id Interest.

38 1]

or wholly different.

But they

raise a

39

presumption in

favor of the theory here advanced and against the theory
that the rate of interest

is

lowered by inflation of the

currency.

A

definite test

must be sought where two standards

An

are simultaneously used.
is

excellent case of this kind

supplied by two kinds of United States bonds, one

From

payable in coin and the other in currency.
prices

which these bonds fetch in the market

it is

the
pos-

sible to calculate the interest realized to the investor.

The currency bonds

known

are

and

as currency sixes

mature in 1898 and 1899. The coin bonds selected for
comparison are the 4^5 of 1907. The following table
gives the rates of interest realized in the two standards
together with the

premium on

gold.

RATES OF INTEREST REALIZED FROM DATES MENTIONED
TO MATURITy.i
Price of
Coin.

Coin.

Currency.

3-7
3-8

Currency.

4-5

Gold.

Jan., 1870
July. 1870
Jan 187T
July, 1871
Jan., 1872
July. 1872
Jan., 1873
July, 1S73
Jan., 1874
July, 1874
Jan., 1875
July, 1875

.

.

.

,

Jan.,

July,
Jan.,
July,
Jan.,
July,

1876
1876
1S77
1877
1878
1878

.

.

.

6.4
5-8
6.0

5-4
5-3

I

5-8
5-3

50

113.
109.5

56

5-1

4-9
5.0

119.
112.

TO 8

113-9

5-7
5-4

5-1

III.

50

"5-3

•

5-0

.

50

5-0
4-9

110.3
T10.7

•

5-1

47

112.

51

4-4
4.4

112.

•

•

•

.

.

4-7
4-5

.

45

.

4.4

50
.

3.9

4.2

4.4
4-3
4.6
4.4

1

17.0

112.3
107.0
105.4
102.8
TOO. 7

Jan.. 1879
Jan., 1880
Jan., 1 881
Jan., 1882
1SS3
Jan.
Jan., T884

May, 1SS5
Jan., t886
Jan., 1887

•

•

1

.
i

3-3
3-0

•

1

2.9
2.6

\

^-7
2.6

1

1

2.3
2.3
2.2
2.T

Mar. t888
1889
May, 1S90
July, 189T
Jan., 1892
Mar. 1S93
Nov. 1894
Aug. ,1895
Aug. 1896

Jan.,

,

,

2.4
i

i

'-^
2.8
2.7
2.8
3.2

4.0
3-4
3-5
3-3
2.9
2.7
2.6
2.6

29
2.6
2.6
3-0
3-1
3-1
3-5
3-6
4-3

^This table has been obtained by the aid of the usual brokers' bond
In the case of currency bcir.ds, it was only necessary to deduct
accrued interest (if any) from the quoted price and look in the table
for the interest which corresponds to the price so found and the num-

tables.

American Economic

40

^

Association.

The

Several points in this table deserve notice.
tations for 1894, '95, '96

[382

quo-

show a considerably higher rate

currency standard than in the coin stand-

of interest in the

ard as well as a higher rate in both standards than in

The difference is between 2.7^ and
and between 3.2^ and 4.3^ in 1896.
3.5^
Both the increase and the wedging apart of the two rates

previous years.
in 1894,

are explainable as effects of the free silver proposal and
its

incorporation

(July 1896)

A

Democratic party.
duce the value

of returns

bly also of those

the platform of

in

free silver

law

from currency bonds and possi-

from coin bonds.

inflation has this effect, it

ing the period of actual

If

the mere dread of

might be supposed

the exact opposite to be true.
in gold but

that, dur-

inflation, the discrimination in

favor of coin bonds would be even greater.

made 6.4^

the

v^^ould certainly re-

But we

find

In 1870 the investor

was willing

to accept a return of

only 5.4^ in currency. This fact becomes intelligible
in the light of the theory which has been explained. It

meant the hope

of resumption.

so depreciated there
value.

It

was not

Just because paper was

was a prospect

until

of a great rise in its

1878 when the prospect of a

further rise disappeared that the relative position of the

two

rates of interest

was

reversed.

After resumption in

1879 the two remained very nearly equal for several
years until recent fears of inflation again produced a

divergence.
ber of years to maturity.

In the case of gold bonds, since the quotait is necessary to divide the quoted price

tions are given in currency,

by the price of gold in order to obtain their price in gold {i. e.,
"coin") and then proceed as above indicated. The quotations of
prices of bonds and gold are the "opening" prices for the months
named and are taken from the Financial Reviezv, 1895, the Commercial and Fitiancial Chronicle, the (New York) Bankers' Magazine
and the Bankers' Almanac. After 1SS4, January quotations were not
always available.

and

AppreciatioJi

383]

Interest.

41

§3-

We

have found so

how

to inquire

with the

far that the facts agree

But

theory previously laid down.

it is

necessary further

For

agreement.

close is this

this pur-

They

pose, the figures just given are of little value.

represent the rates of interest realized for the periods be-

tween the dates named and the times

These

mature.

As has been explained such

bonds.

at

which the bonds

periods are not the same for the two

a rate of interest

is

a sort of average of the rates of interest for the individual

Thus, in the foregoing

years of the periods in question.

table, the rate of interest in currency opposite January,

1870,
1899.

is

5.4^. This

It is a sort of

is

the rate realized between 1870 and

average

of,

say, the rate realized be-

tween 1870 and 1879 and between 1879 and 1899. As
shall see the former was 6.3^ and the latter, 4-5/^.

we

It is clear that

we must

seek the rates of interest in

the two standards for the same periods.

In the follow-

ing table the periods selected terminate on Jan.
the date of resumption of specie payments.
say, to fix

our ideas, that the figures represent the rate of

interest realized to investors

dates mentioned and sell

who buy

the bonds at the

them on January

i,

1879

but

;

obviously unnecessary to consider the bonds as ac-

it is

tually either
is

1879,

i,

We may

no

nevv^

bought or

use of terms.

in their assets at
rise or fall

sold,

but only as owned.

Business

men

This

reckon securities

their market prices and

if

these prices

they count themselves as gainers or

losers.

This gain (or loss) added to the annual interest receipts

and properly distributed over the time considered gives
the rate of interest realized.

1

.
•
.
.

American Economic

42

Association.

[3S4

RATES OF INTEREST REALIZED FROM DATES MENTIONED TO JAN-

UARY

I,

1879,

(Date of Resumption').
Appreciation of Currency in Gold.

Coin.

Currency.

j

i

Expected.
Actual.

January, 1S70.
July, 1S70
January, 1871
July, 1S71
January, 1S72
July, 1S72
January, 1873
July. i'S73
January, 1S74.
July. 1874
Fanuary, 1875
July, 1875
January, 1876.
July, 1876
January, 1877
July, 1 87 7
January, 1878.
July, 1878
.

.

.

•

.

.

•

•

.

.

.

.

.

'

.

.

.

.

a

q.i

6.3

.8

2.1

6.2

5-7

•5

1.4

6.7

63

•4

1-3

6.4
5-9

5-7
5-7
5-7

7

1.8

.2

•5

1-3
2 1

.3
.2

2.0
2.8

—.5

2.T

6.2
6.5
6.2
5.6
5-7
6.0
6.1

5-4
5-2
5-5
5.7
8.2
4.8

62
6.0

6

T

•

5-8

2.4

5-4
4.2

!6

3-1

1.8

4-9

41

1.2

43

2.4
4.0

2.7
1.4

4.9

3-1

2.5

6.0
2.6

2,

3-5
3.6
2.8

2,1

1.4

Since the figures in this table represent the rales of interest which
render the " present value," at the date of purchase, of all the

will

future benefits to January, 1879, equal to the purchase price, they can
be calculated by Horuer's method as indicated in Chapter V. But the
method which has been adopted is less laborious, as it ena1)les us to
use the bond tallies. It can best be explained by an example. The
opening price, January, 1870, of currency 6's was 109)^, and January,
1879, ^^9/i, which require no correction for accrued interest.
Our

problem

is, if a man spends ^109"/^ in
1870 and receives |ii9>< in
1879 with $6 per annum (semi-annually) in the meantime, what rate
of interest does he realize? Now it is clear that the answer is the

same

if all the benefits and sacrifices involyed are doubled or halved
or increased or decreased in an}' common ratio. Let us then divide

them

all by i.icjyiThen I91.3 would be paid in 1870 for |;ioo due in
and ^5.02 per annum in the meantime. That is, the interest
realized is exactly as if the bond were a 5.02% bond maturing in 1879
and bought at 91.3 in 1870. This can readily be obtained from the
bond tables by interpolating between the figures for a 5% and a 5)4%
bond purchased at 91.3 and having 9 years to run. For a 5% bond
we obtain 6.28%, and for a 5}4% bond, 6.81%. Hence for a 5.02%
bond the result is 6,30%, or 6.3%, The third column gives what may

1879,

be called the expected rate of appreciation of currency in terms of
is, that rate of appreciation which would have made the

gold, that

Appreciation

385]

From

this table

we

and

Intej^est.

43

see that the interests realized for

the period, January, 1870 to January, 1879, were, in coin,

7.1^, and in currency, 6.3%, which, according to the
( i + <« ), gives a rate of appre( i + z
formula i + 7
)
This may be called the " expected apciation of .8%.

=

preciation

That

The

".

actual rate of appreciation was 2.1%.

the estimated appreciation was about two-fifths

is,

of the appreciation as

who

Thus

those

held currency sixes had the better investment.

fact it is w^ell

known

that

exchanging gold bonds

The

really turned out.

it

many speculators grew

for currency

bonds

rich

In

by

at this time.

shows the same misjudgment in July, 1870,

table

January, 1871, and

July,

1871.

From then

to July,

1874, the outlook for resumption grew gloomy, due no

doubt to the strong greenback sentiment.

The

inflation

1874 actually produced a prospect of negative
This bill was vetoed by
appreciation, i, e.^ depreciation.

bill of

December of that year the bill
Accordingly
for resumption was passed by the Senate.
January, 1875, opened with a more hopeful estimate.
President Grant, and in

The

became law on the 14th

bill

was an immediate
which, from then

rise in the "

on,

of

January and there

expected " appreciation

averaged 2%.

But during the

same period the actual appreciation from the dates named
two interest

+y=

rates equally profitable.

+ «)•

It is

obtained from the formula

column gives the actual rate of appreciation between the dates mentioned and January i, 1879. This
Thus the opening price
is calculated from the quoted prices of gold.
Hence
of gold January, 1870, was 119.9, and January, 1879, ^oocurrency appreciated in nine years in the ratio 100 to 119.9, which is
I

(i

-I- ?)

(i

The

last

2.1% per annum. If the appreciation proceeded uniformly this method would be strictly correct. As it is, a more elaborate method would be required, in accordance with the principles explained in Chapter V, to take account fully of the fluctuations of the
annual appreciation. But for our present purposes, and for results
worked out to but one decimal place, the simpler method here

at the race of

adopted

is

sufficiently correct.

American Econoviic

44

Association.

[386

to January, 1S79, averaged 3.6%, so that even after the

government promised resumption, investors and speculaput implicit confidence in that promise, the

tors did not

"expected" appreciation being only a
well

known fact

upon

It

little

more than

This corresponds

half the actual appreciation.

that the resumption act

to the

was then looked

as a political manoeuvre, likely to be repealed.

should be observed that the method employed to

determine the rate of interest realized
danger.

It correctly

is

open

to oiie

represents the rate of interest act-

ually realized between tw^o dates, but, unless the later of

the two dates

is

maturity,

it

does not necessarily repre-

sent the rate of interest expected at the

investor could not
of

know

first date.

in January, 1870,

The

what the price

bonds would be in January, 1879, unless the bonds
at that time.
To compare, in 1870, the relative

matured

advantages of coin and currency bonds for the period
1870-79, a forecast was necessary, not only of the relation of currency to gold, but also of the prices of the

bonds in 1879.
forecast

made

two
These prices in turn depend on a new

in 1879.

forecast of 1879

It

follows that a mistake in this

^^^ embodied in the prices

wall affect the rate of interest realized

1879 in the

same manner

between 1870 and

as a mistake of the opposite

kind in the forecast of 1870.
But in most cases the method given
exact.

of that year

is

sufficiently

would have been imtwo bonds in
can usually be depended upon that any great

For, although in 1870

it

possible to predict exactly the prices of the

1879, yet

it

change in price is apt to affect both alike (provided they
have approximately the same time to run) and thus

Appreciation

387]

and

Interest.

45

eliminates itself for the most part in the comparison.

For

this reason

it is

clearly better to take bonds

whose

dates of maturity approximately correspond, in order

that any abnormal influence in

1879

may

affect

both

than to take, for instance, currency sixes of 1899
and coin bonds of 1881.

alike,

American Economic

48

From

this table

it

Association.

[390

will be seen that the rates realized

two standards

to investors in bonds of the

differed

but

when the fall of Indian exchange
The average difference before 1875 was .2^

slightly until 1875,

began.

while the average difference since 1875 has been .7^,
or more than three times as much.

From 1884 exchange

fell

much more

rapidly than be-

fore, and the difference in the two rates of interest rose
Since
accordingly, amounting in one year to i.i^.

the two bonds

were issued hy the same government,

same degree of security, are quoted side by
same market and are in fact similar in all
important respects except in the standard in which the}-

possess the
side in the

are expressed, the results afford substantial proof that

the

fall of

(after it once began) was discounted
Of course investors did not form perfectly

exchange

in advance.

definite estimates of the future fall,

but the fear of a

predominated in varying degrees over the hope

The

year 1890 was one of great disturbance in ex-

changes, the average for the

and

for the last six

months

first

six

19.3.

months being

The

of 73.8 to 83.5 for the last six

rise in their silver price

17.6

gold price of

the silver bonds rose from an average for the

months

fall

of a rise.

first

six

months, but the

was only from 100.6

to 103.7,

showing that the increase of confidence in the " future
was not great and in fact only reduced the
disparity in the interest from i.o to .8^.
This great rise in exchange and the slight revival in
of silver"

silver securities occurred simultaneously

with the pas-

sage of the Sherman act of July, 1890, by which the
United States was to purchase four and a half million

ounces of silver per month.

There can be

little

doubt

that the disturbance was due in some measure to the

operation or expected operation of that law.

Appreciation

39 1]

This

is

and

Interest.

49

not the only case in which the relative prices of

rupee paper and gold bonds were probably affected by po-

The

litical action.

smallest difference (since 1874) in

the tw^o rates of interest occurs in 1878, which was the year
of the

Bland act and the

first

international monetary

conference.

After the closure of the Indian mints on June 26, 1893,

exchange rose from 14.7 to 15.9, the gold price of rupee
paper from 62 to 70 and consequently its rupee price
from 101.2

to 105.7.
§ 2.

The preceding comparisons

serve to establish the in-

fluence of the divergence between the standards on the
rates of interest, but afford

The

rates of

no measure

bonds were the rates realized

it

and had

differed

if

the bonds were held to

The rupee bond had no fixed date

maturity.
ity

of that influence.

interest which have been deduced for gold

to

of matur-

be treated as a perpetual annuity, although

from such an annuity in being terminable by

the government at par on three months' notice.

In order to measure the extent to which the
ver was allowed for by investors,

it is

fall of silr

necessary to exam-

ine the rates realized during specified periods.

The

lowing table gives the rates realized between the
five

and the

change.

last five years of the

folfirst

period of falling ex-

American Economic

50

Associatioii.

[392

RATES OF INTEREST REALIZED ON INDIA BONDS FOR PERIODS
SPECIFIED.!
Appreciation of Gold in
Silver.
Gold.

Estimated.

J

i

a

4.1

3-5
3-6
3-6

.6

4.3
4-5

•9

2.1

4.6
4.8

3.8
3-9

.8

2.6

•9

2.4

4-5

3-7

.8

2.1

Silver.

Actual.
.

1878-94
1879-95

....
....
....
....
....

Average

....

1875-91
1876-92
1877-93

The
taken

1.6
1.8

.7

average estimated appreciation for the periods
is

.8%, which

is

slightly

more than one

the average actual appreciation, 2.1%.

third of

Perhaps to ob-

tain the net estimate of investors as to the fall of ex-

change we ought to deduct from the .8% another .\^'/o due
to the trouble and expense of obtaining English money
for Indian

exchange, for

before the

fall

of

investors differed

extent to which,

will be

remembered that even

exchange began, the

by .2%.^

We

rates yielded to

thus obtain ,7% as the

on the average, investors protected

themselves against the
'

it

fall

The methods by which the

first

in silver during the period

columu

is

computed are the same

as those explained in the preceding chapter, account being taken of

the fact that the price quotations for rupee paper are not "flat," so that

no corrections for accrued interest need be applied. For computing
the second column a more laborious method was necessary, due to the
fact that the quotations are not continuous for the same bond.
The
earlier ones are for a 4 % bond and the later for a
The
3 % bond.
buyer of a 4 % bond is regarded as converting it into the 3 % at the
current price in 1888, the date of maturity of the earlier bond. As no
bond tables apply to such conversions, tables of present values were
used and that rate was found by trial (and interpolation) which would

make

the present value of all benefits equal to the purchase price.
^This probably included besides the brokerage and trouble of obtaining and selling " interest bills ", the risks even at those early
dates of a falling or fluctuating exchange.

Appreciation

393]

The remaining

named.
ative

the

to

the holders

loss to

holders

of

gold

world fully foreseen the

and

fall,

of

hiterest.

implies

1.4%,

a

rela-

rupee paper and a gain

bonds.

fall of

51

Had

the

business

Indian exchange, rupee

paper would have been cheaper or gold bonds dearer

than they actually were, or both.

The

rates of interest

two standards during the periods mentioned would have been spread apart ( at most ) i ^/^
^

realized in the

further.

§3.

The

question arises at this point,

how is

this 1)4 fo to

Did investors overestimate silver or
underestimate gold most ? There is nothing in the fore-

be distributed?

going investigation to decide this vexed question.

Our

purely a differential one.

But

quantitative result

is

other sorts of evidence point strongly to the conclusion
that the major part of the miscalculation

ver

So

side.

effect

on

was on the

sil-

far as " demonetization " is concerned, the

silver

must have been, according

to

any reason-

able view, greater than the effect on gold, and in conse-

quence any unforeseen part of these

effects

would be

probably greater in the case of silver than in the case of
gold.

So

far as production is concerned,

the disturb-

ance in silver was far greater than that in gold either

when reckoned

absolutely or in proportion to the total

masses whose values would be affected.

Finally, since

the break-down of bimetallism in 1873-4, the world-wide
agitation to " rehabilitate silver " has held out a delusive

hope which must have acted to give the silver bonds a
higher price than they " were worth." The strength of
this agitation

need scarcely be dwelt on here.

expression in

many

bills

It

found

in Congress which were never

passed and in two which were passed, in numerous pro-

1

American Economic

50

Association.

[39-

RATES OF INTEREST REALIZED ON INDIA BONDS FOR PERIODS
SPECIFIED.
Appreciation of Gold in
Silver.
Silver.

Gold.

Estimated.

J

z

a

4.1

3-5
3-6
3.6

.6

4.3
4-5

Actual.

1875-91
1876-92
1877-93
IS78-94
1879-95

....
....
....
....

4.6
4.8

3.8
3-9

Average

....

4-5

3-7

.8

2.1

The
taken

•

.

.

.

•9

1.6
1.8
2.1

.8

2.6

•9

2.4

•

7

average estimate4 appreciation for the periods
is

.8%, which

is

slightly

more than one

the average actual appreciation, 2.1%.

third of

Perhaps

to ob-

tain the net estimate of investors as to the fall of ex-

change we ought
to the trouble

to deduct

and expense

for Indian exchange, for

it

from the .8% another
of obtaining

will be

,

i

%

due

English money

remembered that even

before the fall of exchange began, the rates yielded to
investors differed

extent to which,

We thus obtain .7% as the
on the average, investors protected

by .2%.^

themselves against the
^

fall in silver

The methods by which the

first

column

is

during the period
computed

are the

same

as those explained in the preceding chapter, account being taken of
the fact that the price quotations for rupee paper are not "flat," so that

no corrections for accrued interest need be applied. For computing
the second column a more laborious method was necessary, due to the
fact that the quotations are not continuous for the same bond.
The
earlier ones are for a 4 % bond and the later for a
The
3 % bond.
buyer of a 4 % bond is regarded as converting it into the 3 % at the
current price in j8S8, the date of maturity of the earlier bond. As no
bond tables apply to such conversions, tables of present values were
used and that rate was found b}' trial (and interpolation) which would

make

the present value of all benefits equal to the purchase price.
^This probably included besides the brokerage and trouble of obtaining and selling " interest bills ", the risks even at those early
dates of a falling or fluctuating exchange.

Appreciation and Interest.

393]

The remaining

named.
ative

the holders

loss to

the

to

fall,

holders

world fully foreseen the

implies

1.4%,

a

rela-

rupee paper and a gain

of

gold

of

51

Had

bonds.

fall of

the

business

Indian exchange, rupee

paper would have been cheaper or gold bonds dearer

The

than they actually were, or both.
realized in the

rates of interest

two standards during the periods men-

tioned would have been spread apart

at

(

most

)

i ^^

^

further.

§3-

The

how

question arises at this point,

is

this i}4 fo to

Did investors overestimate

be distributed?

underestimate gold most ?

There

is

silver or

nothing in the

fore-

going investigation to decide this vexed question.

Our

purely a differential one.

But

quantitative result

is

other sorts of evidence point ^t^ongly to the conclusion
that the major part of the miscalculation

ver

So

side.

effect

on

was on the

sil-

far as " demonetization " is concerned, the

silver

must have been, according

to

any reason-

able view, greater than the effect on gold, and in conse-

quence any unforeseen part of these

effects

would be

probably greater in the case of silver than in the case of
gold.

So

far as production is concerned, the disturb-

ance in silver

was

when reckoned

far greater

than that in gold either

absolutely or in proportion to the total

masses whose values would be affected.

Finally, since

the break-down of bimetallism in 1873-4, the world-wide
agitation to " rehabilitate silver " has held out a delusive

hope which must have acted

to give the silver

higher price than they " were worth."

The

this agitation

need scarcely be dwelt on here.

expression in

many

bills in

bonds a

strength of
It

found

Congress which were never

passed and in two which were passed, in numerous pro-

American Economic

52
posals in

Germany,

Association.

[394

in silver commissions there

England, and in three international conferences.
further evidence

and in
If

any

needed that this agitation contrib-

is

uted to mislead investors as to the future of

silver, it

can be found by examining the discussions and mistaken
prophecies on silver, contributed to the Economist and
other trade journals.

would seem extremely improb-

It

able that these hopes for the " rehabilitation of silver "

have acted to depress the price

of gold

bonds rather than

to raise the price of silver bonds.

For these reasons

it

seems likely

relative gain or loss, not

that, of the

lyi'fo

more than half represents an
That is, the inter-

unexpected gain on the gold bonds.
est realized

be,
of

on the gold bonds,

if

higher than

it

should

was not higher by more than Y^'fc If this be true
one gold investment it was undoubtedly true of all

gold investments and of the whole

in

This affords therefore, a probable upper limit

London.

to the debtor's loss in

1874.

money market

But even

if

England

the miscalculation was

for gold as for silver, the

Our
London

for contracts

made

since

twice as great

upper limit becomes only

i

^.

result therefore, is that the average debtor's loss

in

for contracts

made

since the fall of silver be-

gan, was probably less than y^ ^ and almost certainly
less than i ^ per annum.
we shall atIn Chapter

X

tempt

A

to find a lower limit.

great deal has been written on the loss incurred

by

India in paying her annual interest to England in gold,

but

little is

said of the interest paid at

home in silver.

Of

India's national debt, about ^100,000,000 are in gold

and

Rx

100,000,000 in rupees.

This rupee debt was

almost
lent

and

Appreciation

395]

all in force

Interest.

twenty years ago and was then equiva-

worth only ^60,mean an added burden of

to ^100,000,000, but today

The

000,000.

it

and

silver debt

may

difference

gold debt, but

may

it is

mean

also

it is

a lessened burden of

by no means impossible

as national indebtedness

is

concerned, India

than she would, have been
silver

53

if

that, so far
is

better off

a bimetallic tie between

and gold had been maintained.

In this connection

it

may

be worth while to point out

a curious oversight in Mr. Elijah Helm's recent book.^

In Chapter

XVI

he proposes the conversion

rupee debt into a

3^

of the

4^

gold debt and, assuming very

plausibly that the gold bonds could be sold for 99, shows
that so long as exchange remained at

there

would be an annual saving
This

160,000.

is

present level,

its

of

interest oi

Rs

correct enough, but he next attempts

show that if exchange should gradually fall there
would continue to be a saving until it should sink to
to

This

ioj4d.

is

entirely erroneous.

It

takes account only

of the

annual interest and not of the deferred principal

which

if

in gold, grows progressively onerous in terms

of silver.

It is

odd that a bimetallist

who

portrays so

vividly the evils to the debtor from an appreciating gold
principal should have found himself in the position of
deliberately advising a debtor to adopt that standard to
lessen his

burden

of interest.

In the same year that

Mr. Helm's book was written, the Indian Government
converted

its

4^

rupee debt, not into gold, but into

another rupee debt at S}4
1

"The

Joint Standard,"

fo.

(London and New York,

1894.)

CHAPTER

X.

MONEY AND COMMODITIES.
§1.

In attempting to apply our theory to periods of rising

and

we

falling prices,

met by the

are

that

difficulty

comparison can only be made between successive periods.

We

can learn what the rate

1873, ^^^ "^^ cannot

of interest

know what

has been since

would have been

it

bimetallism had been extended or

if

if

the world's cur-

rency had been so expanded as to have prevented the

Without this missing term
difficult to measure the influence

fall of prices.

son,

it is

of compariof the pro-

such there has been, upon

gressive scarcity of gold,

if

the rate of interest.

does not answer the

to

1873.

No two

can say they

rates of interest before

purpose

and

after

periods are so alike industrially that

differ

Other

standard.
" value of

It

compare the

merely

we

only in the state of the monetary
influences

innumerable

money" on the money market.

affect

the

Individual

quotations at different times on the same market vary

from one half

of

one per

cent, to fifty per cent,

while

yearly averages vary from one to seven per cent.

can never wholly eliminate

all

partial elimination is possible only
for periods of several years each.
culties

however,

certain

We

causes but one, and even

by taking averages

In spite of these

general conclusions

diffi-

can be

established.

§2.

Our main problem

is

not concerned with high and

low prices but with rising or falling

prices.

But we

1

and

Appreciation

397]

Interest.

55

note in passing an important generalization in regard to
price levels and the rate of interest.

Shall

we

associate

high interest with high prices or with low prices ? To
answer this question the following table is constructed.

Two

The

rates of interest are given for each decade.

MARKET RATES OF INTEREST IX RELATION TO HIGH
AND LOW PRICES.i
1824 to 1832 to 1842 to 1852 to 1862 to 1872 to
1851
I86I
1841
1881
1831
1871

:

London,
"

High

incl.

incl.

incL

incl.

incl.

13.8

4.4
3.2

3-6
2.6

5-4
3-0

5-1
2.6

3-7
2.5

30

2

9-1

7.4
6.7

7.0
5-1

5-3
5.1

4.6
3-4

prices

Low prices

.

3-7
3-2

3-3
2.7

4.1

2.6
2.6

T,

;

New York, High prices
"
Low prices ....
.

Berlin,

"
Paris,

"
^

Calcutta,

"

High
High

91

.

prices

Low prices
High

.

prices

Low prices

.

.

.

....

i

6,2
5-6

Tokyo,

High

"

Low

*

Shanghai, High prices
"

prices
prices

.

.

....

Low prices

5-4

12.3
12.0

.

'

2.5

2.4

prices

Low prices

1882 to
1891
incl.

incl.

;

lO.I

6.2
10.

'
;

i

.

.

.

;

.

.

!

.

.

1

.

.
i

6.0
5-7

^ This table is constructed
from the data given in the Appendix.
For New York, the rates for the first decade are averaged from the
column in the Appendix headed "60 days," and are not to be compared with those for the remaining decades, which are averaged from
the column headed " Prime two name 60 days." The index numbers
of prices which have been employed are those of Jevons (1S24-51)
and Sauerbeck (1S52-91) for England, Soetbeer and Heinz for Germany, the Aldrich Senate report for the United States and France,
and the Japanese report for India, Japan and China. (See Appendix,
The table ends in 1S91 because there are no index numbers for
\ 3).

the United States since that year.
2

For Calcutta the

"market"

bank of Bengal is employed, no
The first column is for 1873-81 inthe reason that no index number for 1872 is

rate for the

rate being available.

stead of 1S72-81, for
available.
*

For Tokyo the

first

column

is

for 1S73-81 for the

same reason.

1S85-93 instead of 1S82-91, for the reason that the available rates begin in 1885 and the index numbers end
*

For Shanghai the period

in 1893.

is

American Economic

56
first,

opposite

"

Associatio7i.

high prices,"

is

[398

the average rate for

those years of the decade whose price levels, as

shown

by an index number, were above the average price level
whole decade the second is the average rate for

for the

;

the years whose prices were below the general average.

Of the 21 comparisons contained

in this table, 17

show

higher rates for high-price years than for low-price
years,

one shows the opposite condition and three show

As

equal rates in the two cases.
years for London, 40 for

New

the table covers 68

York, 30 for Berlin, 20

for Paris, 19 each for Calcutta

and Tokyo, and 9

for

Shanghai, or 205 years in the aggregate, the result
may be accepted with great confidence that high and

low prices are usually associated with high and low
interest respectively.

There are two probable reasons for this connection.
One is that high general prices usually mean scarcity of
capital rather than abundance of money, while low prices
generally

money.

mean abundance

on the relation

wheat

^
;

of

not scarcity of

capital,

This corresponds to the observations

of Jevons

of the rate of discount to the price of

the other reason

is

connected with periods of

speculation and depression and will be discussed in

§

12.

§3.

The
est

relation of high or

low

|)rices to

must not be confused with the

the rate of inter-

relation of rising or

falling prices to the rate of interest

",

to

which

vv

e

now

turn.
^

"Investigations in Currency and Finance," (1884), p. XIV.

de Haas appears to have fallen into this confusion both in his criticism of Jevons and in his treatment of statistics. See "A third
^

element in the rate of interest," Journal of the Royal Statistical
March, 1889.

Society,

Appreciation and Interest.

399]

57

was predicted by Mr. Gibbs/ formerly a director of
the Bank of England, and by other eminent bimetallists
that the progressive scarcity of gold would raise the rate
It

Such a scarcity makes
money market, and the banks, each

of interest.

a stringency in the

struggling to attract

reserves from the others, will raise their rates.

prophecy, however, has not been

when

Mr. Gibbs made his prediction
mously.

Some

This

Scarcely had

fulfilled.

the rate

fell

enor-

monometallists have argued from this fact

that there has been

no appreciation

of gold

But the

^.

theory that appreciation raises interest has been confi-

dently afiirmed on both sides and has even received the

stamp
'

of approval of Mr. Giffen.^

"The

It

is,

however, utterly

Bimetallic Controversy," (London, 18S6), pp. 19, 231, 245-8-9,

3732 Report of the Gold and Silver Commission, (1888), p. 120; also
Professor Laughlin in Quarterly Journal of Economics, Vol. i., p. 344.

" The years oi fall3 " Essays in Finance," (2d series, 1886), p. 70.
ing prices and rising prices also correspond as a rule with those years
in which high rates and low reserves, and low rates and high reserves
are combined." This (so far as prices and interest are concerned) is
not only the exact opposite of the truth but it is flatly contradicted by
the few figures which Mr. Giflfen himself brings forward. Of these
in years like 1865 and 1866 with which the Table
he says "
begins, there is an obvious connection between the low reserve and
high rate of discount of those years and the high Index No., leading
in the following [!] years 1867-71 to a simultaneous fall in the Index
"
" He adds
the low
No. and the rates of discount
prices rather succeed the high discount rates than exactly correspond
" Coming to the recent period of gold contraction, he says
" Turning to the rate of discount, we find the facts once more in correspondence. What we find first is a striking disturbance of the
:

.

.

.

.

.

:

.

.

:

.

money market

at the

riod of rising prices

begins."
writes:

maximum
and high

Of the period 1875-79

"With

period of high prices, 1871-73 [a pewhen the contraction of gold

interest],

(falling prices

and low

interest),

he

minimum average monthly rate of 2 per cent in
following maximum monthly rates were nevertheless
a

each year, the
"In the present year (1885)
touched, viz"
[4^, 4f, 4f, sf, 4^ %s].
when with dull trade and low prices the reserve should be full and
:

discount rates low, we find that with a minimum of 2 per cent, there
is again to be a comparatively high maximum (4 %) within the year."

American

58
at variance

with

bank reserve
abnndantly

is

Ecoyiornic Associatio7i.

[400

Tliat an abnormally high or low

facts.

correlated with low and high interest

is

theory and verified in practice.'

justified in

But the normal bank reserve

itself

shrinks with a

shrinkage of gold and in consequence the inference that a
contraction of the general gold supply will raise interest
is fallacious.^

When

prices are rising or falling,

ing or appreciating relatively to

money

is

depreciat-

commodities.

Our

theory would therefore require high or low interest ac-

cording as prices are rising or falling, provided

sume

that the rate of interest in the

justified

commodity stand-

only in case the two periods were eco-

nomically alike in

all

respects except in the expansion

or contraction of credit and currency.

"To sum up — what

as-

This assumption would be thor-

ard should not vary.

oughly

we

In the following

have to say of the recent discount rates is that
while there has been an undoubted fall in recent years, corresponding
to the abundance of capital, yet the market has been fevered by the
"
demands on the reserve
"The monetary history of recent
years has accordingly been very like what was to be expected on the
theory above set forth, assuming a contraction of gold to have occurred,
finally the money market has been irritable and feverish in a remarkable manner during the period of contraction."
Thus,
beginning with a statement that years of falling and rising prices correspond to years of high and low interest, Mr. Giffen cites facts which
show that the opposite is true, but proceeds complacently to compare
I

.

.

.

.

the rates of periods of rising (or falling) prices with the prices of the
succeeding period of falling (or rising) prices. As the period of falling prices in which he writes is unfinished, he can onl}- say of it that
the "money market has been irritable and feverish in a remarkable
manner." Another monometallist, Clarmont Daniell, objects to bimetallism for India on the ground that it would deplete India of silver
and raise the rate of interest. ( "The Bimetallic Controversy," p. 257).

On

this point see

\ 5.

"Essays," ibid., or the diagrams in Clare's
" Money-Market Primer," L,ondon, 1891 also F. M. Taylor, "Do we
want an Elastic Currency," Political Science Quarterly, March, 1S96,
^See,

^.

^., Giffen's

;

pp. 133-157^

See, however,

§ 12,

note.

Appreciation

40i]

and

Interest.

59

London the periods are selected to correspond
with the main movements of prices. Thus the period
1826-29 was a period of falling prices so that money ap-

table for

preciated in terms of commodities at the average rate of
\.2fo per

annum.

This

by the figure +4.2.
so that

cated

money

fell at

is

indicated in the third

column

In the period 1836-39 prices rose
the rate of

2.3^ per annum,

indi-

— 2.3.

by

I^ONDON RATES OF INTEREST IN REIyATlON TO RISING

AND

FAI,I,ING PRICES.i
Appreciation of

Bank.

Market.

Money

in

Commodities,

virtual Interest

m

Commodities.
(Market.)

a

i

1826

— 29

•

4.4
4.0
4-7
4.2
3-7
2.9

1830—35
1836—39
1840—44
1845—47
1848—52
1853—57
1858—64
1865—70
1871—73
1874—79
1880—87
1888—90
1891—95

3-5
3-2
4.2

4.1

•

5-3
4.2
3.6
3-7
2.7
2.6
2.9

4.4
3-8
3-9
3.2
3-3
3-8
2.6

Mean Variation,

•5

3-5
4.2
2-5

1.6
7

J

4-4.2
0.0

7.8
3-2

—2.3
+5.9

9.6

+ 1.2

37

—2.4

2.8

+ 1.1

4-7

—6.2

—2.7

-f4-3

7-1
6.5
1-5

—3-0
—3-0
+3-8
—1.4
+3.8

1.8
I.I

I.I

5-5
2.6

constructed from the data in the Appendix. The
based on index numbers, (Jevons' for 1826-52, and
Sauerbeck's for the remaining years). The index numbers for two
dates, as 1826 and 1829, being given, their inverse ratio gives the relaFrom these
tive value of money (in commodities), at those two dates.
Theoit is easy to calculate the average annual change in its value.
retically, since the loans here included run usually, perhaps 30 to 90
days, the quotations averaged should begin at the first of the two dates,
and cease, say, 60 days before the second. But the index numbers are
not always for definite points of time, nor can the interest quotations
be subjected to such minute corrections without an immense expenditure of labor. Hence, the method adopted has been to average the
^

This table

third

column

is

is

rates for all the years of a period, e.g., for the four years, 1S26-29,

while the "appreciation" is reckoned between those dates, and
thus is an average for only three years. If the index numbers repre-

American Economic

6o

If this table

be

Association.

[402

exaiiiiiied in successive periods, it will

be found, in eleven out of thirteen sequences for bank

and in ten out

rates

terest is

market

of thirteen for

high or low according

prices are rising or falling.

to the

Attention

rates, that in-

degree in which
is

called particu-

1S53-57 during which prices rose

larly to the period

very fast simultaneously with and presumably because
of the great gold production.

The market

rate of in-

averaged 5.3/^ which was far higher, not only
than in any subsequent, but also than in any previous

terest

period, although

it

was less abundant
by various writers,
tivity

can scarcely be supposed that capital

This
^

and

and speculation.

fact has

is

been commented upon

usually attributed to trade ac-

Such

a reason, however,

is

not

really explanatory unless the reason for the speculation
also given.

is

The

theory here offerred, that the high rate represent-

ed an effort to offset the depreciation of money, not only
affords a complete explanation but in

connection with

another fact soon to be noted, explains the trade activity also.

§4-

The

following table for Berlin displays the same con-

nection between price

movements and

interest.

sent the price levels at the middle of 1826 and of 1829, then the average
interest rates ought in theory to include only the last six months of
1826, and the first four months of 1829.
But it seems better to include

much

both ends, than to omit the averages for 1826 and 1829
is the more valuable the
greater the number of terms included. The method adopted also
seems better than omitting either otie of the extreme years, partly for
the reason just given, and partly because both years usually belong
too

at

altogether, for the reason that an average

to the

same economic movement.

E.g., Sir Louis Mallet. Note to Report of Gold and Silver Commission, ( 1888) p. 120; andjevons' " Investigations in Currency and
Finance," (1884) p. 95. The latter will be again referred to.
^

2

.

Appreciation

403]

and

61

Interest.

BERLIN RATES OF INTEREST IN REI.ATION TO RISING
AND FALLING PRICES.
1

Appreciation of

Virtural
Virtual
Interest in Interest in

Bank. Market Money in

Commod-

Commod-

Commod-

Mean

4.0
4-7
4-3

ities.

(Bank.)

(Market.)

a

1851-52
1853-57
1858-64,
1865-70
1871-73
1874-79
1880-83
1884-88
1889-91
1892-95

ities.

ities.

h

J2

-1-5
-3-3

3-4

3-6
4.0
3-4

2.5

-4

4.1

3-1
2.2
•

1.4

4.0

—0.2

I

+3.I
—0.1
+2.9
—1.4
+5-2

3-2

variation, 1858-91

2.0

0.0

4.0

43

1.2

— 2.2

3-7'

4-7
4-5
4-3

2.4

6.4
3-3
5-5
1-7
7-5
2.1

4

In the foregoing table the relation

is

observed in six

out of nine sequences for bank rates (one being neutral)

and in six out

of

seven for market

rates.

For France, index numbers covering a wide range of
Using those given in the Al-

articles are not available.

drich report for sixteen articles,

we have

:

PARIS RATES OF INTEREST IN RELATION TO RISING

AND FALLING

PRICES.
Appreciation in

Bank.
Commodities.

1861-64.
1865-70
1871-73.
1874-79
1880-86.
1887-90.
1891-95
.

,

5-1

+ 3-6

3-2
5-3
3-1
3-2
3-1
2.6

46^
2.6
2.8
2.6

- 4.5
+ 43
+ 2.3
— 5-1

2.0

1 This table is constructed
from the data in the Appendix. The
average in the second column, marked (i), is for the years 1861-64,
not 1858-64. The "appreciation" is calculated from the figures of
Soetbeer and Heinz, as given in the Aldrich report.
2 This table is constructed
from the data in the Appendix. The
average in the second column marked (2) is for the years 1872-73, not

1871-73.

62

A?}!C7'ica?i

Economic Association.

Here the law is observed
for bank rates and three out

in five out of six sequences
of four for

has been very similar in England,

New York we have

FAI^IvING PRICES

IN RELATION TO RISING

i
a

C-I3

0-°
^

gv§

•3

>.2

Mean

a

I

7-4
8.4
8.4

a

-3-8
+b.4
—20.2

•

.

.

.

.

.

.

.

•

•

•

•

5-4

+7.9
+0.6

.

.

5-1

2

.

.

2 a

6.8

-h4.7

7-5
5-1

.

(J

a

s

•i^.§i^'

3'-'—

>

y

— I.O

-7

14-3

-9-3 -13-5

-05

8.0

5-1

13-5

4-3-2

b-z

— I4.S

-1.7

12.6

7-9

—3-1
7.0

85

13-4
6.0

—2.0
-1-3

4-9

3-3
3-7

3-8

—

2.1

.

varia-

tion, '66-91

We

.6

find here the

same

association of appreciation

interest in all of the three sequences for call

two

ii..

15^

J

-I.I

4.6

.

i!^?
.9

,U!

u

<

5.0
5-9
5-4

OJ

s a

t

0]

—

1-1

ii'-S"

CO:?

days

9.2

AND

in

I.S

rt

Call.

6.2

:

AND WAGES.2

g-0
60

Germany and France.

the following table

NEW YORK RATES OF INTEREST

1849-57
1858-60
1861-65
1866-74
1875-79
1880-84
1885-91
1892-95

market rates/

be noted that the course of prices and interest

It will

For

[404

of the three cases for

and

loans, in

60 days paper (the third being

neutral) and in three of the five cases for " prime " paper.^

This

is

with reference to commodities.

We

true in reference to wages.

periods that interest
in

which wages

is

The same

holds

find in the successive

high or low according to the degree

rise or fall.

This

is

true in each of the

three sequences for call loans, in two of the three for 60
days paper and in three of the four, for " prime " paper.
^Assuming that prices
'^

This table

is

fell,

1891-95.

constructed from the data in the Appendix.

rates of appreciation are calculated

and wages
3

from Falkner's figures

in the Aldrich Report.

Assuming that

prices

fell,

1892-95.

The

for prices

Appreciatio7i

405]

and

Interest.

63

Perhaps the most remarkable fact in this table

is

low rate for 1875-79.
'^he average
which is the next but lowest in the table,

the extremely
is

5. 1 /^

being

lowest

the

4.6%

for

The

1892-95.

extra-

ordinary change in interest rates beginning in 1875
has been observed before but its connection with the
;

resumption act

(as it

seems to the writer) has been mis-

Thus William Brough referring to that act
The mere announcement of our intention to
put our money on a sound metallic basis had brought

construed,

says

^

:

"

capital to us in such

not only

made

reduced.

.

.

.

easy,

This

abundance that the resumption was
but the normal rate of interest was

remarkable

reduction

.

.

ex-

is

plainable only on the ground of a large influx of foreign
capital."

a

still

But

this explanation

would naturally require

lower rate of interest after resumption had been

As the facts are the opposite, there
room for doubt that the rate of interest was
simply accommodating itself in some degree to the rapid
accomplished.

seems

little

appreciation involved in a return to specie payments.

§5-

The preceding

statistics

Index numbers

countries.

apply

to

gold standard

for silver standard countries

are not available prior to 1873.

It is,

however, a priori

probable that the relative price movements in gold and
silver standard countries before

and

after the rupture of

tie in 1874 presented a strong antithesis.
This event marked a change in gold standard countries

the bimetallic

from rising

to falling prices, while in silver standard

countries prices began to
in silver countries
1

" Natural

Law

of

rise.

Unless, therefore, prices

had been rising previous

Mouey," (New York,

to 1874,

1894), p. 124.

and

1

American Economic

64

Associatio7i.

[406

must

rising very fast indeed, the antithesis referred to

have existed.

It

is,

inquire whether the

much

consequently, of
fall

in the rate

interest

to

which

of interest

was so marked for gold countries was shared in equal
degree by silver countries. The following table for
periods of five years before and after the silver and gold
standards began to diverge, throws some light on this

problem.

AVERAGE BANK RATES IN GOI^D AND SILVER STANDARD COUNTRIES
BEFORE AND AFTER THE BREAKDOWN OF BIMETAI^USM.!
^
W
u^

Tl

u)
iH

a

lU
.9"

u

fi,

1870-74.
1875-79-

5-1
b.5

.

•

While the
firm our

m

fi

16.4
14.6

10.6
9.2

3-7
3-0

In

theory.

all

it

rose,

flow of capital to India from

But

It is

^Tbis table

this fall

is

7-5
5-1

10.7

5-2
3-y

10.

go

to confell

was

this in spite of the

England and other gold

true that in Japan and China the rates

was much

the only influence at

Bank

<

silver countries

and

less

countries, whereas we should expect
if

4.9
2.9

<

gold countries the rate

exchange with

broken, while in India

fell.

4-5
4.2

^5

> u
-^

%

&<

results are not conclusive, they

after the par of

countries.

cd

m

hT

i!

_«

a

tJ

a
3

MO

a
3

tn

11

"" t!

it

than in the gold
to be

much

greater

work were the migration

of

constructed from the data given in the Appendix.
than market rates, as the latter are not

rates are selected rather

available for Calcutta
rates for " prime two

and Shanghai.

For

name 60 days paper "

New

York, however, the
Although

are employed.

the United States and Japan were on a paper basis at the periods
given, the premium on gold in the one case and silver in the other
moved in opposite directions, affording, therefore, as great or greater
antithesis than if the standards had been simply gold and silver.
For
the American premium see Chapter VIII, § 2 for the Japanese, see
;

Appendix,

\ 3,

note.

Appreciation

407]

and

Interest.

65

Such extraordinary rates as ruled in China and
the '70's must have been extremely sensitive to

capital.

Japan in

the influence of an influx of capital.
British investment in Japan or

much

less

Even though
China may have been

than in India, we should expect

to reduce the native rate of interest to

its

tendency

be more effective

was 10^ or 15 ^ than where it was 5 ^.
An added reason for a fall in rates in Shanghai and
Tokyo is the narrowness of the areas affected by foreign
capital, which, having little opportunity to penetrate

where that

rate

inland, tends to glut the

Turning

ports.

which index numbers are

to the period for

we have

available,

market in the open

the following table for India, Japan

and China.
RATBS OF INT:EREST IN R^I/ATION TO RISING AND FAI^LING PRICES
IN CAI,CUTTA, TOKYO

AND SHANGHAI.i
Appreciation in

Bank.

Market.
Commodities.

Calcutta

....

1873-75
1876-78
1879-85
1886-89
1890-93

Tokyo

+2.6

5-3
6.8

— II.O
+3-8
-2.6
-4-7

5-9
6.0
4-3

1873-77
1878-81
1882-86
1887-93

Shanghai.

.

Here we

.

find

9-3

—0.2
-13-3
+10.4
-2.8

12.0
12.2
10.3
9-4

1874-81
1882-88
1889-93

.

14.0
16.3
12.8

91
7-5
7.0

-1-4
+1.3
-0.9

5.8^

5-8

our theory confirmed in three out of

four cases for India, two out of three for

bank

rates in

Japan, and two out of three for market rates, one out of

two

for

market

bank

'This table

The

rates in China, while the

one case for

rates is neutral.

entry

is

constructed from the data given in the Appendix.
(i) is for 1885-88, not 1882-88.

marked

American Economic

66

Summarizing the
ined,

we

Association.

[408

exam-

cases for the seven countries

and 16 unfavorable,

find 57 favorable,

theory, distributed as follows

to

our

Japan. China.

Total

:

United

Eng-

Favorable
Unfavorable
.

We

.

.

Ger-

land.

many.

France.

.States.

India.

21

12

8

8

3

4

I

5

3

2

2

I

2

I

therefore

57
16

conclude with great confidence that,

" other things being equal," the rate of interest is

when

prices are rising

We
terest

and low when prices are

high

falling.

turn next to the question hozv far the rate of in-

has been adjusted to price movements.

mula (1 + /)=(!

+

2

)(i +'^)

form for present purposes, /

or

«

+

^/+

its

The

for-

more convenient
ia.,

enables us to

calculate the rate of interest in the commodity standard

which was equivalent to the money interest paid in each
Thus in London for 1826-29 the rate of interperiod.
est ( z ) in money was 3.5 %, but money was appreciating
relatively to commodities 4.2

^

«

(

),

so that the interest

actually paid in terms of commodities

(z.

commodities averaged by Jevons) was

/=

+

.035

X

.042

=

7.8^.

It will

^.,

the forty

.035

+

.042

be seen from the table

§ 3 that the virtual rate of interest paid in commodities usually varies inversely with the rate paid in money.

in

For 1853-57, money interest was 5.3% and for 1891-95,
1.6^ but commodity interest for 1853-57 was 2.8^ and
Moreover commodity interest flucfor 1891-95, 5.5^.
tuated

much more than money

tion from the average being for
for

commodity

—indeed

interest,

2.6^.

interest, the

varia-

money interest .7 ^, and
All these facts suggest,

practically demonstrate

was not adequately adjusted.

mean

— that

It is

money

interest

of course not to

be

Appreciation arid Interest.

409]

assumed that commodity

interest

67

ought to be invariable,

but we can be practically certain that its variations ought
not to be three and a half times the variations in

money

Such fluctuations must mean that the price
movements were inadequately predicted. If any doubts
were possible on this point they must disappear when
we find that for 1871-73 commodity interest was minus
2.7^. Money lenders would have been better off had
they simply bought commodities in 1871 and held them
till 1873.
Such losses are especially apt to appear in
Thus if we take the period 1824-25, we
short periods.
market rate was Z-l%i ^^^ '^^te of apprecifind that the
ation was minus 14.5% and the virtual rate of interest
in commodities minus 11. 2,%.
The same observations apply to the rates at Berlin,
interest.

Paris,

New

York, Calcutta, Tokyo and Shanghai.

New York

during the inflation period

modity interest sank
fo

,

though the

only -3. 1

fo

.

to the fabulously

1861-65, com-

low figure

of -14.8

rate of interest in the labor standard

was

This shows in a striking way how thor-

oughly the greenback inflation upset
culations.

In

This

fact

all

business cal-

has generally been recognized,

though probably underestimated.

It is

amply confirmed

by examining the predictions as to the termination of
the war and the reduction of the gold premium which
were recorded from month to month in the " Notes on
the Money Market " in the ( New York ) Banker's Magazine.

In

all

riods of paper

probability

money

this

inflation.

is

always true of pe-

Our

tables

show

it

for

the Japanese inflation of 1878-81.

§7

We

can

now understand why

a high rate of interest

need not retard trade nor a low rate stimulate

it.

These

American Economic

68
facts

have puzzled many

Association.

[410

For instance,'

writers.

" Public

inquiry has been of late strongly directed to the reasons

low rate

for the very

upon loanable

of interest

in the year 1875, the

more

capital

especially as ten years ago

the very high rates then prevailing created equal surprise. "

Again,^ "

The

such and

effect of

changes effected during the

last

many more

twenty years or

so, is

seen in a general increase in wealth and of mercantile

industry and

Thus only can be explained the
money

profits.

extraordinary high rate at which the interest of

has in the

During 1854-57

last ten years often stood.

the rate of interest was only for a few months below

For more than half
5 fc but for many months above it.
a year it stood at 6 and 7^, and in the end of 1857 it
,

remained

two months

for nearly

1861, interest rose to 6 and

\o%.

at

8^, and

Again, in

all this, to

the S2ir-

prise of the elder generation.^ without the general stop-

page of

the breach

trade.,

of

credit.,

and

the flood of

bankruptcy., which has hitherto attended such rates of interest.
ital

It is certainly

we should

extended

field for

its

were these rates high

don

rates

we

not to increasing scarcity of cap-

attribute such rates, but rather to a greatly

find

profitable

?

If

we

employment.

But

^

turn to our table for Lon-

the average

that

"

market

rate

for

1853-57 ^o^s appear to be the highest in the table but,

unmasking

it

of

the

money

element,

we

find

equivalent to a commodity interest of 2.8^.

it

This

is
is

i.o^ lower than the average for the whole period, 1826
Should we be surprised that industry did not lan-

-95.

guish ?
'Robert Baxter, Journal of the Royal Statistical Society, June, 1S76.
'^Jevons,

" Investigations, "

p.

95.

The

italics

are the present

writer's.

^This view had also been expressed by
tory of Prices ", Vol. V, p. 345.

TookeandNewmarch,

" His-

41

Appreciation and

1]

Bonamy

Professor

interest rates says

associated with

"

:

69

Price^ writing at a time of very low
Everyone remembers the agitations

7^, the

apprehension of

Inte^'est.

trepidation of merchants, the

in business.

losses

...

how happy

moderate rate could be reckoned on as steady,

would everyone have been
and feelings today?

.

!

.

Yet what are the

.

.

.

accommodation so necessary

Alas

.

no such sounds meet our

!

mercial depression

is

facts

Is every merchant, every manu-

facturer rejoicing in the pleasant terms on
tains the

only a

If

which he

ob-

for his business ?
ears.

.

Com-

.

.

the universal cry, depression prob-

ably unprecedented in duration in the annals of trade,

except under the disturbing action of a prolonged war.
In the export figures, the writer

any signs

still fails to

see

Both

of the long-looked-for revival of trade.

quantities and values continue to shrink in all save a few

What

The

explajta-

ation will certainly not be found in gold nor in

any form

cases.

.

.

.

then is the cause

of currency whatever.

.

anything so ridiculous.
one only

:

%

!

It

.

nor has anyoize

That cause

said

one and

is

London table we find, however,
commodity rate of interest was

to our

that for 1874-79 the
7. 1

.

.

over spending. "

we turn back

If

.

.

?

would be astonishing

if

trade did not shrink

under such a burden.
All these writers mistook high or low nominal interest for

high or low

he names as the
for 1814-37,
est.

"

This

and

effect,

1"

One per

real interest.

Tooke apparently did

In his " History of Prices

the same.

is

vol.

ii,

p. 349,

last of six reasons for the fall of prices

"a reduction

but

",

in the general rate of inter-

probabl}^ not only an inversion of cause
also,

when

the veil of

money

cent ", Contemporary Review, April, 1877.

are the present -writer's.

is

thrown

The

italics

American Economic

70
off,

1826-29 was 7.8%.
all

It

[412

The commodity

a mis-statement of fact.

and Jevons

Association.

interest for

Avould seem that Tooke, Price,

overlooked the fact that interest, unlike

an instantaneous but essentially a time phe-

prices, is not

nomenon.
§8.
In order to

make our

following table

results as certain as possible, the

formed in which the longer price

is

movements

are selected.

ten, twelve,

and twenty-one years respectively.

LONDOISr

MARKET RATES OF INTEREST

IN REI^ATION TO RISING

ANT) FALLING PRICES, WAGES,
Apprecia-

interest

/

AND

Apprecia- Apprecia- Virtual

tion of
tion of
Money in
in
Commod- commod- Money in Money in
Labor.
Income.

i

+ 1.2

a

1826-35
1853-64
1874-95

3-4
4.6

1860-74
1874-91

4.0

— 2.1

2.7

0.0

-0.9
-1-2.4

2.4

We

accidental
find that

causes

Virtual
interest interest
in
in

Labor.

Income.

y

a

J

1.8

1.4
2.5

4.6
3-7
4-9

In averages covering so
that

INCOMES.i

ities.

a

interest.

Virtual

tion of

ities.

Market

three periods, of

It consists of

many

-2.5
—0.2

years,

2.7

we may be

are almost wholly

during the period of rising

sure

eliminated.

prices,

1853-64,

the average rate of interest was 2.2^ above the average
for the subsequent period of falling prices, 1874-95,

1.2^ higher than
1826-35.

The

and

in the former period of falling prices,

rates in the

commodity standard how-

ever vary in the inverse order, the highest interest being
for 1874-95 and the lowest for 1853-64.
It is a noteworthy fact, in strong contrast with what we have found

The rates of appreciations in labor and income are based on
Changes in average wages in the United Kingdom between i860
and 1 89 1," by A. L,. Bowley, in the Journal of the Royal Statistical
'

"

Society, June, 1895.

Appreciatio7i

413]

and

true of sliort periods, that the
table of long periods

is

Interest.

commodity

less variable^

71
interest in this

than the money

Thus the adjustment of (money) interest
long price movements is more perfect than to short.

interest.

to

§9.

The

how the English
commodities and labor are con-

foregoing table shows exactly

borrower has fared so

far as

During 1853-64 he paid 2^-1% in commodities
but during 1874-95 he had to pay 4.9%, an increase of
cerned.

1.2%.

In the labor standard, during 1860-74, he paid

1.8%, and during 1874-91, 2.7%, showing an increase of

.9%, while in the income standard the rates were 1.4%,

and 2.5% respectively, showing an increase of 1.1%.
Now it is quite conceivable that commodity interest
should normally be high during the latter period, if this

shown to be one
economic progress.^ That this was
period can be

of

unusually rapid

in fact the case has

The mean variation for the three money rates is easily seen to be
.8% and for the commodity rates only .5%. The two "labor" and
" income" rates differ by .9 and 1.1% while the money rates differ
by 1.3/3- In the New York table which follows, the money rates
differ by 3.0% and the commodity rates by 3.2%, but the labor rates
by only 2.2%.
^

For when the future seems a time of relative plenty, future goods
be discounted at a high rate and profits measured in commodiContrariwise during a period of progressive
ties may be large.
These theories
scarcity commodity interest may be normally low.
'-^

may

may seem

but only when the fundaoverlooked between a period of plenty and a
period of progressive plenty, and between a period of scarcity and a
During stationary scarcity and
period of progressive scarcity.
stationary plenty, normal commodity interest may be high and low
respectively. But during the transition from scarcity to plenty instead of running through the intermediate rates, commodity interest
may be normally higher than in either of the extreme states. This
differ strikingly from
is a case in which " dynamic" economics
to conflict with current opinion

mental distinction

is

"static" economics.

;

American Economic

72

Association.

[414

been pretty thoroughly established by the admirable

and others, and by the
wages compiled by Falkner ^ and Bowley."

researches of David A. Wells
statistics of

^

" labor

But these considerations can scarcely apply to
interest" or "

income

interest."

A man who

borrowed

the equivalent of a hundred days' income during 1860-74

could pay

it

back in a year with the equivalent

of 101.4

days' income, while during 1874-91, for a similar loan

he must return 102.5 days' income.

what we should expect

of

the opposite

gain or loss before 1874.
of this

comparative

1860-74.

If

may

well be that part

half

.5% or .6%,
division

this

gain,

this

to

during

as loss

quite

is

there

arbitrary

conclusion that the borrower's loss was at least

the

seems

Yz'^/o

total

if

when we

reasonable

comparative

But even

1.1%, was

loss,

we suppose

consider that
itself

tion which, in

view of

minimum.

a

all

latter, (a

reasonable monometallists)

we

claims of

all

(English) debtor's loss since 1874 of

IX we

supposi-

the facts, must be within the

minimum

Combining the

the

the debtor's gain during the

former pferiod twice his loss during the

results just given

still

have a

^%.

with those of Chap-

see that the average loss to English borrowers

during the
'

1.1%

1874-91 represents a gain

ascribe

half,

Although

1874-91.

It

loss for

we

remains the other

ter

prog-

at least

borrower's loss since 1874, compm^ed with his

as the

for

is

as the influence of

seems safe to ascribe

It therefore

ress.

This

fall of prices

since 1874-75 probably lies be-

" Recent Economic Changes,"

These

(New York,

1890).

taken in connection with price statistics,
show that commodity wages, i. e., money wages divided by the index
number of prices (z£/Ao/(?5a/^ unfortunately), rose in England during
1860-74 at the rate of 1.8% per annum and during 1874-91 at the rate
of 2.2%, while in America for 1849-57 they fell 2.7% per annum and
^

Lac.

cit.

for 1875-91, rose

statistics,

2.4% per annum.

Appreciation and Interest.

415]

tween

and

yi'^/o

^%

and almost certainly between

The former

and 1%.

y^± yi%

73

and the latter,

result

^

d=

may be

stated

]A,^o

thus,

We may therefore

>^%.

say with considerable confidence that the average debt-

England

or's loss in

for contracts

made

since

1874-75,

annum with

has been two-thirds of one per cent, per

possible error of one-third of one per cent.

a

In other

words, the average debtor's loss could have been cor-

by a reduction

rected

from

in the rate of interest of

one-third of one per cent, to one per cent.

§ 10.

For contracts made before 1874, but continued to the
1874, must have been greater.

present, the loss, since

We may therefore accept the former
lower limit

we

or, to

be

safe, 5^

estimate of

To

%.

^%

an upper

find

as a

limit,

recur to the fact that India gold bonds purchased

prior to 1875 yielded very nearly

^ % more interest than
Since

the average subsequent to that date.

we have

estimated that the average from 1875 was at most

i

%

too high, the average for periods beginning before but

ending

after 1875,

must have been at most

i

^%

too high,

can scarcely be claimed that the rate of interest for
the part of the term of the bonds previous to 1875 ought
to have been lower than that for the part subsequent to

for

it

We

that date.
tracts

made

therefore conclude that, for English con-

before 1874-75, the debtor's loss since 1874-

75 has been between

^%

and i>^%, i- <?., i d= ^%.
which were made prior

It follows that for contracts

to

1874-75 but subsequently converted or continued at a
lower rate of
I d=

^

>^%

d= >^

%

per

interest,

annum

the

to

since that date.

the

loss

date

since
of

1874-75 was
and

conversion

American Economic

74
It

Association.

[416

should be observed that the foregoing calculations

are based on public prices of bonds and rates on

money.

on private loans and farm mortgages, although

Interest

influenced

market,

is

by the same causes which affect the money
less flexible and the debtor's losses or gains

^

in these cases are doubtless

somewhat

greater.

§11.

The

New

following table gives the long time averages for

The war

York.

period

period of rising prices

is

is

omitted and a nine years'

compared with a seventeen

years' period of falling prices.

OF INTEREST IN REI.ATION TO RISING AND
FALLING PRICES AND WAGES.

NEW YORK RATES

Appreciation Appreciation

Interest

Prime

Two name

money

of

60 days.

1875-91

jcommodities.

i

1849 - 57

of

money

in
|

a\

•

-3-8
+2.0

8.2^

.

labor.

5-2

Virtual
Interest

Virtual
Interest

in commodities.

labor.

j\

h

-I.I

4.1

7.0

-0.4

7-3

4.8

We find for 1849-57

and 1875-91 that the money rates
were 8.2 and 5.2%, the commodity rates 4.1 and '].'^%^
We see therefore,
but the labor rates 7.0 and 4.8%.
that in terms of labor, loans in

America have actually
This

been easier during 1875-91 than during 1849-57.
fact suggests

the conclusion that the debtor's loss in

America has not been
^

See Appendix,

\ 2,

4th

as great as in England.

This,

if

title.

"prime" paper)
but i.o has been deducted from this average in order that it
may be properly compared with the average of Robbins' figures for
1S75-91. The correction is based on the fact that i.o was the average
excess of Elliott's figures over Robbins' during the fifteen years,
'^The average of Elliott's figures (which are not for

is 9.2,

1860-74.

See Appendix.

Appreciation and Interest.

417]
true,

may be due

to a

more rapid

75

rate of progress in the

United States/
§ 12.

Four general
(i)

have now been established

facts

:

prices are directly correlated with

High and low

of interest
(2) Rising and falling
and wages are directly correlated with high and
low rates of interest (3) The adjustment of interest to
price (or wage) movements is inadequate (4) This ad-

high and low rates

;

prices

;

;

justment

more nearly adequate

is

for

long than for short

periods.

These

facts are capable of a

pressing the
takes place.

common

explanation ex-

manner in which the adjustment referred to
Suppose an upward movement of prices

Business profits (measured in money) will

begins.

rise,

for profits are the difference between gross income and

expense, and
rise.

if

both these

rise,

their difference will also

Borrowers can now afford to pay higher " money

interest."

If,

however, only a few persons see

interest will not be fully adjusted
realize

an extra margin of

charges.

This

raises

^

profit after

an expectation

^

See page

72,

note

the

deducting interest

of a similar profit in

the future and this expectation, acting on the
loans, will raise the rate of interest.

this,

and borrowers will

If

demand

the rise

for

is still

2.

seems scarcely necessary to add as an independent cause of maladjustment the accumulation (or in the opposite case, depletion) of
bank reserves, for this is but another symptom of mal-adjustment due
^

It

to imperfect foresight.

An

increase of gold supply, as in 1852-53

Tooke and Newmarch, "History of Prices," vol. V, p. 345)
may first find its way into the loan market instead of into circulation.
(see

But if foresight were perfect, this would not happen, or if it did happen, borrowers would immediately take it out (or increase the liabilities against it) to avail themselves of the double advantage of low
interest and high prospective profits from the rise of prices about to
follow.

American Economic

76

Association.

[418

inadequate the process
trial

is repeated and thus by continual
and error the rate approaches the true adjustment

When

a

fall

Money

pear.

pay the old
they

still

of prices begins, the reverse effects ap-

Borrowers cannot afford to

profits fall.

rates of interest.

attempt to do

If,

through miscalculation

this, it will

cut into their real

Discouraged thus for the future, they will then
bid lower rates.
profits.

Since at the beginning of an upward price movement,
the rate of interest

is

downward movement

too low, and at the beginning of a
it is

too high,^

we can understand

not only that the averages for the whole periods are imperfectly adjusted but that the delay in the adjustment

leaves a relatively low interest at the beginning of an

ascent of prices and a relatively high interest at the be-

ginning of a descent.
least,

This would explain, in part

at

the association of high and low prices with high

and low

interest.^

The

fact that the

adjustment

is

more

perfect for long periods than for short, seems to be be-

cause in short periods, the years of non-adjustment at
the beginning occupy a larger relative part of the whole
period.
§

What

13-

has been said bears directly on the theory of

"credit cycles."

In the view here presented periods of

speculation and depression are the result of ifiequality
of foresight.

price in the

If

all

persons underestimated a rise of

same degree, the non-adjustment

of interest

would merely produce a transfer of wealth from lender
to borrower.
It would not influence the volume of
loans (except so far as the diversion of income from one

person to another would
'

-"

These

facts

Cf. I 2.

may be

verified

itself

have indirect

effects,

from the tables in the Appendix.

such

and

Appreciatio7i

419]

Interest.

77

Under such circumstances the

as bankruptcy).

rate of

would be below the normal, but as no one knows
no borrower borrows more and no lender lends less

interest
it,

because of

it.

In the actual world, however, foresight

very unequally distributed. Only a few persons have
the faculty of always " coming out where they look."

is

Now

it is

rowing

precisely these persons

class.

who make up

the bor-

Just because of their superior foresight

them the management of
they who become "captains of industry."

society delegates to
It is

capital.

Their

share consists of profits (or losses)

while others lend

them

commuted

capital

and receive

interest or

happens that when prices are

It therefore

rowers are more apt to see

while the borrower

is

it

profits/

rising, bor-

than lenders.

Hence,

willing to pay a higher interest

than before for the same loan, lenders are willing to loan
the same
"

amount

for the

demand schedule

schedule "

"

remains

^

same

will

rise

interest.

while

That
the

comparatively unchanged.

will of course raise the rate of interest.

But

cause an increase of loans and investments.^
stitutes part of the stimulation to business

metallists so

much

"

it

is,

the

supply

This

will also

This con-

which

bi-

admire.

When prices fall, borrowers see that they cannot employ " money" productively except on easier terms, but
why the terms should be made easier.
In consequence " entrepreneurs" borrow less, enterprise

lenders do not see

Hadley, " Interest and Profits," Annals of the American Acadeof Political and Social Science November, 1893; also "Economics," (New York, 1896), pp. 116, 269.
^

my

,

^Marshall, "Principles," Vol.

i,

(3rded.)

p. 171.

and the corresponding statement in the next paragraph
are borne out by facts appears to be confirmed, so far as bank loans
and discounts are concerned, by Sumner, "History of Banking in
the United States," (New York, 1896) and Juglar, " Crises commer^

That

ciales,"

this

(Paris, 1889).

.

American Economic

78

Association.

languishes and, though interest
decrease in demand,

it

falls

does not

fall

[420

in consequence of

enough

to

keep the

demand from decreasing/
If lenders, as

a class, were possessed of greater fore-

sight than borrowers,

we should

find trade languishing

during rising prices and stimulated during falling prices.
In the former case lenders would require high interest
for fear, as in 1871-73, they were lending at a loss of
real wealth, while borrowers

parently high rates charged

would be
;

afraid of the ap-

and in the reverse case

lenders would be eager to reap the benefits of an appreciating standard while borrowers, deceived

by the appar-

ently low rates, would rush in to profit by them.

We

see therefore, that while imperfection of foresight

transfers wealth

from creditor to debtor or the reverse,

inequality of foresight produces over-investment during
rising prices and relative stagnation during falling prices.

In the former case society

much wealth
processes "

the rule.

is

tion
^

which

President

low

is

.

.

^

is

trapped into devoting too

to productive uses

and in " long production

while in the contrary case under-in vestment
It

does not seem possible to decide the ques-

of the

Andrews

not because

two
in

evils is the greater.

"An Honest Dollar,"

money is abundant

p. 3,

^

writes

:

"Interest

as before, but because

not, its scarcity having induced fall of prices

and so paralysis

it is

in in-

But it should be added, the cause of the fall of interest
primarily the expectatio7i of small profits. Cf. infra.
dustry."

-

is

Professor Bohm-Bawerk, (" Positive Theory of Capital, " p. 335),
" Now the constant presence of the agio on present goods is

writes

:

on the tendency to extend the production peExtensions which would be harmful as regards social provision are thus made economically impossible. " During rising prices
this drag presses too lightly and during falling prices too heavily.
like a self-acting drag

riod.

^

Bimetallists usually claim that falling prices are the greater evil

For arguments on both sides see Professor Marshall's evidence,
Report on Depression of Trade, (1886), p. 422.

Appreciation

42 1]

It is believed that

and

Interest.

79

the foregoing theories correspond

closely with observed facts as to business stimulation

and depression, volume

of loans, etc., but

it is

not pro-

posed here to enter upon a special statement of them/
Nor is this the place to treat fully the reaction on prices

But

themselves.

it

can scarcely be doubted that the

mal-adjustment of interest

whole movement.
fully the distinction
terest,

says

:

^

"

is

a

central feature in the

Professor Marshall,

who

recognizes

between money and commodity

When we come

in-

to discuss the causes of

alternating periods of inflation and depression of com-

mercial activity,

we

shall find that they are intimately

connected with those variations in the real rate of inter-

which are caused by changes in the purchasing
of money.
For when prices are likely to rise,
business is inflated, and is managed recklessly and wastefully
those working on borrowed capital pay back less
real value than they borrowed, and enrich themselves at
the expense of the community.
When afterwards credit
is shaken and prices begin to fall, everyone wants to get
rid of commodities and get hold of money which is rapidly rising in value
this makes prices fall all the faster,
and the further fall makes credit shrink even more, and
est

power

;

;

thus for a long time prices

fall

because prices have

fallen."

We would
follow

if

add that these

effects of credit

could not

the interest rate were perfectly adjusted.

terest, rather

than

credit,

In-

appears as the chief independ-

ent variable, objectively speaking, though behind

it all

imperfection of foresight.

is

^See Report on Depression of Trade, 1886; and Report of the
Gold and Silver Commission, 1888.
2

" Principles of Economics

", Vol. I, (3rd ed., 1S95), p. 674.

PART III. APPLICATIONS.
CHAPTER XL
THE BIMETALLIC CONTROVERSY.
§1.
all

the arguments

and against bimetallism, but merely

to outline the

It is

for

not the purpose here to follow

bearing of the foregoing theories and facts upon some of
those arguments.

We

have seen in theory and in practice that the

of interest has tended

changing value

to

accommodate

money.

of

itself

to

rate

the

It follows that it is quite er-

roneous to obtain the amount of the debtor's or creditor's

by merely reckoning the effect of appreciation
depreciation on \}i\^ principal of the debt.
loss

And

yet, after all

allowances are made,

it is

or

true that

there remains a net loss alternating between debtors and
creditors according to the varying tides of credit
prices.

During the

that the debtor

probably

twenty years

^ + ^%

less in this country.

When

per

annum

This

in

England and

loss is not inconsid-

looked at in the aggregate

very large indeed.

The minimum

net

public and private in the United States
billions,^

has happened

it

We have estimated

was on the losing side.

his average loss at

erable.

last

and

is

it

appears

indebtedness

given

at

20

^%

on which
would amount to 130 millions
But when we compare this with the aggre-

per annum.
'

G. K. Holmes, Bulletin of the Department of Labor, November,

1895, p. 48.

Appreciation and Interest.

423]

81

gate principal involved or with the 14 odd billions ^ of an-

nual product,

does not seem capable of the deep social

it

harm attributed

to

In fact

it.

it is

aggregates except in

consider

always misleading to

comparison with each

other.

Applied to an ordinary two months' loan

$1,000,

%%

amounts

to one dollar.

In

of

New York city
^^

the up-town banks often charge a rate more than

higher than that of the down-town banks without driving

away customers.
§ 2.

The

ordinary estimates of the debtor's loss are based on

From Sauerbeck's tables it appears that
between 1873 ^^^ ^895 money appreciated in terms of the
index numbers.

commodities selected, 79.0%, which is at therateof 2.7%
per annum. This is from three to eight times as much as
the estimate

we have made.

The

error of the ordinary

calculation does not consist simply in neglecting the

The

matter of interest.

use of index numbers

subject to fatal objection.^
statistics

When

is itself

unchecked by other

Not only do we
the number of com-

they are very misleading.

reach different results according to

modities and the method of averaging,^ but the very best

methods

fail to

give a trustworthy measure of ordinary

domestic purchasing power, both because they are based

on wholesale instead

and because they
house rent and for labor and

of retail prices

ignore expenditure for

domestic service, which, in the family budgets of those

who borrow and
^

lend,

must form a very large item.

Edward Atkinson, Engineering Magazine, December,

1895.

though we have used index numbers
to determine " commodity interest, "^we have not employed them to
^

The reader

is

reminded

estimate the debtor's

that,

loss.

^See articles by Edgeworth, Sauerbeck and Pierson in the ^co«o w«^
Journal, March, June, and September, 1895, and March, 1896.

American Economic

82

Moreover

to

Association.

[424

know the purchasing power of a dollar does
know the " subjective value" or marThe number of dollars at comof money.
money incomes) must also be considered.

not enable us to
ginal utility

mand ( ^.,
And even were our knowledge complete as to the
marginal utility of money as well as its purchasing
power, we should be as far as ever from solving the
problem of the debtor's loss. The question is not one
/.

of appreciation of gold relatively to

labor or any other standard.

It

commodities or to
as

is,

we have

seen,

exclusively a question of foresight and of the degree of

adaptation of the rate of interest.
§3It scarcely

can only

needs to be pointed out that bimetallism

We

unpaid debts.

affect

clearly recognize the fact that the

should therefore

most

of the loss

which

debtors have suffered since 1873 has already passed be-

yond the reach

of

remedy.

Of the residuum the

vary with the duration of the debt.

On

losses

debts three

years old the loss in England
cent.,

is probably about two per
on those six years old about four per cent., and so on.

Moreover, on debts contracted before the

fall

of prices

began, the annual rate of loss was greater, being probably, as

we have

ever, including

i ± /^%.
Most such debts, howeven national debts, have received part

seen,

of the benefit of

low

interest

through extensive con-

versions.

Now

bimetallism,

if

adopted, so far from rectifying

gains and losses, would simply increase the inequalities.
If it resulted in

debasing the standard ten per cent,

might exactly remedy debts
correction

fifteen

would be too small

it

years old, but the

for those older

and too

and

Appreciation

425]

Interest.

83

large for those younger than fifteen years.

form the great bulk
average

life

of a

The

latter

existing indebtedness.

of

The

farm mortgage

the average age of mortgages

4^

is

now

years

so that

^

in force would be

about ^Yi years. Bank loans run only a few days or
months. These and other short time loans make up

some

mainder consists
few

The

sixty per cent, of existing indebtedness.^

them extend back

of

dominant

effect of

to

1873.^

'^\i^

and

chief

debasement would therefore be

defraud the lender of today and yesterday.*
debts, for

re-

and government loans and

of railway

which the remedy

is

The

to

older

designed, no longer exist.

§4.

But even

if

bimetallism or any other financial scheme

could so scale debts as exactly to counteract the losses

connected with the

fall of prices,

arrangement ought not

to

the ethics of such an

go unmentioned.

The

fact

that debtors have lost does not imply that they have suffered an injustice.

a

If

man

insures his house and

burns the next day the insurance company suffers a
but not an injustice.
islative relief

If

the

company should ask

on the ground that

sudden a termination

foresee or provide against,

^

Keep your

^

that the

fire

was

could not possibly

would be laughed

contract " would be the reply.

'Eleventh Census, Bulletin
'^Holmes,

it

it

for leg-

had not expected so

of its policy,

brought about by causes which
"

it

it

loss

to scorn.
It

would

71.

loc. cit.

mucb less than one- fourth for American railways. This
made by looking over all the funded indebtedness whose

Probably

estimate

is

dates of issue are given in the " Ofl&cial Intelligencer" for 1894.
* For effects on "Social Classes," see article by Professor H.
Farnani, Yale Review^ August, 1895, p. 183.

W.

American Economic

84

make no

difference

if

the

fires

Association.

[426

were nniversal, and every

company lost. Those who assume the risks
must take the consequences. A farmer mortgages his
farm and agrees to pay $1,000 and 5% interest. By the
terms of the agreement he takes all risks as to what the
dollar will buy of wheat or anything else.
He may lose
and all farmers may lose and the causes may be in India

insurance

we can

or Australia or in the sun spots, but

scarcely af-

ford to surrender the ancient principle of the Inviolabil-

through sympathy with the misfortunes
any individual man or group of men. That elements

ity of Contracts,

of

of risk exist in every contract

and that

responsibility are too often ignored.

writes

" Increase in the value of

^
:

It forces

this risk implies

President

money

Andrews

robs debtors.

every one of them to pay more than he cove-

nanted [!]
contracts

—not

which

more

more value." But
not call for " value "

dollars but

call for

money do

any more than contracts to deliver wheat call for money.
If a man had agreed a year ago to deliver 10,000 bricks
to a builder at a fixed price, he

would not be

justified in

offering only 9,000 on the

gone up.

A

contract to

ground that the price had
pay " value " would be a legal

and the court which should attempt to interwould hear an interesting assortment of defini-

curiosity,

pret

it

tions from our leading economists.

Closely associated with the principle of the Inviolability of

laws,

Contracts

and in

contracts.

is

the principle

particular, against laws

The world

against retro-active

which

has reached

alter existing

these

principles

through a long and weary struggle and much costly experience with repudiation and the abuses of legal tender.

The burden
^

of proof rests

" An Honest Dollar, "p.

2.

on those who would revert

Appreciation

427]

and

Interest.

to these experiments for the sake of

85

any

benefits

from

bimetallism.

Surely the practical reasons against such
a course are obvious enough.
When once a government
has undertaken to " correct " debtor's
stop at one attempt.

losses, it will

not

History teaches that a nation once

embarked on such a policy never keeps its most solemn
word as to where it shall leave off.
Creditors will fear
^

to lend except at usurious rates

and the debtor

of the fu-

ture will pay dearly for the emancipation of the debtor
of the present.^

§5-

To

those

of debts

who

claim that the cause of the aggravation

was governmental action

and that therefore

it is

in the

now a fit subject
answer

correction, the obvious

is

for

first

instance

governmental

that this does not ap-

ply to the great mass of existing contracts which have

been formed since demonetization.
Finally

such
it is

is

it

may be

on the side

objected that the gold standard as

of creditors as against debtors because

an appreciating standard and according to our

statistics

own

the debtor usually wins in rising and loses

in falling prices.

Such reasoning, however, is entirely fallacious. The
same kind as that contained in the fa" Buy when stocks
cetious advice to young speculators
It is easy to
are low and sell when they are high. "
fallacy is of the

:

prophesy after the event

have

lost for

;

investors in India silver bonds

twenty years but this does not prove that

the present price of rupee paper
did,
1

London brokers would be the

Shaw, " History of the Currency," (18951

of American Currency,"
2

is still

See the writer's

The Bond Record,

first
;

too high.
to

know

If it
it

and

also Sumner, " History

p. 331.

"Would

Bimetallism benefit the 'Debtor Class'?"

April, 1896.

American Economic

86
correct

We

it.

arrangement
the debtor. "

Association.

cannot therefore
in favor of

is all

What

[428

the " present

say

and against

creditor

tlie

bimetallist will risk his reputation

in predicting the course of prices

and interest in the

next twenty years ?

we may with

prices rise,

If

If they

probability predict that the debtor will vrin.
fall,

he will

But who knows which

lose.

great

is

the true

§6.
Legislation to offset the effects of a

the past

is

wrong, because retro-active.

offset the effects of a fall in

we cannot know
there

would be no need

There remains

the future

there will be a

to

fall,

absurd, because

and

we

if

could,

of legislation.

less variable, that

we can

not to prevent something which

to prevent

Legislation to

be considered legislation for the

purpose of making the monetar}- unit
is,

is

prices in

fall of

something which we cannot

foresee but

foresee.

Such

must be recognized
at once as thoroughly sound.
But it applies equally
well to " symmetallism" and other plans - for monetary
a reason for monetan,- legislation

^

reform.

That bimetallism

(

as long as

it

lasted)^

would be

Edgewortli, " Thoughts on monetary reform", Economic loiirnal,
September, 1S95.
'

'E.g., the multiple

standard propounded by Lowe,

and

1S22,

Scrope, 1833, and advocated by Jevor.s, "Money and the Mechanism
of Exchange", p. 328, and "Investigations", p. 123, and by Marshall,

Report of the Commission on Depression of Trade, p. 423
the various forms of double standard suggested by Marshall,

;

also

ibid.,

Edgeworth, ibid., Hertzka " Das iuternationale Wahrungsproblems,"
also the various forms of
1892, and Stokes, "Joint Metallism," (1S95)
elastic currenc}* suggested by Professor Walras, " Theorie de la
Monnaie", (Lausanne, iSS5i, by Secretary Windom and others.
;

'See the writer's " Mechanics of Bimetallism," Economic Journal,
September, 1894.

Appreciation and Interest.

429]

87

more dependable than monometallism is probable on
statistics which we have given
seem to reveal as great uncertainty in price movements

a priori grounds, but the
before 1873 ^^

how

since.

indeed a large question

is

remedy the

far au}^ sort of monetary' reform could

matter

;

expansion

for the

might be almost

as violent

may be however,
is

It

worth while

little."

^

If

and contraction

and mischievous

that " the evils

do

to

much

.

.

as ever.

in order to diminish
^

now

it

them a

monetary

will be an inestimable

As an improvement on

the civilized world.
single standards

it

It

are so great that

a more stable and less expensive

standard can be found,

credit

of

boon

to

the two

existing, bimetallism, launched at

the market ratio, ma}" be worth serious consideration.

But the proposal now before the world
15/^ or 16 to

I.

is

bimetallism at

Such bimetallism means debasement
any single country- which attempts it.
it means debasement in gold standard

of the standard of
If international,

countries,

and a violent contraction and appreciation in

silver standard countries.

In no other wa}- could the in-

fluence of the legal ratio on the

market

ratio

be

felt.

We

should witness not only losses to creditors in the former
countries but losses to debtors in the latter, and these
losses

would be

far in excess of those

found to follow from the

slow"

which we have

and half foreseen appre-

ciation of the last tv^'enty years.
'Marshall, "Principles of Economics" Vol.

*Jevons, "Investigations," p. 104; "

.

3rded., (1895),

p. 674.

the very scarcity of gold

recommendation
in itself gold digging has ever seemed
me almost a dead loss of labor as regards the -world in general."

is its

to

.

I,

.

.

Also Lexis, Economic Journal, June, 1S95,

p. 276.

CHAPTER

XII.

THE THEORY OF INTEREST.
§1.

The relation existing between interest and
implies that the rate of interest
in

which

is

it

Adam Smith

appreciation

relative to the standard

Hume

Economists, from

expressed.

down, seem

is

to

and

have considered the money

element entirely eliminated from the rate of interest by
the simple fact that, in the last analysis,

which

not money,

has been seen,

is

we can

loaned

it

is

and returned.

capital,

But, as

identify the rate of interest in

terms of capital with the rate of interest in terms of

money only when

the price ratio between

money and

capital remains constant.

The

first

thought suggested by this fact

is

to dis-

"

" real" interest in the

money

as introducing a " third element"^

nominal" and
same way that we distinguish between " nominal" and
" real" wages.
This seems to be the thought of all the
writers who have touched on the subject.
Professor
" real" and " nominal."^
Marshall in fact uses the words
de Haas speaks of the effect of the appreciation or detinguish between

preciation of

into the rate of interest.

This " element"

is

to be

added

to or subtracted from the sum of the other two elements,
which are a payment for capital (or the rate of interest
proper) and a payment for insurance.
John Stuart Mill
'

"Principles of Economics," Vol.

I,

3rd ed. (1S95), P674.

It will
''Journal of the Royal Statistical Society, March, 1S89.
be seen from the formula i-l-7"=(i
(i
a) that the "third
element" is not a mere additive term.

+

+

Appreciation aiid hiterest.

43 1]

and the eighteentli century pamphleteer

89
^

were evidently

thinking of a normal rate of in terest in coin to which
a certain extra charge
in reference to

John

B. Clark

is

^

to

be added

paper depreciates

if

Finally the article of Professor

coin.

devoted chiefly to a search for an ab-

is

which we may refer any monetary
appreciation or depreciation and in which therefore
solute standard to

" real"

interest could be expressed.
" real"

that the words
ient terms

and

and

"

It

is

not denied

nominal" are very conven-

may

rough and ready expression

for a

serve a useful purpose.

But the mere distinction be-

tween "real" and "nominal"

is

quite inadequate for a

true and accurate statement of the case.^
If

we

seek to eliminate the

money element by

ex-

pressing the rate of interest in terms of real " capital,"

we

are immediately confronted with the fact that no

two

forms of capital maintain or are expected to maintain a

There are therefore

constant price ratio.
rates of interest

on capital

Even

diverging in value.

dex number

if

we

title of " real "

interest.

changes in

;

we

many

could find an ideal in-

for capital in general

there are other kinds of interest

the

just as

as there are forms of capital

or for commodities,

which might also claim
and " income"*

refer to " labor"

even be claimed that relative
wages and incomes are abnormal phe-

cannot

It

prices,

nomena, or incident only to a dynamic society. Even
in the most ideal stationary state, the mere changes in
seasons would
'

See Chapter

make interest between summer and winter

I, § 2.

"^

Political Science Quarterly, September, 1895.

*

Professor Edgeworth

(

" Variations in Value of Monetary Stand-

ards", Report of the British Association for the Advancement of
Science, 1889, p. 163), exhibits seven kinds of standards for deferred

payments.
*

See Chapter X,

?? 8, 9.

Ama-ican Economic

90

low in terms

Association.

summer precincts

of

[432

sncli as frnit,

interest

is,

as Professor

and high

The

rate of

Bohm-Bawerk shows, an

agio on

in terms of winter products such as ice.

present goods exchanged for future goods of the same
kind.

It is

Professor

agio

may

a simple corollary of this theorem, though

Bohm-Bawerk does not express

it,

that this

be in theory and must be in practice a different

agio for each separate kind of goods.

§ 2.

But,

it

may

be urged, surely there

standard conceivable in theory
practice,

which may

is

some invariable

not determinable in

if

serve for a base line of apprecia-

tion and depreciation for all goods and money, and in

terms of which we

This brings us
of value.

may

express a "real" rate of interest.

to the question of

But here we

Such an absolute standard

The

vidual.^

difficulty.

will differ with each indi-

a dollar

fact that

an absolute standard

encounter another

is

a smaller unit to a

millionaire than to a poor laborer, has as

its

consequence

that as the millionaire grows poorer his dollar grows
larger while as the laborer grows richer his dollar grows

On

smaller.

account of such changes in personal

for-

tunes the dollar, however defined, will be constantly
appreciating and depreciating in different degrees
different

men and

quence

In fact the phenomenon of

classes.

borrowing and lending
of the different

ciates or depreciates to

among

some extent itself a consedegrees in which money appre-

is

to

borrower and lender.

1 Marshall, "Principles," Vol. I, (3rd ed.),
p. 198, and Royal Comalso the writer's
mission on Depression of Trade, 1SS6, p. 423
"Mathematical Investigations in the Theory of Value and Prices,"
;

Transactions of the Connectictd Academy,

(New Haven,

1892).

Appreciation

433]

and

hiterest.

91

In addition to the differences already mentioned, there
a different rate of interest for each period of time con-

is

The

sidered.

tracted to-day

rate in

any given goods

for a loan con-

and payable one year hence
next year's goods

this year's over

is

the agio of

the rate for a -loan to

;

be contracted one year hence and payable two years

hence

is

the agio

(

reckoned to-day

)

of

next year's goods

over the goods of the succeeding year and so on.
rate for a loan contracted to-day

hence
rates.

is

the " actuarial average "

There

is

The

and payable two years

two previous
no reason why these three rates and

others constructed in the

^

of the

same manner should not be

all

different.^
§ 4-

We

thus reach a multiple theory of interest.

results are,

first,

Our

that different standards have in general

different rates of interest

;

secondly, that of the numer-

ous standards thus possible a different one
for each individual

;

is

" absolute "

thirdly, that in each standard there

will be a different rate for dijfferent periods of time.^
'

See Chapter V,

§ 4.

" p. 280 ), in showing
( "Positive Theory,
"arbitrage transactions" tend to equalize rates, tacitly assumes
that the iirst two rates above mentioned are equal and only proves
that in that case the third will be equal to the first.
"^

Professsor

Bohm-Bawerk

how

Besides these three sorts of variations there are others due to unIn the theory of Part I, we have only
considered the case where the relative divergence of two standards is
foreknown with certainty. To complete the picture it is necessary to
introduce the theory of probabilities as applicable to economics.
^

certainties of various kinds.

(See Marshall's "Principles", p. 198, note, and 211, note.) When this
done it will also explain the diiferent terms for call loans, 30 days, 60
days loans, etc., as well as for different degrees of security. Although
in the latter case we may distinguish pure interest as the rate for perfect security, yet the surplus above this sum is not simple insuranceIt is not a certain sum paid for a contingent loss but it is itself conis

American Economic

92

Association.

[434

In actual business experience none of these three sorts

The third is usually
The second is not reducible to

of differences attract attention.

very slight in amount.
statistical

^

measurement

;

while the

first

escapes notice

because of the habit of reckoning- always in money.
a few cases, as for Indian and Chinese bonds,

In

London

brokers must have occasion to note the fact that

3%

in

^

silver is usually not equivalent to
in gold, but even
3
in such cases the gold rate is thought of as " the " rate.

So

also speculative contracts in wheat,

and

land, etc.,

ordinary loans, which are really advances of stock, materials,

into

and other forms

money and

pendent standards
so often finds

of capital, are

always translated

their essential nature as involving inde-

it

money and speak

is

concealed.

But the economist, who

necessary to forsake the language of
in terms of the things

which money

measures, must here also recognize the fact that the rate
of interest in terms of

money

is

simply a

common

repre-

sentative of multiform rates in other standards.

These rates are mutually connected and our task has
been merely to state the law of that connection. We
have not attempted the bolder task of explaining the

Such an explanation constitutes the
more usual sense and forms
Professor Bohm-Bawerk's masterly trea-

rates themselves.

" theory of interest " in the

the subject of
tise.

ject

The relation between the two branches
may be pictured as somewhat analogous

tween the theory

of relative prices

of the subto that be-

and the theory of

price levels.
and, what is more important here, it is not a present sum but
a series of deferred sums and as such is itself subject to the principles
of pure interest. It follows that we cannot strike out the " insurance
element " as a mere additive term with which the theory of interest

tingeut

;

proper has no concern.
'

A

complete theory has yet to be written.

For a supposable case of great variation, see Chapter V,

^ ?

i, 2.

APPENDIX.
STATISTICAL DATA.
§ I.

The

writer has found so

much

difficulty in securing

a long series of yearly averages for rates on "

money ",

that the results are here presented in the hope that they

may

be of use

to others.

1

YEARLY AVERAGE RATES OF INTEREST ON
London

New

Berlin.

York.

'

(LI

1824
1825
1826
1S27
1828
1829
1830
1831
1832
1833
1834
1835
1836
1837
1838
1839
1840
1841

1842
1843
1844
1845
1846
1847
1848
1849
1850
1851
1852
1853
1854
1855
1856
1857
1858
1859
i860
1861
1862
1863
1864
1865
1866
1867
1868
1869
1870
1871
1872
1873
1874
1875
1876
1877
1878
1879
1880
188
1882
1883
1884
1S85
1886
1887
ib88
1889
1890
1891
1892
1893
1894
1895
I

I

C

Calcutta

rt

"

MONEY."

Tokyo.

i

Shanghai.

I

3-5
3-9
4-5
3-3

30
,

3-4
2.8

3-7
!

I

!

3-1
2.7

3-4
3-7
4.2
4-5
3-0
5-1

50
4-9
3-3
2.2
2.1

3-0
3-8
5-9
3-2
2.3
2.2
3-1
1-9

3.7
4-9
4-7
5-9

3-9
9-7
6.5

7-1
3.1

7.0
6.1

25

4-9
4.2
4.2

4.1

5-5
2.4

5-1

4-3
7-4
4.6
6.7
2.3

5-5
8.7
6.9
9-1
5-1
5.8
6.0

1.8

3-0
3-1
2.7
3-8

5-7
4-7

50
3-9
6.2

4-5
3-5
3-0
2.2

5-7
6.8
8.4
5-3
6.3
4.6
5-3
6.6
6.8
6.4
5-4
6.0
5-6
5-5
7.0
5-8

2.3
3-5
1.8
2.2
2.9
3-4
3-0
2.6
2.0
2-1

2.4
2.4
2.7

3-7
2.5

!i8

18
18
14
ii4
'14
i,S

^3
15
|i6

'17
;i7

131410.

17
7.9 II

12.

16

13.

II

8.8
9.0
10.
TO.
11.

9
8
I

9
10
II

3-1

Paris

9-4

3-5
4-9
5-4
4-3

1-5

The London, Berlin and

iS.

141414.
12.
12.
12.
10.
II.
11.

8.3! 8

market rates are on

9

7.8i 7
9-3; •

9.6
first

.

class merchants'

Appreciation arid Interest.

437]

95

All the rates are entered in the foregoing table as
rates of "interest,"

though the

rates

for the

England, Germany and France are rates

The two

Banks

of

of discount.

are not quite equivalent but, for the purposes

of the foregoing

work, the distinction between them

unnecessary because, in a continuous
any, affects

all

series,

the error,

items nearly alike and thus cancels

is
if

itself

out in the comparisons.

Had

it

been necessary, some of the tables could have

Thus

been extended back.

could be given to 1696 but
use.

The

the

it

Bank

was too

of

England

rate

inflexible to be of

bank rates could also be exmarket rate could be given from

Berlin and Paris

tended and the Paris

1861 (except for 1870 and 1871) from data in Wi^ Economist.
The

figures for 1824-58 are

from the evidence of D.

Chapman

before the
reprinted in
Hunt's Merchants' Magazine. Vol. 41, (1859) P- 95)- Th"; remaining figures are
compiled from the Economist. For those for 18S4-94, the writer is indebted to
Professor F. M. Taylor of Michigan University, who had collected them, from the
Economist for a different purpose. The Bank of England rates for 1824-43 are reduced from Burdett's " Ofiicial Intelligencer," (1894), p. 1,771. The remaining ones
for England, Germany and France are reduced from those given in the Report
of the Royal Commission on Depression of Trade, 1886, p. 373, and the Economist.
They represent the bank "minimum." The New York rates are taken, the first
two columns, from a table by E. B. Elliott (afterward government actuary) in
the (New York) Banker's Magazine, 1S74. The quotations given as "60 days"
apparently included single name paper. The third column to 1890 is compiled
from a diagram of highest and lowest monthly rates prepared at Yale college by
Mr. G. P. Robbins of the class of 1891, and has been completed from the Financial
Review, by averaging the highest and lowest weekly rates. It has been
found impossible to extend the table back beyond 1849, as the rates are not
systematically reported. The Calcutta rates are the minimum of the Bank of
Bengal and have been kindly furnished by Messrs. Place, Siddons and Gough,
brokers, of Calcutta. The market rates of Tokyo are averages of the highest and
lowest rates of each year, furnished by Mr. Ichi Hara of the Bank of Japan,
Tokyo. The bank rates are for the Tokyo and Yokohama Co-operative Bank and
were translated by Mr. Sakata, student at Yale, from a history of Japan by
Zenshiro Tsuboya. The tables for Shanghai have been procured through the
kindness of Mr. F. W. "Williams of the department of Oriental History of Yale
University, who obtained them from Mr. J. F. Seaman of Shanghai. The first
column contains the rates ruling in the native market, and the second, those of
the Hong Kong and Shanghai bank (under English control) on overdrawn current accounts, a species of demand loans and the ordinary form of lending in
Shanghai. Mr. Seaman was told that the market rates cannot be extended back
beyond 1S85, as the books of the Chinese banks for previous years are burnt.
bills.

Committee on the Bank Act,

1857,

Sess.

2,

X,

B.

pt. I, p. 463, (also

2 This rate is only from September when the operation of the Bank Act began,
previous to this the custom of the bank was to have a uniform rate for all loans.

American Economic

gS

Many
drawn

of the sources

as the rates

Amsterdam and other money

weekly or monthly

number

[438

from which the table has been

also contain other information such

for Vienna,

the

Association.

of

rates, the variation

changes

of the

centres, the

with the seasons,

Bank Minimum,

etc.

§2.

Of sources not mentioned in the above
which the writer has encountered are

note, the chief

:

Adolf Soetbeer, " Materiallen zur Wabrungsfrage," (Berlin, 1S86),
p. 78.

Covers 1851-S5 for Banks of England, France and Germany, and market rates of Hamburg and Vienna.

Austrian

Government,

" Tabellen

zur

Wabrungsfrage," (Vienna,

(A second edition bas just appeared, 1896).
1S92), pp. 204-6.
Covers 1S61-91 for banks of Italy, England, France, Germany, Austria,
Belgium and Holland, and market rates in Vienna, iS6q-gi.

W. Stanley Jevons,

" Investigations in Currency and Finance," (Lon-

don, 1884).
Contains diagram for prices of consols and 3 per cent, stock from 1731,
and minimum rate of interest in London from 1824 also monthly variation in rate of interest, p. 10. The diagram for the price of consols
shows that during the middle and first half of the eighteenth century
the interest realized was almost as low as in the present generation.
This was a period of falling prices.
;

Eleventb Census of the United Slates, Bulletin
mortgages, 1880-89).

71

(on real estate

probably the most elaborate series of interest averages ever
If these averages be compared with the course of prices
during the average term of the contracts (five years), it will be found
in nearly every case that interest is high or low according to the degree

This

is

constructed.

of the rise or fall in prices.

"Viscomte G. D'Avenel, " Histoire economique de la propriety, des
Salaires, des Denr^es et de tous les Prix en gdn^ral depuis I'an 1200

jusqu'en I'an 1800," (Paris, 1894), vol. II, p. 882.
This work contains also tables of the purchasing power

of money, but
neither the interest nor price statistics are sufficiently exact or detailed
for use in the foregoing study.

Tooke, "History of Prices," and

Tooke and Newmarcb, " History of Prices from 1793 to 1856."
G. Winter, "Zur Gescbicbte des Zinsfusses in Mittelalter," Zeitschrift fiir Social und Wirlschaftsgeschichte, (Weimar), 1895,1V, 2.
Arthur Crump, "English Manual of Banking," (4th ed., London,
1879). PP- Mi-4Gives Bank of England rates for

1694-1876.

Appreciation and hiterest.

439]
Alph. Courtois

97

" Histoire des Banques en France," (Paris, 1881).

fils,

Gives rate of interest at the Bank of France,

iSoo-1880.

Wilhelm von Lucam, " Die Oesterreichische Nationalbank wahrend
der Dauer des dritten Privilegiums," (Vienna, 1876), p. 121.
Gives rates for Bank of Austria,

"Jahrbiicher

fiir

1817-75.

Nationalokonomie und Statistik," February,

1896,

pp. 282-83.
Gives bank and market rates for London, Paris, Berlin, Amsterdam,
Vienna and St. Petersburg, 1841-80 by decades, and 1881-95 by

Brussels,

years.

" Handworterbuch der Staatswissenschaften," Article "Banken."
Gives rates for Bank of Prussia and Germany, iS47-89i^^for Bank
of Austria, 1878-89

;

<^^^

Switzerland, 1883-88.

Om

A. N. Kiaer, "
seddelbanker, " (Kristiania, 1877).
Contains diagram of bank rates at Kristiania, Stockholm and Kjobenhavn,

1853-76.

M. G. Mullhall, "Dictionary

of Statistics," (London, 1892), pp. 76,
607.
Gives rates for countries of Europe by five and ten year periods since
1850.

William Farr, "On the valuation of railroads, telegraphs," ^ic, Journal of the Royal Statistical Society, September, 1S76, pp. 464-530,
" Report of the

New England Mutual

Life Ins. Co.," Boston, 1890.

Gives rates realized by twenty representative insurance companies for
1869-88, and for Massachusetts savings banks for 1877-89, and bank divi-

dends in Boston, New York and Philadelphia. The rates realized by the
insurance companies for the twenty years, 1869-88, inclusive, were 6.0,
5.9, 6.1, 6.2, 6.5, 6.2, 6.5, 6.1,

5.6,

5.1,

5.0,

4.8, 4.8, 5.1, 5.1, 4.7, 4.7, 4.9, 4.7, 4.6,

These represent (if the -writer mistakes not) the average
rates earned on the par value of investments of all ages, some old, some
new, some terminable soon and others having many years to run. For
this reason they are of little or no use for the foregoing study.
respectively.

Robert GifFen, "Essay in Finance," second

series,

(London, 1886),

P- 37-

Seasonal variations of interest in connection with bank reserves,

F.

M. Taylor,

'
'

Do we want an

Elastic Currency

?

'

'

etc.

Political Science

Quarterly, March, 1896, pp. 133-157.
Gives diagram showing the relation of surplus reserves and rates
discount

;

of

also seasonal variation of rate of discount.

R. H. Inglis Palgrave, "Analysis of the Transactions of the

Bank of

England," (London, 1874).
Gives rates, 1844-72, and seasonal variation, 1844-56 and
dependence of rate on ratio of reserve to liabilities.

1857-72.

Shows

R. H. Inglis Palgrave, "Bank-rate in England, France, and Germany,
1844-78 with remarks on the causes which influence the rate of
interest charged and an analysis of the accounts of the Bank of
;

;

England," (London, 1880).
R. H. Inglis Palgrave, (London) Bankers' Magazine, March, April,

May, 1878.
Number of changes in bank

rates of England, France,

and Germany.

American Economic

^8

Association.

[446

Theodor Hertzka, "Wahrung und Handel," (Vienna,

1S76).
Gives the number of weeks each rate lasted for the Banks of England,
France, Germany, and Austria during 1844-73.

George

"Money Market

Clare,

Diagrams

for

Primer," (London, 1S91).

seasonal variations of interest, bank reserves,

etc.

Commercial and Financial Statistics of British India. Second
(Government Printing OfSce, Calcutta), 1894, pp. 354-64.
Monthly Discount, Bank of Bengal, 1861-94, and average quotations
government securities held in I,ondon.

Report of the Secretary of the Treasury, 1893,
Report of the Comptroller of Currency, 1894,

issue,

of

p. 401.
p. 179.

H. W. Farnam, "Some Effects of Falling Prices," Yale Review, August, 1895.

The

last

three references contain statistics of rates of interest realized

on some United States Government bonds.

R. A. Bayley, "National Loans of the United States", (Government
Printing Ofl&ce, Washington, 1882).
Gives rates of interest and price of issue of all United States loans from
July

4, 1776,

to

June

30, 1880.

"Dictionaire des Finances," Article "Interet."
Gives rates at vrhich France has borrowed.

The

following tables of index numbers are appended

in order that the reader

and

X

falling prices

and

may

for the reason that

those for India,

been accessible

to

verify the periods of rising

which have been discussed in Chapters

many

of the tables,

notably

Japan and China, have not hitherto

most readers.

1

1

INDSX NUMBERS IN SEIVEN COUNTRIES.i
England.

1824
1825
1826
1827
182S
1829
1830
1831
1832
1833
1834
1835
1836
1837
1838
1839
1840
1841
1842
1843
1844
1845
1846
1847
1848
1849
1850
1851
1852
1853
1854
1855
1856
1857
1858
1859
i860
1861
1852
1863
1864
1865
1866
1867
1868
1869
1870
1871
1872
1873
1874
1875
1876
1877
1878
1879
1880
188
1882
1883
1884
1885
1886
1887

1890
1891
1892
1893
1894
1895
1

Germany.

United States.

India.

Japan. China.

105
124
108
108

97
95
97
98
93
90
93
96
103
lOI
loi

no
104
102
90

83
90
84
85
88
95
95
88
83
89
99
98

85
83

94
82
77
77
79

100
102
114

781

95
102
loi
lOI
105
91

94
99
98
lOI
103
105
lOI
102
100

113

99
98
96
100
109
III
102
96

95
94
87

105
105
109
112
114

121

134

129

124
123
130
114
116
121
118
123
125
129
123
126
124
122
123
123
127
136
138
136
130
128
128

"3
103
100
100
118
127
129
112
115
100

95
97
94
94
105
103

94
87
85
82

121

117
122

132

172
232
188
166
174
152
144
136
132
129
130
129
123
114
105

95
105
108
109
107
103

121

122
122
114
109
104
102
102
106
108
109I

94
104

79

106
102

93
93
94
96
98
94
94

100
100
loi
104
119
134
149
156
164
165
167
167
166
167
166
162
158
151
144
141
139
143
151
153
159
155
156
156
157
158
163
168
169

95
99
121
125
119
112

99
96
97
95

99
loi
104
107
103
104

"5
119

104
104
105
102
105
114
145
160
175
159
130
116
116
107
109
112
116
124
123
124
129

100
103
III
10
106
III
105

no
108
103
104
105
107
105
100
105
104
104
108
109

92
91

For England, the figures

for prices are

from Jevons and Sauerbeck.

Those

American Economic

lOO

Associatio7i.

[442

from Sauerbeck begin in 1852. They are taken from the Aldrich report (I, 247)
and from the Journal of the Royal Statistical Society, March, 1S96. Those from
Jevons are from 1824 to 1852 inclusive, and are taken from his " Investigitions in
Currency and Finance." In order to make ihe tables of Jevons and Sauerbeck
continuous, Jevons' number for 1S52 is called 78 (i. e., Sauerbeck's for that year)
instead of 65 as given in the "Investigations," and all the other numbers are
raised in the ratio 78 65. Jevons' figures are for forty commodities Sauerbeck's
for fortj'-five. The index numbers for English wages are from the article by
Bowley in the Journal of the Royal Statistical Soceety, June, 1895.
The German numbers are from Soetbeer, Heinz and Conrad. Those for 1851-gi
inclusive, are from Soetbeer, continued by Heinz, and given in the Aldrich report
those for 1891-95 inclusive, are from Conrad, as given in "his JahrbUcher^
(I, 294)
1S94-6, but are all magnified in the ratio 109 98 in order to make the series continuous, since Heinz's figure for 1891 is 109, and Conrad's 98. The statistics of
Soetbeer and Heinz cover 114 commodities.
The French numbers are from the Aldrich report (I, 335) founded on the figures
of the Commission permanente des valeurs. They cover only sixteen articles.
The figures for the United States are those of Professor Falkner in the Aldrich
report (I, 9, 13), the weighted averages (last method) being employed.
Those for India, Japan and China are from the Japanese Report of the Commission for investigation of monetary systems, 1S95. The writer is under great
obligations to Mr. Ichi Hara, of Tokyo, for a copy of the report, and to Mr.
Sakata of Yale University, for translating the tables.
That for India is an average of three tables which cover respectively twentj'-one
articles of export, sixteen articles of export priced at Calcutta and Bombay, and
eight grains at Bombay. That for Japan is an average of three tables, of fortytwo articles at Tokyo, sixteen at Osaka and thirty. one articles of export. That
for China is an average of three tables, of twenty inland commodities, seventeen
articles of export and fifteen food-stuffs in Shanghai.
The tables for India were based on official statistics, those for Japan on information from guilds and merchants, and those for China on the reports of the
consuls of Japan and England (Mr. Jameson) in China.
In the Japanese report the prices for Japan are reduced to a silver basis. As
silver was at a premium up to 1S85 it has been necessary in constructing the
above table to reconvert into currency by applj'ing the premium for 1873-85, viz.:
4, 4i 3) I1 3) 10) 32, 48, 70, 57, 26, 9, 5 per cent, respectively.
:

;

;

:

THE MACPHILLAS^ COfVIPANY'S NEW PUBLSCATIONS.
the; PRINCIPI^ES of SOCIOI^OGY. An Analysis of the Phenomena of Association
and of Social Organization. By Franklin Henry Giddings, M.A.. Professor of
Sociology in Columbia University in the City of
{Columbia University Press.)
$2,-00, tie t.

New

York.

Second Edition.

8vo,

cloth,

MUNICIPAL HOME RULE. A

Study in Administration. By Frank J. Goodnow,
A.M., Ivly-D., Professor of Administrative Law in Columbia, author of "Comparative Administrative Law." i2mo, cloth, I1.50, net. {Colutnbia University Press.)

AND SOCIOLOGY.

STATISTICS

Mayo-Smith, Professor
lege.

Science and Statistics.

of Political

Economy and

Part

I.

By Richmond

Social Science in Columbia Col-

{Columbia University Press.)

Svo, cloth, I3.00, net.

INTRODUCTION TO POLITICAL SCIENCE. Two

Series of Lectures by Sir John R.
Seeley, K.C.M.G., Litt.D.. Regius Professor of Modern History in the University
of Cambridge, etc. i2mo, cloth, pp. xi + 387, $1.50.

THE CHILD AND CHILDHOOD IN FOLK-THOUGHT

(The Child in Primitive CulBy Alexander Francis Chamberlain, A.M., Ph.D., Lectures on Anthropology in Clark Universit3f sometime Fellow in Modern Languages in Universitj^
College, Toronto Fellow of the American Association for the Advancement of
ture).

;

;

Science,

Svo, cloth, $3.00, net.

etc., etc.

PRINCIPLES OF THE ENGLISH LAW OF CONTRACT, AND OF AGENCY IN ITS
RELATION TO CONTRACT, By Sir William R. Anson, Bart., D.C.L., of the
Inner Temple, Barrister-at-Law, Warden of All Souls' College, Oxford. Eighth
Edition.

First

American Copyright Edition.

Ernest W. Huffcut,

Professor of

Law

Edited, with American Notes, by
in the Cornell University School of Law.

Svo, cloth, pp. 456, $3.00, net.

AN EXAMINATION OF THE NATURE OF THE STATE. A Study in
By Westel Woodbury Willoughby,

osophy.

osophy in the Johns Hopkins University.

Political PhilPh.D., Lecturer in Political Phil-

Svo, cloth, $3.00.

THE KING'S PEACE A HISTORICAL SKETCH OF THE ENGLISH LAW COURTS.
:

By F. A. Inderwick, Q.C, Author of "Side Lights on the Stuarts." With 15 illustrations and I map. i2rao, cloth, pp. xxiii -|- 254, ^1.50.
*** New Volume of Social England Series, edited by Kenelm D. Cotes, M.A.
Oxon,

WOMAN UNDER

MONASTICISM.

A.D. 500 and A.D.

1500.

Chapters on Saint Lore and Convent
By Lina Ickenstein. Svo. cloth, §4.00, ?iei.

Life between

THE HISTORY OF THE DECLINE AND FALL OF THE ROMAN EMPIRE.

By

With Introduction, Notes, AppenFellow and
Bury', M.A., Hon. L-H.D. of Durham
Tutor of Trinity College, Dublin; Professor of Modern History in Dublin Univeri2mo, cloth. Vol. I, $2.00. {To be completed in seven volumes, each $2.00.)
sity.
Edv^^ard Gibbon,

dices,

Edited in seven volumes.

and Index, by

J.

B.

;

THE THEORY OF THE DIVINE RIGHT OF

KINGS, By J Neville Figgis, M.A.
Lecturer of History in St. Catherine's College, Cambridge. Prince Consort Disser
Catnbridge Historical Essays
tation, 1S92. i2mo, cloth, pp. xiv -|- 304, $1.25, net.
No. IX,

GREEK PAPYRI.—An Alexandrian

Erotic

Fragment and other Greek

Papyri, chiefly

Edited by Bernard P. Grenfell, M.A., sometime Craven Fellow of
Fellow of Queen's College. With Frontispiece. Svo, cloth, pp. xi + 129,

Ptolemaic.

Oxford

;

S3.00; net.

THE riACMILLAN COMPANY,

66

FIFTH AVE.,

NEW YORK.

PERIODS OF EUROPEAN HISTORY.
General Editor,

ARTHUR HASSALL,

M.A.

PERIOD IV.—THE BALANCE OF POWER— 1715-1759.

By Arthur
Hassall, M.A., Student of Christ Church, Oxford, author of "Bolingbroke," " Louis XIV, aud the Zeuith of the French Monarchy," etc.
i2mo, cloth, |i.6o,

net.

CAMBRIDGE HISTORICAL SERIES.
PROTHERO,

General Editor, G. W.

M.A., Fellow of Kings College,

THE UNITED STATES OF AMERICA— 1765-1S65.
NING, Ph.D., Assistant Professor of History
lamo, cloth, I1.50, net.

THE ARUERICAN

By Edward ChanHarvard University.

ASSOCBATION.

ECOr^OSVISC
Vol. X, Nos.

in

etc.

5-6.

LETTERS OF DAVID RICARDO TO JOHN RAMSEY McCULLOCH.

Edited with An-

notations b5'- J. H. Hollander. Ph.D., Instructor in Economics, Johns Hopkins
University. Svo, paper cover, Si. 25, net or bound in cloth, $2.00. 7iet.
;

Vol. XI, No.

i.

RACE TRAITS AND TENDENCIES OF THE AMERICAN NEGRO. By Frederick
I,.

Hoffman,

F.S.S., Statistican to the Prudential

AND SOCIAL PLOBLEMS.

ISflCHOLSON.— STRIKES

D.Sc.j Profesor of Political

pp. viii

+

Insurance Co. of America.

Economy

By

J.

Shield Nicholson, M.A.,

in the University of Edinburgh.

i2mo, cloth,

238, 51.25.

BOOTH.— LIFE AND LABOR OF THE PEOPLE IN LONDON. Edited by Charles
Booth. Vol. II.— POPULATION CLASSIFIED BY TRADES. (Continued.) Svo,
cloth, pp. viii + 50S, $3.00.
MALI/OCK.— CLASSES AND MASSES, OR WEALTH,

THE UNITED KINGDOM. A

and Speakers.

WAGES AND WELFARE IN

handbook of Social Facts
By W. H. Mallock. i2mo, cloth, $1.25.

for Political

THE UNIVERSITIES OF EUROPE IN THE MIDDLE AGES.

Thinkers

By Hastings

Rashdall. M. A., Fellow and Lecturer

of Hertford College, Oxford. 3 vols., Svo,
pp. 562 Vol. II, pp. 832, $14.00. net.
Contents. Vol. I Salerno, Bologna, Paris Vol. II, Part i Ital3', Spain, France,
Germany, Scotland, etc. Vol. II, Part 2 English Universities, Student Life.

Vol

cloth.

I,

—

;

;

:

;

:

:

THE GROWTH OF BRITISH POLICY: AN HISTORICAL

ESSAY.

By

Seeley,

Sir

J.

R.

Litt.D., K.C.M.G., formerly Regius Professor of Jloderu Historj' in the
University of Cambridge. With Portrait. "Two vols., i2mo, cloth, pp. (Vol. I.)xxiv

+

436

;

(Vol. II.) 403, $3.50, net.

THE MACMILLAN COHPANY,

66

FIFTH AVE.,

NEW

YORK.

Economic Classics
BY —

— EDITED

ASML-EY,

\A/. J.

Professor of Economic History in

IVl.A,.,

Harvard

University,
Li7icoln College, Oxford.

16mo.

late

Fellow of

75 cents each.

Cloth.

THE MERCANTILE SYSTEM AND

ITS HISTORICAL SIGNIFI-

CANCE.

Illustrated chiefly from Prussian History.
Being a Chapter
" Studien ueber die wirthschaftliche politik Friedrichs des Gros-

from

By Gustav SchmollKR.

sen."

ADAM SMITH.

Select Chapters and Passages from "The Wealth of
I/imp cloth. Price 75 cents.
pp. 2S5.
RICARDO. The first six chapters of "The Principles of Politi-

Nations."

DAVID
cal

T. R.
of

12

mo.

Economy,"

etc.

MALTHUS.
"An

Parallel Chapters from the First and Second Edition
Essay on the Principle of Population."

ENGLAND'S TREASURE BY FORRAIGN TRADE.
MUN,

By THOMAS

1664.

PEASANT RENTS.
tion of
1831.

Being the First Half of an Essay on the DistribuWealth and on the Sources of Taxation. By Richard Jone;s,

OTHER VOLUHES

IN

The Century
ISdited

by Sir

Henry

12010.

PREPARATION.

Science
'B,.

Roscoe,

Cloth.

Series

D.C.I,., F.R.S.

Each $1.25.

Jamks Clerk Maxwell and Modern Physics,
By R.

T.

Glazenbrook,

F.R.S.,

tnrer in Mathematics,

Fellow of Trinity College, Cambridge, University

and Assistant Director of Cavendish

With

Portrait.

JUSTUS VON LIEBIG: HIS LIFE AND
W.

I,ec-

I^aboratory.

WORK

(1803-1873).

By

A. Shenstone;, F.I.C.

THE HERSCHSLS AND MODERN ASTRONOMY. By Miss AGNES
M. CtERKE.
CHARLES LYELL: HIS LIFE AND WORK. By Rev. Prof. T. G.
BONNEY, F.R.S.
JOHN DALTON AND THE RISE OF MODERN CHEMISTRY.
Bv Sir HENRY E. RoscoE, F.R.S.
MAJOR RENNELL, F.R.S., AND THE RISE OF ENGLISH

GEOGRAPHY. By CLEMENTS R. Markham, C.B., F.R.S., President of the Royal Geographical Society.
OTHER VOLUHES

IN

PREPARATION.

THE MACMILLAN COMPANY,

66 Fifth Ave.

—

The WIacmillan COMPANY'S Recently Published Biographies, Etc.

BARNARD.— MEMOIRS OF FREDERICK A. P. BARNARD, D.D., LL.D., L.H.D., D.C.L.,
Tenth President of Columbia College in the Citj' of New York. By John Fulton.
{Calumbia University Psess.)

8vo, cloth.

"It is

Manning himself as

revealed in his correspondence."

LIFE OF CARDINAL MANNING, Archbishop of Westminister. By Edmund Sheridan PuRCELL, Member of the Romon Adademy of Letters. With Portraits.
Second Edition.

Two

vols., Svo., cloth, $6.00.

Vol. I. Manning
Vol. II.— Manning

as an Anglican.
as a Catholic.

LIFE, LETTERS, AND WORK OF LOUIS AGASSIZ. By Jules Marcou.
traits and Illustrations. Two vols., crown Svo, $4.00.

THE LETTERS OF MATTHEW ARNOLD,
George W.

Matthew Arnold's Complete Works.)

vrith

THE LIFE AND LETTERS OF EDWARD

FREEMAN,

A.

W. Stephens, B.D., Dean of Winchester, author of
Hook," etc. With Portraits, etc. Two vols., crown

JOHN KNOX. A

Biography.

Humanist and Reformer."
two

Collected and arranged by
i2mo, cloth, $3.00. (^Uniform

1S48-1888.

Two vols.,

Third Edition.

E. Russell.

vols.,

demy

"

By W. R.
D.C.L., LL.D.
Life and Letters of Dean

The

Svo, cloth, $7,00.

By P. Hume Brown, author of "George Buchanan,
With Plate Frontispiece and other Illustrations. In

Svo, $7.50.

THE LETTERS OF EDWARD FITZGERALD TO FANNY KEMBLE.
Edited, with Notes, by

SIR

With Por-

SAMUEL BAKER. A

William Aldis Wright.

Memoir.

By

T.

i2mo, cloth,

Douglas Murray,

the late Samuel Baker, and A. Silva White, Hon. F.R.G.S.

Collected

and

$1.50.

F.R.G.S., Executor to
Svo,

buckram,

J6.00.

MIGUEL DE CERVANTES HIS LIFE AND WORKS. By Henry Edward

Watts.
and Enlarged, with complete Bibliography and Index. Por:

New

trait.

Edition. Revised

Crown

Svo, cloth, $2.50.

SONIA KOVALEVSKY Biography and Autobiography.
:

I.

Memoir by

A. C.

Leffler

(Edgren), Duchessa Ds Cajanello. II. Reminiscences of Childhood. Written by
English by Louise von Cossel. With Portraits. i2mo.

herself. Translated into
cloth, $1.25.

THE PRIVATE LIFE OF WARREN HASTINGS,
of the University of Madras, etc.
tions. Svo, cloth, $3.50.

DUNDONNALD. By the Hon. John W.
limp, 60 cents.

[E?igh'sh

With

3

By

Sir

Fortescue. i2mo,

Men of Action

Series.

66

78 Illustra-

cloth, uncut, 75 cents

;

cloth,

)

RENAN.— BROTHER AND SISTER. A Blemoir and the
ette Renan. Translated by Lady Mary Loyd. i2mo,

THE riACniLLAN COflPANY,

Charles Lawson, Fellow

Photogravure Portraits and

and Henri-

letters of Ernest
cloth, $2.50.

FIFTH AVE.,

NEW

YORK.

—

—— —

)

AN IMPORTANT HISTORICAL
Economic History

WORK.

of Virginia in the Seventeenth Century.

An Inquiry

into the Material Condition of the People, based upon original and contemporaneous records. By Philip Alexander Bruce, author of "The Plantation
Negro as a Freeman," and Corresponding Secretary of the Virginia

Historical Society.

With a Map.

crown

2 vols.,

8vo, $6.00 net.

A book

that may be fairly termed unique from the viewpoint of exhaustive research
The mass as well as the extraordinary variet5r of material
in its particular field.
which enters into the economic history of Virginia in the colonial period will be appreciated when we point out that these two volumes, each of which comprises some 600
pages, only cover the first ninety-three years of the community's existence." The Sun.
" Iucomparabl3' the most valuable contribution to the social and economic literature of
This superb work not only establishes Mr. Bruce's right to fame in auVirginia
thorship, but it imposes on him as a logical sequence the obligation of continuing his
labors. The Economic History of Virginia will find a place not only in the public and
private libraries of Virginia, but also in the libraries of the whole country." Pittsburgh
''

.

Index

.

.

A p heal.

The

Child and Childhood in Folk-Thought.
(

The Child in Primitive

Culttire.

By Alexander Francis Chamberlain, M.A., Ph.D., IvCcturer on Anthropology
Clark University sometime Fellow in Modern Languages in University College,
Toronto Fellow of the American Association for the Advancement of

in

;

;

Science,

New

The History
By

8vo, cloth, $3.00 net.

etc., etc.

Edition of Gibboti.

of the Decline and Fall of the

Roman Empire.

Edward

Gibbon. Edited in Seven Volumes. V/ith Introduction, Notes, Appendices
and Index, by J. B. Bury, M.A., Hon. I^.H.D. of Dvirham, Fellow and Tutor of
Trinity College, Dublin, Professor of Modern Hi,story in Dublin University.

i2mo, cloth, vol.

{To be completed in seven volumes^

I, $2.00.

each $2.oo)

The Growth
By Sir

J.

of British Policy

An

:

Historical Essay.

K.C.M.G., formerly Regius Professor of Modern History in
the University of Cambrido:e. With Portrait. Two vols., i2mo, cloth,
R.

Seeley,

Litt.D.,

pp. (Vol. I) xxiv+436 (Vol.
"The work is one of the most important in the
Daily Advertiser.
;

II) 403, §3.50, net.

Boston

field of historical literature."

Works by Jatnes Bryce, M.P., D.C.L.

The American Commonwealth.
2 vols.
Large i2mo. Third Edition. Revised throughout. Price $4.00 net.
His work rises at once to an eminent place among studies of great nations and their
institutions. It is, so far as America goes, a work unique in scope, spirit, and know^lWithedge. There is nothing like it anywhere extant, nothing that approaches it.
out exaggeration it may be called the most considerable and gratifying tribute that has
yet been bestowed upon us by an Englishman, and perhaps by even England herself.
One despairs in an attempt to give in a single newspaper article an adequate account of
Every thoughta work so infused with knowledge and sparkling with suggestion.
ful American will read it, and "will long hold in grateful .remembrance its author's
name." New York Times.
^'

—

.

.

.

.

.

.

.

The Holy Roman Empire.
Eighth Edition, revised and enlarged.

i2mo,

$1.00.

Library Edition, Svo,

S3.50.

Social Institutions of the United States.
Reprinted from "The American Commonwealth."

The riacmlllan Company,

i2mo, cloth,

$1.00.

66 Fifth Ave., N. Y.

:

The Quarterly Journal

of Economics.

Published for Harvard University.

I.

II.

CONTENTS FOR JULY, 1896.
W.
THE BEGINNINGS OF TOWN UFE IN THE MIDDLE AGES
INDUSTRIAL ARBITRATION ITS METHODS AND LIMITATIONS
.

.

.

S.

III.

IV.

SHAW'S HISTORY OF CURRENCY
SUGGESTIONS FOR THE .STUDY OF MUNICIPAL FINANCE,
NOTES AND MEMORANDA.
FACTS ABOUT MONEY A REJOINDER
RECENT PUBLICATIONS UPON ECONOMICS.
Extract from the Prefatory Note

With the number

to the

Index of

for July, 1896, the tenth

Ashley

.

N. D. North

CM.

Walsh

Frederick R. Clow
Willard Fisher

:

"

J.

.

;

Vols.

volume of

I-X

this

fournal

is

An

index of writers and subjects for the series thus
closed has accordingly been prepared for the convenience of subscribers,
and for greater ease of consultation by students.
"In reviewing the remarkable progress of economic discussion in the
United States during the decade now closed, the editors believe that they
The
may feel satisfaction in the share taken by this fournal
progress in the equipment of teachers, in the matter and methods of instruction, in the solidity of the contributions to learning, has been promoted in high degree by the opportunities for a full and free discussion, addressed not to a miscellaneous public, but to a circle of critics, investigators,

brought to a

close.

and well-informed

readers.
object of Xh\s fonrnal has been to promote the advancement of
knowledge by inviting and assisting such discussion, and the editors hope
that a review of the contents of the series now concluded will be found to
justify the confidence with which they undertook this task ten years ago.
The diffusion of knowledge and the application of principles maybe trusted
in large degree to take care of themselves, when once the advance of scienIt has been the object of the editors of Xlie fournal
tific thought has set in.
mainly to promote the latter end. They will continue to publish in the
future, as they have done in the past, papers which may appeal to but a
limited number of readers. The}' will welcotne, also, the sober and unbiased discussion of topics of more immediate interest, and in all cases will
endeavor to present matter which deserves the attention of scholars and
And in this endeavor they again confidently ask the cooperation of
critics.
all who are interested in the advancement of knowledge within the chosen

"The

field."

Books, periodicals, and manuscript to be addressed,

EDITORS

of

QUARTERLY JOURNAL OF ECONOMICS, Cambridge, Mass.
Business letters, etc., to be addressed, GEORGE H.ELLIS, Publisher,
141 Franklin Street, Boston,

Mass.

SUBSCRIPTION
Specimen copies

of the Journal,

$2.00

and the Index

A YEAR,

for Vols. I-X, sent

on application.

JOHNS HOPKINS UNIVERSITY

Studies in History and Politics.
Edited by

HERBERT

Fourteenth Series, 1896.

B.

Adams.

Subscription, $3.00.

CONSTITUTIONAI, HISTORY OF HAWAII. By Henry E. Chambers.
CITY GOVERNMENT OF BAI^TIMORE. By Thaddeus P. Thomas.
COI^ONIAIv ORIGINS OF NEW ENGLAND SENATES. By F. Z,. Riley.
SLAVERY IN NORTH CAROLONA (1663-1865). By JOHN S. Bassett.
REPRESENTATION IN VIRGINIA. By J. A. C. Chandler. 50 cents.

THE HIvSTORY OF TAXATION IN CONNECTICUT

ByF.

(1636-1776).

SLAVERY IN NEW JERSEY. By H. S. CooLEY. 50 cents.
CAUSES OF THE REVOLUTION OF 16S9 IN MARYLAND. By

25 cents.
25 cents.

50 cents.
50 cents.

R. Jones.

F. E.

50c.

Sparks.

Other papers will be from time to time announced.

ANNUAL SERIES, 1883-1895.

SERIES
SERIES
SERIES
SERIES
SERIES
SERIES
SERIES
SERIES
SERIES
SERIES
SERIES
SERIES
SERIES

I.— Local

479 pages.

Institutions.

$4.00.

II.— Institutions and Economics. 629 pages. $4.00.
HI.— Maryland, Virginia and Washington. 595 pages. $4.00.
IV. Municipal Government and Land Tenure. 600 pages. $3.50.
v.— Municipal Government, History and Politics. 559 pages. $3.50.
VI.—The History of Co-operation in the United States. 540 pages. I3.50.
VII.— Social Science, Municipal and Federal Government. $3,50.
VIII.— History, Politics and Education. 625 pages. 8vo. I3.50.
IX. Education, History and Politics. 640 pages. 8vo. $3.50.
X.— Church and State Columbus and America. 630 pages. 8vo. I3.50.
XL— Labor, Slavery and Self-Government. 574 pages. 8vo. I3.50,
XII.— Institutional and Economic History. 626 pages. 8vo. $3.50.
XIIL— South Carolina, Maryland and Virginia. 606 pages. 8vo. I3.50.

—

—

:

RECENT EXTRA VOLUMES.

THE SUPREME COURT OF THE UNITED STATES.
pp.

8vo. cloth.

By W. W, Willoughby.

THE INTERCOURSE BETWEEN JAPAN AND THE UNITED STATES.
(Ota) Nitobe.

198 pp.

8vo. cloth.

225 pp.

8vo. cloth.

and

31 plates.

8vo. cloth.

By Frank W. Blackmar.

Svo. cloth.

pp.

:

ITS

By

Prof. C.

M. Andrews.

GEOGRAPHICAL HISTORY,

Svo. cloth.

1492-1S92.

2S0 pp.

B.

$1.50.

Scaife.

176

B. Scaife.

256 pp.

Svo.

Weeks.

414 pp.

Svo.

I1.50.

THE SOUTHERN QUAKERS AND SLAVERY.
Cloth.

8vo. cloth.

By Dr. W.

$1.50.

FLORENTINE LIFE DURING THE RENAISSANCE- By W.
cloth.

By M. M. Cohn.

$1.50.

THE OLD ENGLISH MANOR.
AMERICA

380

|2.oo.

INTRODUCTION TO THE STUDY OF THE CONSTITUTION.
250 pp.

By John Martin

$1.50.

SPANISH INSTITUTIONS OF THE SOUTHWEST.
pp.

Inazo

$1.25.

STATE AND FEDERAL GOVERNMENT IN SWITZERLAND.
Vincent.

124

$1.15.

By Stephen

B.

$2.00.

The set of thirteen series is now offered in a handsome library edition for $39.00, and
including subscription to the current (fourteenth) series, $42.00. The fourteen series
v/ith fourteen extra volumes, altogether twenty-eight volumes, for $60.00.
Orders should be addressed to

THE JOHNS HOPKINS

PRESS, BALTIMORE,

MARYLAND.

RECENT PUBLICATIONS OF

American Academy of

& Social Science

Political

CUBA.
The Recognition

of

Cuban

By

Belligerency.

Price IS

An argument

By

HersheY.

in its favor.

THE MONEY
The Multiple Money Standard.

Prof. A. S.

cts.

QUEvSTlON.

Prof. J.

Ali.EN Smith.

Price 50

cts.

Professor Smith discusses the relation of tnonej' to industrial society, the two conceptions of a standard of value and the unstability of gold as a coninioditj'. He then shows
the advantages and disadvantages of a composite gold and silver standard, and advocates
the adoption of a multiple money standard. Under this plan a considerable number of
leading commodities are combined together in the ratio of their importance and form
the permanent standard of value, which standard would be practically invariable.

The Standard
tion.

of Deferred Payments.
Price 15 cents.

Pennsylvania Paper Currency.

A documentary and

By

By

Dr. C.

Prof.

Edw.

New

A. Ross.

W. Macfarlane.

edi-

Price 50 cts.

study of the early experience of Pennsylvania in issuing paper money. The Pennsylvania system of putting out money on loans based on
landed or other security, received long ago a commendatory notice from Adam Smith,
By patient research among old records, Dr. Macfarlane has been able to fully trace the
history of this interesting experiment in currency. The es.say thus calls attention to
some aspects of the money problem which cannot fail to be of interest in the present
era of discussion.
statistical

RAILWAYS.
Some

Observations on Railway Pooling.

By Hon. MARTIN

A.

Knapp.

Price 25 cents.

The purposes of railway pools are here pointed out, and the double-facedness of the
Inter-State Commerce Law clearly exhibited. Designed to prevent discrimination, it
also makes railway pools illegal, and thus deprives the companies of the weapon with
which they could themselves combat discrimination. With proper legal restrictions,
Mr. Knapp believes that pools should be permitted and hopes from such permission a
fuller realisation of the purposes of the Inter-State Commerce Act.

BELGIUM.
The

Constitution of the Kingdom of Belgium. Translated and supplied
with an historical introduction and notes by Prof. John Martin Vincent. Price 50 cents.

Also issued in this series the Constitution of France, of Ital}', of Prussia,
of Mexico, and of Colombia. Price 50 cents each.

Neiu and complete

list

American Academy of
Station B.

of publicatiojis on application.

Political

and Social Science,

Philadelphia, U. S. A.

THE

CITIZEN,

PUBLISHED MONTHLY,
By

the Anierica7i Society for the Extensio7i of University

Teaching

TREATING OF

PUBLIC EDUCATION
— BY —
Schools, Libraries,

University Extension Teaching,
Public Health and Convenience,

Conditions of Living,
Civic Education,
Literature, Art,

and Science.

A

very large number of scholars, drawn from leading universities and
Bxtension courses. The cooperation of the
Society's Lecturers and Staif should give THE CITIZEN a unique value.
colleges, lectiire in University

THE EDITORIAL DEPARTMENT
terest, falling

touc'ies

upon

topics of current in-

within the province of the journal.

THE BOOK REVIEWS and BOOK NOTES are carefully prepared,
A SPECIAL DEPARTMENT will give information about University Extension throughout the world.

Rates

—One Number lo

cts.

For one year

$i.oo, postpaid.

Advertising rates furnished upon application.

Address communications to

TME
III

CITIZEN,

South 15th Street, Philadelphia.

Revue Politique

Parlementaire

et

no, Rue de l'Universite;.

Directeur

:

Marcel

Abonnement Annuel.— Un an:
Postale 30

fr.

:

I,es

COLIN

A.

L'ESPRIT
de

II.

23
le

fr.
I<J°

;

Colonies et Union

:

3

fr.

abonnements parteut de Janvier ou de

et Cie,

5,

RUE DE

SOMMAIRE »U
I.

;

FOURNIER.

DU BUDGET

:

I^ES

Juillet.

ME:zIE:rES,— PARIS.

N" 25—JUILLET

IMpOts ET LES REVENUS— Maurice

Block,

I'lnstitut.

LES CAISSES DES
Maire du Vlll«

E;C0I^ES

et I,EUR situation Legale. Beurdeley,

Arr'.

.^LECTIONS D'ESPAGNE. Lefevre-Pontalis, de

III.

I,ES

IV.

LE TARIF LEGAI^ DES NOTAIRES. A. Douarche.
LES PROGRES DE L' ASSURANCE SUR LA VIE. E. Rochetin.
LA NOMINATION DES INSTITUTEURS. A. Albert-Petit.

V.

VI.
VII.

LE MORCELLEMENT DES VALEURS MOBILIEIRES
DU Capital et du Travail.

VIII.

Ans : V Occupation de
A. Raffalovich, de I'lnstitut.
P.-J. Proudhon. Ch. de Lariviere.

\° II

y

a Trente

3° Souverainetk

IX.

du Peuple

et

Gouvernemejit.

la Part

les

Pmssiens in

Th. Ferneuil.

D. Zolla.
:

Carstensen, M" du Landsthing.
LuzzATTi, M" du Pari' Italien.

L.

LA VIE POLITIQUE ET PARLEMENTAIRE EN FRANCE
1°

La

Politique Exterieure

du Mois.

2°

Chronique Politique Intirieure.

3°

XII.

par

Danemark.

2° Ilalie.

XIII.

;

:

Francfo7'i

LA VIE POLITIQUE ET PARLEMENTAIRE A L'fiTRANGER
1°

XI.

les Salaires

REVUES DES PRINCIPALES QUESTIONS POLITIQUES ET SOCIALES
Revue des Questions Agricoles.

X.

:

Neymarck.

voyages et DOCUMENTS

VARIETJSs, notes,

2°

A.

I'lnstitut.

La

Vie Parlementaire.

:

Fr. de Pressense.

Felix Roussel.

* * *

CHRONOLOGIE POLITIQUE E;TRANGERE ET FRAN^AISE. XXX.
BIBLIOGRAPHIE.

:

1866.

Gioraale Degli Economisti
RIVISTA MENSILE DEGLI INTERESSI ITALIANl

ROMA
Via Naz^ionale, 87

Abbonamento annuo

Sommario
I,

II.

Italia

:

L. 30, Estero L. 35

-

Numero separate

L. 3

del Fascicolo del 1° Luglio, 1896

lya situazione del

mercato monetario.

La base agronomica

(X.)

della teoria della rendita {Contiiitia).

(G. Valenti.)

III. I dazi fiscal! e

i

consumi.

(Aldo Contento.)

IV. La circolazione in Italia— Difetti e rimedi.
vacca.)

(L. Sbroja-

questione dell'indebito aggravio alle Casse
di risparmio per le spese di vigilanza portata alia

V. Previdenza

:

Camera.

La

(C. Bottoni.)

VI. Cronaca: Giustizia italiana— II discorso del sindaco di
Marsiglia— Dialoghi morali. (V. Pareto.)

THE NEW WORLD.
A

Quarterly Review of Religion, Ethics and Theology.

(200 pp., 8vo.

:

issued the

first

of March, June, September and December.)

EDITORIAL BOARD

:

President Orello
Professors C. C. Everett, and C. H. Toy, of Harvard University
Cone, of Buchtel College, and Prof. N. P. Oilman, (the Managing Editor, to be
addressed at Meadville, Pa.).
;

always something good to read, because there is aways earnest thinking in
is the quarterly organ of "reverent breadth " in American reAltogether the New World is a periodical which deserves
ligious thought
nuich attention. There is hardly its equivalent on this side of the Atlantic."
The Spectator (London).
"

the

There

is

New World which

Contents of No. XVI, December, 1895.
Tendencies of Thought in Modern Judaism.
David Philipson.

The

Miracles of Jesus in the Synoptic Gos-

Albert Reville.
W. E. Griffis.

pels.

The
The Pseudo-Athanasian Augustinianism.
Levi L- Paine.
Anabaptists.

Julia H. Gulliver.
Tito Melema.
Popular Protestant Controversy.

Starbuck.

C. C.

Local Cults in Homer.

The Nomadic

Arthur Fairbanks.

Ideal in the Old Testament.

Karl Budde.

Contents of No. XVII, March, 1895.
Tendencies in Penologj'.

Octavius Brooks Frothingham.

Thomas Wentworth Higginson.

Miracles and Christian Faith.

John

E. Russell.

Thomas Henry Huxley.
John W. Chadwick.
The Religion of the Manchu Tartars.
C. DE Harlez.

Samuel

J.

Barrows.

Paul's Doctrine of the Atonement.
C. C.

Everett.

Leibnitz and Protestant Theologj'.

John W^atson.
The Preprophetic Religion

of Israel.
C.

H. Toy.

Contents of No. XVIII, June, 1896.
Social Problems,

St. George Mivart.
International Arbitration, John B. Moore.
Limits of the Doctrine of Evolution,

The Minister and

Matthew Arnold's Letters, Milton Reed.
New England Trinitarianism,
Levi L. Paine

Mr. Balfour and his
The Will to Believe,

Cardinal Manning,

George H. Howison.

Single

Number,

75 cts.; 3s.

John W. Day.

Las Casas and Democracy,

Starbuck

Charles

C.

Critics,

T. R. Slicer.

William James.

Yearly Subscription, $3.00

;

12s.

BOSTON AND NEW YORK:

HOUGHTON, MIFFI^IN &
LONDON GAY
:

CO., Publishers.

& BIRD, Bedford

St.

Studies in History, Economics and Public Law,

— EDITED

BY

—

THE UNIVERSITY FACUI.TY OF
OF COLUMBIA
Numbers marked thus

I.

The Divorce Probi,em
Willcox, Ph.D.

II.

III.

IV.

* are not sold separately.

VOIvUMB I.
A Study in

:

The Economics of the Russian
Ph.D.

III.

11.

:

:

Price, 75 cents.*
III.

History of Ei<ECTions in the American Coi^onies.
F. Bishop, Ph.D.

Price, I1.50

By

Cortlandt

bound, |2.oo.

;

The Commercial Policy of England toward the American
Colonies

By George Louis

Beer, A.M.,

VOLUME
I.

Isaac H. Hourwich,

Bankruptcy A Study in Comparative Legisi^ation. By Samtiel
W. Dunscomb, Jr., Ph.D. Price, 75 cents.*
Speciai. Assessments A Study in Municipai, Finance. By Victor

VOLUME
II.

By

Vii,i.age.

Price, $1.00.

Rosewater, Ph.D.

I.

F.

Price, |i.oo.

VOLUME
II.

By Walter

Staiistics.

Price 50 ceuts*

History of Tariff Administration in the United States, from
CoLONiAi, Times to the McKini^ey Administration Bii,i,. By
John Dean Goss, Ph.D. Price, 50 cents.*
History of Municipai, Land Ownership on Manhattan Island.
By George Ashton Black, Ph.D. Price, 50 cents.*
Financiai, History of Massachusetts. By Charles H. J. Douglas,
Ph.D.

I.

POIvlTlCAL SCIENCE

COIvIvEGE.

Price, |i.oo.

IV.

By W.

Financial History of Virginia.

Z. Ripley,

Ph.D.

Price,

75 cents.
II.

III.

The Inheritance Tax. By Max
75 cents.

I.

F. A.

Price, 75 cents.
Price,

Wood, Ph.D.

V.

By

Francis Walker,

Price, 75 cents.

Separation of Governmental Powers.
LL.B., Ph.D.

III.

VOLUME

By

Double Taxation in the United States.
Ph.D.

II.

West, Ph.D.

History of Taxation in Vermont.

By William Bondy,

Price, $1.00.

Municipal Government in Michigan and Ohio.
cox, Ph.D.

By Delos F. Wil-

Price, |i.oo.

For further particulars apply to
Prof. Edwin R. A. Seligman, Columbia College,
or to The Macmillan Company, New York.

—

;

Librarie GuillauminetCie.,

Rue Richelieu

14.

— PARIS.

Journal des Economistes
REVUE MENSUEI.LE

De

la Science

Bconomique

et de la Statistique

CINQUANTE-CINQUIEME ANNEE.

Redacteur en chef: G. de
Correspondant de

Sotnmaire

Le
Mouvement

Socialisme en 1896.

— Les

— Un Etat mis en

I'lnstitut.

No. de yidti 1896.

rapports du capital et du travail aux Etats-Unis.

scientifique et industriel.

et politiqnes.

dii

MOLINARI,

— Revue de rAcademie des sciences morales
— Le socialisme municipal en Angleterre.
vers primes.
commerciale. — Animaux

actions.

L' Association allemande pour la liberie

et

— Society

d'Economie politique (stance du 5 Juin 1896) Discussion: De
Comptes rendus. Chronique
I'Etat de I'enseignement economique en France.
dconomique et Bulletin bibliographique.
Bulletin.

—

Sommaire du No. de

Un

devoir social.

— La

—

yiiillet 1896.

veritable situation des Soci^tes frangaises de secours

mu-

— Revue des principales publications economiques de
— Mouvement
— Une operation commerciale au XVIII.
— Bulletin. — Sociele
du 6
de
d'Economie politique
1896) Discussion De
I'Economie
— Comptes rendus. — Chronique economique Bulletin Bibliotuels.

colonial.

si^cle.

I'etranger.

(s(§ance

Juillet

la definition

:

politique.

et

graphique.

Conditious de rabonuement
France un an,

Union

Un

postale,

numero, 3

36 fr.
38 fr.
fr.

50.

PUBLICATIONS OF THE UNIVERSITY OF PENNSYLVANIA.

Political

Economy and

Law

Public

Simon N. Patten, Ph.D.,

VOLUME

Series.

Editor.

I.

—Wharton School Annals of Political Science. Out of
—Anti-Rent Agitation in New York. Prof. E. P. Cheyney. Price,
50 cents.
No. 3. — G-round Rents in Philadelphia. E. P. Allinson and Boies Penrose, of the Philadelphia Bar. Price, 25 cents.
No. 4. — Consumption of "Wealth. Prof.
N. Patten. Price, 50 cents.
No. 5. —Prison Statistics of the U. S. for 1888. Prof. Roland P. FalkNER. Price, 25 cents.
No. 6. —Rational Principles of Taxation.
Prof.
N. Patten.
Price, 50
cents.
No. 7. —Federal Constitution of Germany, -with Historical Introduction. Translated by Prof. E.
James. Price, 50 cents.
No. 8. —Federal Constitution of Switzerland. Translated by Prof. E.
No.
No.

1.

print.

2.

S.

S.

J.

James.

J.

Price, 50 cents.

Price of Nos. 2 to Sin

One Order,

VOLUME

II.

No. 9.— Our Sheep and the
cloth, $2.00;

Draper Lewis, Ph.D.

Price,

James Harvey Robinson.

Price,

Tariff.
William
paper, ^1.25.

VOLUME
No. 10.

—The German Bundesrath.

$2.40.

III.

Prof.

75 cents.

No. 11.— The Theory of Dynamic Economics.

Prof.

Simon N. Patten,

Price, $1.00.

VOLUME
No. 12.

—The Referendum in America.

IV.
Dr. Ellis P. Oberholtzer.

Price,

$1.50.

Price of Nos. 2 to 12 in One Order, $6.00.

PUBLICATIONS OF THE UNIVERSITY OF PENNSYLVANIA.

Wharton School Studies

in Politics

and Economics.

This baries consists of monographs by the students of the Wharton School of Finance

and Economy.

No.

1.

—The Recent Development of American Industries.

No. 2.—The

OF '91. Price, 50 cents; cloth, $1.00.
City Government of Philadelphia.
Price, cloth, $1.50.

By

the

By the Class
Class of

'93.

LIBRttRY OF CONGRESS

013 495 301 9
PUBLICATIONS OF THE AMERICAN ECONOMIC ASSOCIATION.

MONOGRAPHS.
VOLUr^E
No.

I.

Nos. 2

No.
No.

4.

No.

5.

No.

I.

5.

I.

Report of the Organization of the American Economic Association. B)'
Richard T. Ely, Ph.D., Secretary. Price 50 cents.
and 3. The Relation of the Modern Municipality to the Gas Supply. By
Eiimnnd J. James, Ph.D. Price y^ cents.
Co-operation in a Western City. By Albert Shaw, Ph.D. Price 7^ ceiits.
Co-operation in New England. By Edward W. Bemis, Ph.D. Price ^j
cents.

Relation of the State to Industrial AcTtion.
Price 7S cents.

VOLUME
Three Phases of Co-operation

By Henry

C.

Adams, Ph.D.

II.

in the

West.

By Amos

G. Warner, Ph.D.

Price js cents.

No.

2.

Historical Sketch of the Finances of Pennsylvania.
Price "75 cents.
ton, Ph.D.

By

T. K.

Worthing-

4-

The Railway Question. By Edmund J. James, Ph.D.
The Early History of the English Woolen Industry.

No.

5.

Two

No

5.

Chapters on the Mediaeval Guilds of England. By Edwin R. A. vSeligman, Pli.D. Price 75 cents.
The Relation of Modern Municipalities to Quasi- Public Works. By PI.
C. Adams, George W. Knight, Davis R. Dewe}^, Charles Moore, Frank
Price 75 cents.
J. Goodiiow and Arthur Yager.

I.

Three Papers Read

No.
No.

3.

M.A.

Price

'J5 ce7its.

VOLUME
No.

Price 75 cents.
By W. J. Ashley.

III.

Meeting in Boston: " Statistics in Colleges," by
Carroll D. Wright; "Sociology and Political Economy," by F. H.
Giddings "The Legal-Tender Decisions," by E. J. James. Price 75
at

;

cents.

No.
No.

2.

Capital

and

its

By John

Earnings.

3 consists of three parts:

B. Clark,

A.M.

Price 75 cents.
Class," by General F. A.
Valley," by E- W. Bemis,

"The Manual Laboring

Walker; "Mine Labor in the Hocking
"Report of the Second Annual Meeting," by Richard

Ph.D.

;

Secretary..

Nos. 4 and

5.

T. Ely,

Price 75 cents.

Statistics

and Economics.

By Richmond Mayo-Smith, A.M.

Price $1.00.

No.

6.

The

By Simon N.

Stability of Prices.

VOLUME
No.

I.

Patten, Ph.D.

Price 73 cents.

IV.

Contributions to the Wages Question: "The Theory of Wages," by
" Possibility of a Scientific Law of Wages," by
Stuart Wood, Ph.D.
John B. Clark, A.M. Price 75 cents.
Socialism in England. By Sidney Webb, LL-B. Price 75 cents.
Road Legislation for the American State. By Jeremiah W. Jenks, Ph.D.
Price 75 cents.
Report of the Proceedings of Third Annual Meeting of the American Economic Association, bj' Richard T. Ely, Secretary with addresses by
Dr. William Pepper and Gen. F. A. Walker. Price 75 cents.
Three Papers Read at Third Annual Meeting: " Malthus and Ricardo,"
by S. N. Patten; "The Study of Statistics," by D. R. Dewey, and
" Analysis in Political Economy," by W. W. Folwell. Price 75 cents.
An Honest Dollar. By President E. Benjamin Andrews. Price 75 cents.
;

No.
No.

2.

No.

4.

3.

;

No.

5.

No.

6.

#


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102