the beginning of our work,- Henry Lillie Pierce and George Silsbee Hale,— both honored citizens of Boston, have died since we last met, and deserve the tribute of our praise. Mr. Pierce is in no danger of being forgotten by those who knew him; and thousands who knew him not will bless his name in coming years, as they derive from his munificence recovery in disease, education in science and the arts, and the benefits specially needed in America, which the popularization of high art and the embellishment of busy life can confer. Of the millions which he has given,princely endowments even in our country,- no single dollar was won by dishonest or questionable means. They flowed naturally from a great industry honorably conducted, and a mercantile skill which never needed to be re-enforced by purchasable legislation, nor defended by legal chicanery or judicial stretches of power. He treated his fellow-citizens as his friends, and he did not make enemies of the well-disposed in foreign lands. Accordingly, he found friends wherever he was known, yet was as resolute in the performance of public duty as if he had all the acrimony of the misanthropic journalist or the dyspeptic scholar.

Mr. Hale was of another profession and of a more assiduous devotion to public questions,-particularly those relating to the protection of friendless children and the care of the public poor. Few men in this country understood those subjects better or had a more unselfish interest in the measures of philanthropy. That insidious pretence of charity, which begins at home, and never gets beyond Number One, was his aversion; and much of his last years was spent in retrieving the mistakes of self-seeking legislation and correcting the abuses of bureaucratic charity. His private virtues corresponded to his public record, and his death. has weakened the causes he so heartily supported.

Our Association suffers incessantly from losses such as these. The men and women who embarked with us in enterprises which once seemed hopeless and are now established institutions, generating new mistakes for our successors to correct, grow fewer and fewer with each shortening year. We need the reinforcement of younger and more hopeful brethren, who shall take up the task where those who are in the harness must leave it, and shall permit the veterans to rest on the laurels they may have gathered, and taste for a brief space the lotus of repose.

Meantime we present you, as of old, a series of papers and discussions which will do something to increase our knowledge and promote the good causes we essay to serve.

THE CAUSES OF THE FALL IN PRICES

SINCE 1872.*

BY J. W. JENKS, PROFESSOR OF POLITICAL SCIENCE IN
CORNELL UNIVERSITY.

[Read Friday, September 3.]

Inasmuch as in the discussion of changes in prices there has been much misunderstanding arising from the use of words in different meanings, it seems wise to explain the sense in which some common terms will be used in this paper.

"Price" will mean value expressed in terms of current money. A fall in prices therefore means simply that less money than formerly is needed to buy a fixed quantity of goods. "Money has appreciated in value " means the same. "Money has depreciated in value" and "There has been a rise in prices" may be used as equivalent expressions. In this paper the use of the words "appreciate" and "depreciate" does not call attention to the cause of the changes in prices, as has been the case in many of our late political discussions, in which the expression "gold has appreciated in value" has meant that gold will buy more goods than would have been the case, had silver not been demonetized; while those who denied the appreciation of gold have not intended to deny a fall in general prices, but have wished merely to assert that the cause lay in phenomena primarily affecting goods instead of money.

It should be kept clearly in mind that a change in price may be brought about by changing conditions that affect either money or commodities. We are so accustomed to naming prices in terms of money that sometimes we may forget that the money standard itself may change in value. If to-day five bushels of oats are worth two bushels of wheat and in a month from now six bushels of oats are worth two bushels of wheat, any one would recognize the fact that the change in the price of oats in terms of wheat may have come about through changed conditions affecting the value of either oats or wheat. It is essential that one keep the fact in mind that market price expresses merely the ratio between the generally

* Delivered before the Fourth Annual Convention of the New York State Bankers' Association, Saratoga Springs, July 16, 1897, and published with the diagram illustrating the address in the Bankers' Magazine for October, 1897.

recognized desirability at a certain time of a dollar in whatever standard the laws may have decreed and the generally recognized desirability of the article bought or sold. Anything that affects the desirability of either the article or the dollar will change the ratio, and the price will either rise or fall.

If, then, we assume that there has been a fall in general prices, - and this is assumed in the subject of this paper, we know that the cause must be either one operating on money, that has made money more desirable as compared with fixed quantities of most goods than it was before, or the cause or causes must be general, affecting practically all goods that come into the market, making them less desirable as compared with money than they were before; or both causes may be at work at the same time.

In my judgment, we are most likely to agree upon the probable causes of the late fall in prices, if we trace as carefully as possible the course of general prices over a long period of time, note when they have risen or fallen, and see whether we can at different times find conditions affecting either, on the one hand, the money supply or efficiency of money, or, on the other, affecting the whole business world in such a way as to control the supply of nearly all commodities, and thus to raise or lower general prices. Party bias. may be removed by considering the matter historically.

The only practicable way to discover the course of general prices with any approach to accuracy is by the employment of index numbers. By finding from year to year or from month to month for a period of years the price of each one of a large number of typical commodities, it becomes possible by the addition of these prices or by the reduction of them all to some common basis to find an average number that will represent the general price of all the commodities, the minor and contradictory fluctuations of the separate commodities being eliminated by counteracting one another. The index numbers of the Economist, of Sauerbeck, of Jevons, of Soetbeer, of the United States Senate Finance Committee, have all been criticised adversely many times, and there can be no doubt that valid criticisms can be made against them all; but it is a striking fact that, though they embrace to a certain extent different commodities, and though the index numbers have been found even by different methods of mathematical calculation, yet they all agree substantially as regards the course of general prices. Where they differ, the difference can usually be explained by some local condition; e.g., during our Civil War, when the

Economist's index number increases much more rapidly than do any of the others, it is clearly due to the fact that in that list cotton is given a much larger proportionate share than in any of the others, and cotton in England at that time was naturally very dear. Even David A. Wells,* writing in hostile criticism of the index numbers, reaches substantially the same conclusion regarding the fact of a fall in general prices, and he reaches the conclusion by substantially the same methods as those of Soetbeer and Sauerbeck; and Schoenhof, in his book on "Money and Prices," † while ridiculing the whole system of index numbers because the "violent price variations" of individual articles offset one another (apparently not understanding that just therein lies the value of the index numbers), still says: "Now it cannot be denied that during the last forty years we have lived through high-price periods and lowprice periods. The high-price periods show a higher total in the index numbers than the low-price periods, though the variations. are not less marked." The essential thing is that even he agrees that the index numbers do show the course of general prices, though he naturally denies many of the conclusions often drawn therefrom.

One needs to distinguish carefully general prices from prices of individual articles. The causes of changes in individual prices are of course as various as the articles themselves; and it is absurd to attempt to draw any general conclusion,- as, for example, to determine any change in the value of the monetary standard by the price of any one article for a short time. The causes are any influences that bring about a change in supply or demand, from an unusually large crop or the break-down of a pool or monopoly, on the one side, to the stimulus of holiday time or the failure of the crops abroad or the introduction of a new fashion, on the other. Yet even in individual prices we can recognize a susceptibility on the part of some goods to changes in demand, on the part of others to changes in supply. In general, the world demand for food products-wheat, oats, meats-is relatively steady. Most fluctuations in prices of such products come from changes in supply. The supply may be affected temporarily, as by a failure in crops, or permanently, as by improved methods of production, including transportation. It should be borne in mind that the commodities used in finding index numbers are largely those whose

Recent Economic Changes, p. 122.

Jevons, "Investigations in Currency and Finance," p. 27,

† p. 11.

temporary changes in price depend mainly upon changes in supply. In the case of products suitable for permanent investment, on the other hand, stocks, bonds, land, manufacturing establishments,changes in price come mainly from changes in demand.

This shifting in demand for investments is likely often to depend upon causes so general in their nature that general prices are materially changed. Inspection of our diagram of index numbers shows at more or less regular intervals waves, as it were, of commercial feeling which in times of doubt and despondency-as seen after the panic years of 1809, 1818, 1825, 1839, 1857, 1866, 1873, 1883, 1893 - sink to a lower level, gradually to flow again in times of increasing confidence and prosperity to higher levels. The causes of these recurring panics, which so affect especially investments, followed by periods of recovering hope and confidence, which lead in turn to rashness, over-speculation, and finally failure again, are perhaps to be found chiefly in the weakness of human nature toward speculation and the hypnotic influence of human association, the opportunity for the panic being afforded by the modern system of credit transactions. Back still further, some think, may be obscure forces of nature that determine at regularly recurrent intervals atmospheric or meteoric changes which bring about failure of crops or other industrial change which affects the business world unfavorably; but into that discussion we need not

enter.

Underlying these temporary changes which affect individual prices, underlying even these changes in general prices that seem to move in about decennial cycles of panic and hope, the diagram shows us a substratum of changes more general still, great waves covering a score or more of years, and bearing the panic fluctuations on their surface like mere ripples. Note especially the two periods, 1790-1850 and 1850-1896. It is particularly these general changes which we consider.

To explain the great general fall shown to have been almost continuous since the early seventies, let us first consider briefly like changes in earlier periods of history. It must be understood that exact knowledge regarding the earlier periods is scanty. Until the present century there are no records which have been kept in sufficient detail so that one can speak with accuracy regarding minor fluctuations in prices; but enough facts are known so that all authorities are practically agreed regarding some great revolutionary changes, as well as regarding their causes.