§ 2. —Which is determined by the cost of production.

The value of money, then, conforms permanently, and in a state of freedom almost immediately, to the value of the metal of which it is made; with the addition, or not, of the expenses of coinage, according as those expenses are borne by the individual or by the state.

To the majority of civilized countries gold and silver are [pg 304] foreign products: and the circumstances which govern the values of foreign products present some questions which we are not yet ready to examine. For the present, therefore, we must suppose the country which is the subject of our inquiries to be supplied with gold and silver by its own mines [as in the case of the United States], reserving for future consideration how far our conclusions require modification to adapt them to the more usual case.

Of the three classes into which commodities are divided—those absolutely limited in supply, those which may be had in unlimited quantity at a given cost of production, and those which may be had in unlimited quantity, but at an increasing cost of production—the precious metals, being the produce of mines, belong to the third class. Their natural value, therefore, is in the long run proportional to their cost of production in the most unfavorable existing circumstances, that is, at the worst mine which it is necessary to work in order to obtain the required supply. A pound weight of gold will, in the gold-producing countries, ultimately tend to exchange for as much of every other commodity as is produced at a cost equal to its own; meaning by its own cost the cost in labor and expense at the least productive sources of supply which the then existing demand makes it necessary to work. The average value of gold is made to conform to its natural value in the same manner as the values of other things are made to conform to their natural value. Suppose that it were selling above its natural value; that is, above the value which is an equivalent for the labor and expense of mining, and for the risks attending a branch of industry in which nine out of ten experiments have usually been failures. A part of the mass of floating capital which is on the lookout for investment would take the direction of mining enterprise; the supply would thus be increased, and the value would fall. If, on the contrary, it were selling below its natural value, miners would not be obtaining the ordinary profit; they would slacken their works; if the depreciation was great, some of the inferior mines would [pg 305] perhaps stop working altogether: and a falling off in the annual supply, preventing the annual wear and tear from being completely compensated, would by degrees reduce the quantity, and restore the value.

When examined more closely, the following are the details of the process: If gold is above its natural or cost value—the coin, as we have seen, conforming in its value to the bullion—money will be of high value, and the prices of all things, labor included, will be low. These low prices will lower the expenses of all producers; but, as their returns will also be lowered, no advantage will be obtained by any producer, except the producer of gold; whose returns from his mine, not depending on price, will be the same as before, and, his expenses being less, he will obtain extra profits, and will be stimulated to increase his production. E converso, if the metal is below its natural value; since this is as much as to say that prices are high, and the money expenses of all producers unusually great; for this, however, all other producers will be compensated by increased money returns; the miner alone will extract from his mine no more metal than before, while his expenses will be greater: his profits, therefore, being diminished or annihilated, he will diminish his production, if not abandon his employment.

In this manner it is that the value of money is made to conform to the cost of production of the metal of which it is made. It may be well, however, to repeat (what has been said before) that the adjustment takes a long time to effect, in the case of a commodity so generally desired and at the same time so durable as the precious metals. Being so largely used, not only as money but for plate and ornament, there is at all times a very large quantity of these metals in existence: while they are so slowly worn out that a comparatively small annual production is sufficient to keep up the supply, and to make any addition to it which may be required by the increase of goods to be circulated, or by the increased demand for gold and silver articles by wealthy consumers. Even if this small annual supply were stopped entirely, [pg 306] it would require many years to reduce the quantity so much as to make any very material difference in prices. The quantity may be increased much more rapidly than it can be diminished; but the increase must be very great before it can make itself much felt over such a mass of the precious metals as exists in the whole commercial world. And hence the effects of all changes in the conditions of production of the precious metals are at first, and continue to be for many years, questions of quantity only, with little reference to cost of production. More especially is this the case when, as at the present time, many new sources of supply have been simultaneously opened, most of them practicable by labor alone, without any capital in advance beyond a pickaxe and a week's food, and when the operations are as yet wholly experimental, the comparative permanent productiveness of the different sources being entirely unascertained.

For the facts in regard to the production of the precious metals, see the investigation by Dr. Adolf Soetbeer,230from which Chart IX has been taken. It is worthy of careful study. The figures in each period, at the top of the respective spaces, give the average annual production during those years. The last period has been added by me from figures taken from the reports of the Director of the United States Mint. Other accessible sources, for the production of the precious metals, are the tables in the appendices to the Report of the Committee to the House of Commons on the “Depreciation of Silver” (1876); the French official Procès-Verbaux of the International Monetary Conference of 1881, which give Soetbeer's figures to a later date than his publication above mentioned; the various papers in the British parliamentary documents; and the reports of the director of our mint. Since 1850 more gold has been produced than in the whole period preceding, from 1492 to 1850. Previous to 1849 the annual average product of gold, out of the total product of both gold and silver, was thirty-six per cent; for the twenty-six years ending in 1875, it has been seventy and one half per cent. The result has been a rise in gold prices certainly down to 1862,231as shown by the following chart. [pg 308] It will be observed how much higher the prices rose during the depression after 1858 than it was during a period of similar conditions after 1848. The result, it may be said, was predicted by Chevalier.232

Chart IX.

Chart showing the Production of the Precious Metals, according to Value, from 1493 to 1879.

Chart showing rise of average gold prices after the gold discoveries of 1849 to 1862.

The fall of prices from 1873 to 1879, owing to the commercial panic in the former year, however, is regarded, somewhat unjustly, in my opinion, as an evidence of an appreciation of gold. Mr. Giffen's paper in the “Statistical Journal,” vol. xlii, is the basis on which Mr. Goschen founded an argument in the “Journal of the Institute of Bankers” (London), May, 1883, and which attracted considerable attention. On the other side, see Bourne, “Statistical Journal,” vol. xlii. The claim that the value of gold has risen seems particularly hasty, especially when we consider that after the panics of 1857 and 1866 the value of money rose, for reasons not affecting gold, respectively fifteen and twenty-five per cent.

The very thing for which the precious metals are most recommended for use as the materials of money—their durability—is also the very thing which has, for all practical purposes, excepted them from the law of cost of production, and caused [pg 309] their value to depend practically upon the law of demand and supply. Their durability is the reason of the vast accumulations in existence, and this it is which makes the annual product very small in relation to the whole existing supply, and so prevents its value from conforming, except after a long term of years, to the cost of production of the annual supply.