PRICE MOVEMENTS.

Press, Volume L, Issue 14886, 28 January 1914, Page 10

PRICE MOVEMENTS.

» A REVIEW AND A FORECAST. (specially -wthttex for "the press.") (Bt Jas. W. Mcllraith. Litt.D.) In a previous article it was shown that the general level of prices m >ew Zealand in 1913 was the same as in 1912 viz., 117, or 17 per cent, above the level of 1890-1899. and 26 per cent, above the level of New Zealand's lowest year, 1895. Ihiring successive quarters in 1913, however, the price-level gradually fell, standing in December, 1913, nearly 4 per cent, lower than during the preceding December. Nor was the decline-confined to Zealand. Writing in October last, the Commonwealth Statistician (Mr G. H. Knibbs) said that the level of wholesale prices in Australia, after rising to a record height in the third quarter of 1912, had been falling continuously ever since. • In May last the editor of the "Economic Journal" wrote that, in his opinion, the world was on the crest of a trade boom, and he doubted j whether prices could long maintain so high a level. In July, Professor Irving Fisher, the celebrated economist and statistician of Yale (U.S.A.), said:—"There is reason to expect the present upward rush of prices to culminate in-JKcrisis in a few years, followed by a temporary depression." Wβ have experienced the premonitory symptoms in a rising rate of interest, a vague feeling of insecurity, a subsidence of the land boom, and a temporary fall in prices. From abroad come similar warnings. The London Stock Exchange's report for 1913 speaks of "a decided depression, a continued fall in values." American reports show that the number of commercial failures in 1913 broke all records, and that employment conditions in U.S.A. and Canada are worse than they have been for many years. There has been a regrettable collapse of banking institutions in India —their latest home; while of Germany we read of the- rapid growth of unemployment, and of the refusal of the Government to participate in the Panama Exposition, ostensibly on the ground of trade depression. All these straws in the commercial j wind indicate that a time of tension is upon us, the duration and severity whereof it is difficult to foresee. Yet as since 1895 the New Zealand pricelevel has risen only 26 per cent., compared with 33 per cent, in Australia, 40 per cent, in England, and 48 per cent, in America, it seems a legitimate inference that wo shall experience any reaction in a comparatively mild form. We may note in support of this that when the last reaction in prices took' place in 1908, English prices fell 8J per cunt., and American prices 5 per cent., recovering uieir original level in 1911, ana lato iv It) 10 respectively, in Australia, a decline ot li per cent, in 1909 was not recovered till 1912. In that crisis Now Zealand prices, yhich had risen less than any of the others, ieU. only 3 per cent., a fall amply regained uunng 1909. buuu a crisis is precipitated by a period or continuously rising prices inducing a healthy invigoration of trade tnat passes at length into a fever oi speculation; the. employers, producers, and adventuroils class generally, rush to buy, and to manufacture, in order to sell again at a higher tigure; in many cases greed, taking advantage of public excitement, aud of tho power given by trade combination, raises prices ior no valid reason; money-lending institutions, anxious to share in the good times, advance money often beyond a fair margin of safety; merchants give credit to a degree unknown before; high profits lead to extravagance, for an ostentatious display of a more or less vulgar type always accompanies a suddenly-acquired prosperity; the habit gradually spreads to the less fortunate classes of the community; "high cost of living," thus giving rise to "high living" ; in fact, in the initial stages of a crisis the world suffers from a fever of getting riches and getting rid of riches quickly. Soon there comes that inevitable time when such artificially-raised prices can rise no more; holders find" they cannot obtain the profit they reckoned • upon; many whose bills are falling due hasten to sell before a panic unduly depresses prices; this leads to lower prices, and a further rush to sell; simultaneously,"banking and kindred institutions whose ready supplies added fuel to the fever of speculation,, en-j deavour to protect themselves Tjy calling in their loans and raising the rate of interest. This merely increases the trouble; and speculation tends to-give place to panic. People then talk gravely about "over-production;" as if the world was ever over-supplied with, food, or clothing, or housing, or means of locomotion, or with opportunities" for recreation. Such apparent over-produc-tion arises from the fact, not that people do not want the commodities, but that temporarily they have not the means to purchase them. * Why have prices risen almost continuously since 1895? In fact, what determines the general level of prices? Many theories have been advanced, of which two of the most popular are that prices have men because the population of the world increases faster than the supply of goods; and, secondly, that prices have risen because wages, etc.,, have risen. Of the first, it need only be said that far from it being true tflat, population is increasing faster than goods, goods are increasing, and will probably long continue to increase, much faster than population; and that the population of the world increased faster between 1875 and 1895 than it has since, yet prices were falling then and are rising now. American investigators show that whilo the population of U.S.A. is increasing at the rate of ] \ per cent, per annum, the product j of goods is increasing at the j rate of 51 per cent. Prices are rising, not because people are increasing faster than goods, but in spite of goods increasing faster than people. As regards the second contention, that high prices are due to high wages, interest, and rent, it would be much more reasonable to say that these are the necessary result of high prices. The problem, however, is, in essence, a comparatively simple one: the price level depends upon the amount of goods to be sold, and the amount of money, or facilities tor payment, for which they are exchanged. If the goods of the world increase faster than the money, prices will fall; if,, however, facilities, for payment increase faster than the goods, prices generally will rise. Of course, it is not meant that' in the first case the price Si every! article will bo falling, or that in the second caso the price of every article will be rising; it simply means that, taking all articles together, tho proportion of fall in the first case will be greater'than the, proportion of rise; and j vice versa. Unfortunately, the term i "money" has both a narrow and a wide meaning. At first it meant almost entirely coins of jrold or eilver: then, with the advent of banking, came the useful banknote and the bill of exchange. Of later years the dominant feature of the rronetary world has been tho prodigious increase of deposit banking and the consentient use .of the chp<nie. Through its power of taking mortgases, giving overdrafts, and making advances, the modern bank is an

institution for converting ships, iarms, wool, wneat, etc., into iuono,\ uvauaoie tor immediate circulation by means oi "neques drawn against Dank accounts. Now investigation nas snown tnat tins monev —coin», banknotes, and deposits combined —has been increasing, and is. likely to increase rapidly tor years io come. In U.S.A. coined money increases at the rate ot 4 per cent, pc/ annum, and tanK deposits at tno lute of 7 per cent. In considering facilities for ocean transport, it is not, sufficient to consider merely the number ot ships; we must consider also the number of trips each vessel can make in a given time. So, also, with money. \Ve must consider, not only the total amount ot coins, notes, and deposits, but also the rate at which they circulate or change hands. Tho faster the coins and notes change hands, and the more rapidly bank deposits are "turned over, tho greater will be the .facilities for payment, and, other things being equal, tho higher prices will be. Now, it is found in U.S.A. that tho coins in circulation change hands on tho average 21 times a year, and this velocity of circulation is increasing at the rate ot 1 per cent, per annum. The owner* ot bank deposits turn over their deposits 50 times a year, a velocity increasing at the rate of" 2 per cent, a year. Reckoning, then, both tho gross amount of money and its velocity of circulation, it is found that facilities for payment increase at the rate of 9 per cent, a year. But eince trade increases in volume by only oi per cent, per year, prices rise of necessity by oi per cent, per annum. Throughout the world similar monetary conditions prevail. The bigger tho city, the faster the circulation. In Paris and Berlin deposits are turned over 100 times a year; in Athens four times. So far, tho East has been a great sink of gold, koeping untold millions out of circulation, checking tho increase of banking, and steadying tho rise in prices. But Egypt and India are awakening to modern methods; their hoards are being gradually transferred to banks, to become tho basis of a groat superstructure of deposit banking. The world's annual output of gold is now over 300 per cent, higher than in 1890. In spite of tho increasing cost of labour and materials, the inventive genius at the service of the mine-owners is of so high an order that the cost of producing gold is lower than ever before. This annual output, and more particularly the vast stock of gold in the world, is of prime importance, because bankers may at any time be called upon to pay their liabilities in gold. As these institutions seldom keep gold enough in reserve to redeem more than a small percentage of their liabilities (for experience has told them that a great reserve is hardly necessary), any increase fti tho world's stock of gold increases by a still greater amount the liabilities bankers undertake. In other words, it stimulates deposit banking and tends to raise prices. To sum up, we find a population increasing at a gradually decreasing rato; a trade increasing under the stimulus of speculation, invention and scientific research, faster than the increase of population; and facilities for payment increasing even faster than trade. Roughly speaking, this implies, in theory, a continually greater share of commodities for each person, and a continuously rising price per unit of goods. By the latter, every one is certain that ho is affected; in tho former each is not so sure he is a participant. Hence a world-wide, blind discontont. And'if American investigators are correct, there is no immediate hope of relief. Says Irving Fisher: "Humanly speaking, I feel perfectly safe in predicting that the trend of prices for years to come iwill not be downwards. This does not preclnde the possibility of temporary recessions of prices. ... Prices will rise on the average 2 per cent, per annum for another generation." Surely the world is face to face with a grave problem !> ■■ -