THE GOLD DISCOVERIES AND THE RATE OF INTEREST ON CAPITAL., [From the Economist, Dec. 27. 1851,]

New Zealand Spectator and Cook's Strait Guardian, Volume VIII, Issue 722, 3 July 1852, Page 4

THE GOLD DISCOVERIES AND THE RATE OF INTEREST ON CAPITAL., [From the Economist, Dec. 27. 1851,]

There is one very important -consideration in connection with the recent discoveries of gold inCalifornia and Australia, and the probable depreciation of the Value of that metal, in relation to other commodities, which has hitherto been left without any public discussion, however much it may have attracted the attention, if not the anxiety, of private individuals : — we allude to the effect upon the rate of interest. The commercial and banking community in this country hare bqcome so much accustomed to refer to the fluctuations in the amount of bullion held by the* Bank of England, as a. criterion of the value of money, as it is commonly called, "but which would be more properly termed, loanable capital, or in" other words, as a test of the fluctuations of the rate of interest, that it is not a matter of surprise that many personsshould have considered a great accumulation of gold as a certain index of a corres-' ponding diminution in the rate of interest at which capital may be hereafter borrowed. However common the inference may be, and whatever countenance it may receive from the conclusions drawn from the effects of the fluctuations of bullion in the Bank of Engand under the regulations of the Bank Act of 1844, a fair and full-consi-deration of the whole subject will, we think, convince every one, that no such effect will necessarily follow from an increase' in the supply of gold, however great. But in order to roake our~reasoning perfectly plain, it will be necessary to consider the fundamental principles which determine the abundance of capital and the rate of interest ; as well as the peculiar regulations which at present lead men to look to the fluctuations of the bullion in the Bank as an indication of the interest, or, as it is pepularly termed, of the " value of money." In the first place, then, the accumulation of the capital of an individual depends entirely upon the excess of nis production over his expenditure. Intermediate agents, merchants, and other dealers, form a necessary element in production for the purpose of distributing commodities to the consumer in the most economical way. ..Their accumulations, therefore, are of the same character as those of the immediate producers. Their surplus jof profits over and above their expenditure forms so much addition to the capital of the country. So also the savings of those whose income is derived from rent?, from interest of money lent, and from interest from the public funds, are all so much addition to the capital of the couutry ; for though they are not producers themselves, yet the .rent of land and houses, the interest, of money lent;" the taxes which supply, the dividends* of the public a*ebt, af c all included jn the qost of produ-' xiing" commodities, and therefore, in reality, represent a portion of those commodities: — just as much as if in England, as is the case in some of the Eastern countries, a portion of the actual produce was given up in .payment of rent, for the use of money and other services, or in payment of public taxes. The accumulation of capital in any country, therefore, depends, upon the excess of its production over jts consumption ; and capital will always be great or small in proportion to that excess for a long period. But it is quite plain that whatever the excess of a man's income may be over his expenditure, it does not necessa'rily — and indeed very rarely does — imply the possession of more gold or silver. With traders of all kinds,"it rather infers an additional stock of commodities, either held immediately by them, or by other persons at home or abroad to whom they have given credit, appearing as an addition to their book credits. With others, an accumulation of capital by a saving of a portion of their income, rather than an additional quantity of gold and silver will infer investment in, the funds of this or other countries, a purchase of land, a loan on mortgage to enable some other perton to purchase land r or to build houses, an extension oft railways, improvements in draining or other useful works.- In truth, then, nearly the whole of the accumulated capital of a country, simply be cause every person is desirous of converting it into a source of income or additional profit, is represented by an additional quantity of commodities, or by new facilities by which commodiiies .can be produced more cheaply, and therefore with' greater profit. Every drain that is cut is an additiou to the capital of the country, the interest of which is paid from the "additional produce which the land yields : — every agricultural implement which is made is an addition to the capital of the country," the return of which arises Jiqm^a saving of manual laboar and other expenses, and frequently from a greater production :" every ship that is built — every machine that is constructed — every railway that is opened — i all represent additions to the capital of , the country, in so far as they minister to cheaper, and more perfect productions, to a greater economy of time and, labour ; and each will be profitable just in proportion as it accomplishes those objects. But the great representative of accumulated capital is commodities themselves. The largest portion of the capital of a great trading country like England is used, directly and indirectly abroad and at home, in advancing the wages of labour necessary to produce articles required for consumption throughout the world, and distributing those articles among consumers. Young countries, possessed of little capital — ar, for example, our own colonies and the great majority of our'foreign markets — trade almost exclusively upon the capital of old and rich countries like England. To enable them to car-. ry on production, they not unfrequently obtain advances on their growing crops, and nearly always payment for their produce as soon as it is ready for market ; — while, on the other hand, for all they import from. England, they receive long credits. The produce of one year in reality pays for the imports of the former year. It not unfrequently happens that British capital performs nearly the whole of the trade, both in cultivating the native produce and in distributing British goods. .In Bengal, .the cultivation of indigo is* conducted chiefly by means of capital advanced

"to the planters' by British merchants, while the British goods which are consumed are consigned by manufacturers or merchants here, who wait for •returns until they "are sold, and until a long credit upon them has expired. But it is plain that in proportion as arcountry produces more than it consumes, and therefore as its capital accumulates, the producers will become independent of foreign advances, and the merchants of foreign credits. A stock of indigo in Calcutta, which nominally belongs to a planter' in Bengal, but really to a merchant in London who has advanced the means of cultivating it, will, by an increase of capital, become the real property of the planter to dispose of as he pleases ; — and the stocks of Manchester calicoes and Glasgow muslins, which are apparently the property of merchants or even of retailers in Calcutta, but which in reality belong to manufacturers in this country, will, by an accumulation of capital equal to the requirements of trade, make those persons the importers on their own account and the real owners of the 'goods, Tbe difference in the character of our trade with young and distant countries where capital is scarce and dear, and with the near continental markets where capital is abundant and cheap, strikingly illustrates^ our observations. The trade of all our distant markets i-s'carried on with British capital — by consignments of goods on British account;;tbe merchant and manufacturer here- advancing t tbeircost, Either directly themselves, or through their credit with their bankers and. otherwise, and waiting until tbe goods have been disposed of abroad, -and until the credit at which tbey are sold has expired, before they receive returns for them. Thus it is said that in Brazil, in goods and credits, the capital belonging to this country is never less than five millions sterling ; while tbe produce of Brazil shipped to this country is paid for at the time. It may be that the manufacturer who has made a shipment has himself received advances at home, either from a merchant in cash, or by his' acceptances which his banker is willing to discount until the returns are received ;but in whatever way thisis accomplished, it is still an advance of British capital, and the property in the Brazils is its real representative. On the contrary, the trade with the Continent is carried on to a very small extent with British capital. Goods purchased in Manchester or produce purchased in London for the use of those countries are usually paid for immediately, by credits supplied from the Continent. The cost or value of those goods, though expressed in money, is really constituted of the raw materials of which they are made, and of the food", clothing, &c.,'(or the price of it, which is the same thing) advanced by the manufacturer in wages, expenses, freights, &c. And the money which a merchant or a banker advances upon a shipment of goods, really only, replaces in the hand 3 of the manufacturer the cost of the commodities used up In such goods, and the means of repeating the same process again with- j out waiting for the returns for bis first shipment. ] If in the course of time \,he expenditure of a manufacturer be so much less than his income that he no longer requires those advances, bis increased capital will make the goods which are at present but nominally his own, really his own ; and the capital- which has been released -from making advances to him must, seek oth'^r employ"ment; •< But to> whatever way tr seeks that era-" ployment, it will still be found to be "represented by commodities. If, for example, a manufacturer discounts bills with his banker in order to pay for 100 bales of cotton, or obtains an advance for chat purpose, it is in effect the same as if the banker had lent him 100 bales of cotton for the period for which he requires the ad■vance. For the purpose of facilitating exchanges, it has been found profitable to apply a portion of the capital of the country, — that is, a portion of its produce, — in the purchase of a quantity of gold and silver for the purpose of constituting a circulating medium^ But it must be obvious that the qnantity of those metals which will be necessary for that purpose will depend upon the relative value which they bear to other commodities. For example, assuming that gold is" valuable in comparison with silver, in the proportion of 1 to 15, — then it would require fifteen times the weight in silver to"perform tbe functions of the circulation were it all of silver, that-would be required of gold were it all of that metal. It is the value of the commodities that are to be exchanged that must determine the amount of the coin "required to circulate them ; and the quantity of metal which will be required for that coin must therefore be determined by the relative value which the metal bears to other commodities generally. And as it would now require fifteen times the quantity of silver to circulate the same quantity of commodities that it would of gold, at ,the present relative prices of gold and silver to other commodities in general ; so, if gold were to become so abundant that it? intrinsic value was one-third less than at present, while silver remained stationary, it is plain that a given quantity of gold would circulate only as many commodities as ten times the quantity of silver; and that, in fact, it would require a proportionate additional .quantity _o£.gold to perform the same functions that is* necessary at present. "But it must be plain that such an additional supply of gold.; wjould add nothing to the capital of tlie country. The large quantity at the lower intrinsic value, would only represent the same 1 quantity of commodities that the smaller quantity had done at the higher rate. A loss would be sustained on the existing stock of gold in the country by the fall in its intrinsic yalue ; and that , loss would be represented by the quantity of other commodities which would be employed to furnish the additional quantity of gold required to make up the value of the circulating medium. It is clear that, to whatever extent depreciation may occur in the intrinsic value of gold, this consequence must'folfow in the same proportion. But, under any circumstances, the portion of the capital of a country so invested must represent but a very small proportion of the whole. Let us now shortly consider what determines tbe price which- persons will be willing to give for the\use of capital, or indher words, the rate of interest. It is not alone the quantity of capital which a country possesses, nor is it alone the extent, of trade carried on by a country requiring the aid of borrowed capital, that' determines this point ; but it is the proportion which, 'the one bears to the othei — the proportion" , which khe capital seeking employment /begrs to the trade which requires the aid of borrowed capital, or of advances by means of discounts, or loans of any

kind. For example, in a country like Holland* where capital is abundant, and commerce and trade almost stationary, (he rate of interest will be veiy low ; while in a country like* England, where, though the capital-seeking employment may be fifty times "greater absolutely, and five times greater relatively to the population, yet with\« rapidly increasing trade and new enterprises at home and abroad, the demand is so much greater, that the rate of interest is higher in England than in Holland. And even in this countryj the "value of money," — thai is, the rate of interest on. loaned capital, — varies quite as much in propbition to the demand at any particular time as to the supply. For example, the rate of interest often falls very low- when trade is much depressed, although the quantity of capital seeking employment may not be very large ; — so, in the same way, the rate of interest is frequently higher when trade is very good, although the quantity of capital loaned and loanable at such a time may be very great. The rate of interest, or the price of the loan of capital, therefore; depends, like that of all other articles, not only on the supply, nor on the demand, but on the relation which they bear to each other. Now, then, let us inquire how- the supply of, and demand for, capital are likely to ba affected by the gold .discoveries, a greater abundance of that metal; and a consequent depreciation in its mloe in relation to other .articles. The only means that we possess of obtaining gold, ot any other article of foreign prod action, is by exchanging our own productions for them." Our exports, therefore, represent the foreign coramoditiei which we can import — gold as well as others. But it must always be remembered that it is far more needful that we should obtain supplies of those great raw materials, such as wool, cotton, flax, timber, and every description of food, which form the constituent parts of our manufactures, than of gold and silver, beyond the^ quantity which is absolutely required for the purposes of circulation ; and, therefore, if from any particular quarter we import gold and silver only, in exchange for our manufactures, they are valuable to us but so far as they enable us to purchase raw materials and fopd elsewhere. , For example, we import from Mexico in exchange for our manufactures chiefly silver. With that silver we last year imported flour from France, wheat and wool from Germany and Austria, and sugar from India ; and the silver from Mexico was chiefly valuable to us inasmuch as it enabled us. to replace with a profit from other countries the various articles of which the manufactures shipped- to Mexico had been composed. But no one will doubt that it would have been even -more convenient and more profitable, if, in place of silver, Mexico had furnished direct, at the same price, the commodities which we purchased from third countries with the silver obtained from Mexico ; thus saving the time and labour of a second operation. Take another example : — Suppose the discovery of gold in Australia were to furnish us with that metal to the amount of one million yearly in payment for our exports, and were-to displace the production of wool to that extent, it is plain that our receiving gold in place of wool would only lead to the necessity of purchasing woo^whefever we could find it in other fconntriei ; itt -that we should only be benefited by the change in the character of our returns from Australia, provided we could obtain more wool elsewhere in exchange for the gold, than we should have received direct from Australia, in place of it. Gold and silver form the basis of but a very small portion of our manufactures, and can only be serviceable in so far as they enable us to replace the raw materials and j food necessary to afford productive employment for our labourers. Whatever quantity, then, of the precious metals the peculiar character of our trade at any moment may induce us to import, it by no means follows that a larger quantity will remain here than can be profitably employed, but that a great portion of it will be exchanged for commodities abroad. During fhe last year a large quantity of flour was imported from France, and a very small quantity from the United States. But the United States paid us for their extensive imports. of our goods to a considerable extent in gold ; and with that gold we paid (or the flour received from France. , But it must be plain that it would have been equally, or even more convenient, to hare received flour direct from the United States, if at the same price. So, in the. same way, during the last eighteen months our importations of the precious, metals have amounted to Very many millions sterling, while the bullion in the Bank has only within the last few weeks shown any increase, and even now is not so great as it has been at times during the last few years. So long as gold retains the same value in relation to other commodities, a greater or a smaller quantity of it received here , in exchange for our manufactures would not be likely materially to affect the quantity in the Bank, nor could it affect the quantity of capital, as it would be required to replace from other countries the raw materials and food required for our industry. . -But let us. suppose that the quantity of gold increases so much that its intrinsic value is reduced ibjr one-half. W.b~at, then,' will happen? .The nominal price of all other commodities will be pro-, portionately higher. Goods of the present value of £100 would then he worth £300. But the £200 ' would purchase no more of the raw materials of food required to repVoduce the same goods than the £100 will do now. If, therefore, under such circumstances, we imported double the quantity of gold that we now do, our capital would not thereby be increased, nor our power of purchase from other countries. Commodities could not thereby be rendered more abundant. On the contrary, there are many reasons why our capital should be diminished, and commodities become less abundant by such 'a change. At the'raoment when any reduction in the intrinsic value of gold took place, all the debts due to England in sterling money, or in ahytbther currency consisting of gold, would be depreciated to that extent. For example : — A merchant in Manchester has -sold goods to the amount of £20,000 to customers .in New York. At the time his sale is made the relative price -of cotton and gold would enable him to import 2,000 bales of the -former in exchange for bis goods. But, by the time his credit has expired, the supposed change in the intrinsic value of gold has taken place ; it has become doubly. as abundant than before, and- the intrinsic value inurelation to cotton and wheat has fallen by a half. The' Manchester

merchant would tben'be able to import only 1,000 bales of cotton in exchange for his' goods,, in place of 2,000 bales as" before. Or if he imported gold in place of cotton, still that gold being a quantity fixed when he made his sale, would only- enable him to purchase in this country, or in any third country, one-half of the raw materials or food that it would have done before. -The capital of the merchant would be reduced in that proportion ; and in order to repro--duce the same quantity of goods, either a portion of his own capital must be withdrawn from tome other employment, or he must become a borrowet of capital to that extent from others. Every reduction in the intrinsic va'ue of gold has, therefore, the tendency to- diminish the capital of the country, so far as the debts due to this country abroad are concerned. It is true the same effect would follow as regards the debts»due at home. But in the latter case,_what one class of British' subjects lost by receiving payment in a depreciated coin, another class would gain by liquidating their debts in a similar currency. The great losers would be the recipients of dividends from the funds, of rents on longJeases, and other fixed incomes. * But in all cases -at home, tbe loss of one class would be the gain of another. The loss of .the fundholder would be a gain to the whole nation of tax-payers, Three per cent, consols would still be worfh' the same nominal price ; there would. still, be paid £3 a year asjntere?t on each £100 of stock ; but that £3 would purchase only one half of the quantity of other commodities ' that the -same sum would have done before. The principal of the National Debt would remain nominally the same as before; it would still be nearly eight hundred millions. But in labour and other commodities it would be worth but a half that it is now. Tbe interest would still be the same twenty-eight millions. But the taxes which are sufficient to raise that sum now, being still nominally the same, would require a sacrifice of labour and of other commodities only to the extent of one-half to paythem. So, what the fundholder lost, the taxpayer would gain. What the owner of property let an- Jo.ng leases would lose until they had expired, the tenant would gain, as was tbe case during the first part of the present century. Therefore a fall in the value of gold would have no effect upon the aggregate quantity of capital in the country, so far as credits existed amongst British subjects at home, or so far as fixed future payments, in the shape of annuities or otherwise, existed among such persons. But so far as 'the balance of payments was due *from foreign countries to this, dischargeable in fixed quantities of gold, and those balances are always very large, a depreciation in the value of gold from its greater abundance would tend rather to diminish the amount of our capital than to increase it. There is another way (to which we have already alluded) in which such a depreciation in the value of gold would tend to diminish the amount of our capital. It is supposed that we have gold in circulation and in deposit in banks to an amount exceeding fifty millions. To whatever extent depreciation took place, a national loss upon that coin would be experienced to the same extent. . Suppose tbe depreciation was one-half. As the quantity of coin in circulation is, determined by the quantity and value of the goods required to be circulated;, we should require just double the quantity. of sovereigns to perform the same functions under tho.se circumstances, when their intrinsic value was reduced to the same as 10s. is now, though they would" still retain the same name as at present. To supply this additional coin, a corresponding quantity of commodities would require to be given up which might otherwise remain in a productive channel ; and to this extent the available aggregate capital of the country would be reduced. There are therefore two ways in which some loss of capital would be sustained, and in which the supply would therefore become somewhat less. But the discoveries of the gold mines in California and in Australia will have a considerable effect on the demand for capital. They are two new sources of rich production ; — whether of gold, or any other commodity, sttll a large demand for capital is thereby created for the purpose of exploring and working those mines. Notwithstanding the great quantity of gold obtained in California, yet so distinct is the mere quantity of that metal contained in a country *from tbe question of capital, that tbe rate of 'interest has generally varied there from three Jo Jive per cent, per month on-tbe best securities obtainable. We have assumed, for the sake .of illustration, such an additional supply of gold as would reduce its -intrinsic value to one-half ;— not that we contemplate the probability of any such change,- nor the possibility of that or any important depreciation taking place, except as the gradual effect through a period of years. But it is plain that whatever the increased supply may be, .and whatever diminution may take place in tbe intrinsic value of gold in consequence, the tendency will be rather to lessen than to increase the aggregate amount of our capital, and most so in the first place ; while on the other hand, the great new 1 markets dpened*. to us by those .discoveries, will not only create a fresh demand for capita] on the spot, but even in the old countries which supply them- ; with* manufactures, machinery, &c. Thus, while the snpplyof loanab]e-capualJa^U>Jo~-edUn~=~~ try will be somewhat lessened, the. demand for it will be somewhat increased, and the rate of interest will therefore haveia tendency rather to rise than to fall. At a lime when very exaggerated opinions are entertained as to the effect of the gold discoveries in reducing the rate of interest upon capital, it is of the first importance that the true tenden* cy of those discoveries should be fully discussed and correctly understood. But while we have endeavoured to place the principles which must "determine the points in question clearly before our readers, yet < we must so far guide our observe* tions from being misunderstood, by adding, that however true those principles may be, yet that their practical operation is likely to be thrown overdo long a period, and to. take effect so gradually, as not to produce at any one time any"*very perceptible consequence, or practical inconvenience.