Gold Supply Research Articles

The Theory of Gold Supply: with Special Reference to the Problems of the Witwatersrand.

The Theory of Gold Supply: with Special Reference to the Problems of the Witwatersrand.

The Theory of Gold Supply, with Special Reference to the Problems of the Witwatersrand.

The Theory of Gold Supply, with Special Reference to the Problems of the Witwatersrand.

The Theory of Gold Supply with Special Reference to the Problems of the Witwatersrand.

The Theory of Gold Supply with Special Reference to the Problems of the Witwatersrand.

“THE THEORY OF GOLD SUPPLY.”

South African Journal of EconomicsVolume 5, Issue 2 p. 136-144 “THE THEORY OF GOLD SUPPLY.” REPLY TO DISCUSSION W. J. Busschau, W. J. Busschau JohannesburgSearch for more papers by this author W. J. Busschau, W. J. Busschau JohannesburgSearch for more papers by this author First published: June 1937 https://doi.org/10.1111/j.1813-6982.1937.tb02085.xRead the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Volume5, Issue2June 1937Pages 136-144 RelatedInformation

REVIEWS

The Theory of Gold Supply with Special Reference to the Problems of the Witwatersrand. By W. J. Busschau, D.Phil. The Development of the Business Corporation in England, 1800–1867. By Bishop Carleton Hunt. Economists and the Public. By W. H. Hutt. The Ethics of Competition. By F. H. Knight. Statistical Year‐Book of the League of Nations (1935/36). Men, Money and Markets. By M. D. R. Leys. An Essay on Economy and Value. By Alec L. Macfie. Paris as a Financial Centre. By Margaret G. Myers. Survey of International Affairs, 1935. By A. J. Toynbee, assisted by V. M. Boulter. Issued under the auspices of the Royal Institute of International Affairs.

The Supply of Gold

The Supply of Gold

The Gold Supply in Ancient and Medieval Times and its Influence on History

The present paper is an attempt to show the far-reaching effect on history of a single economic factor, namely, the gold supply.

The Problem of Monetary and Ecnomic Stability

I. Range and variations in the price level, 175.— II. Wide divergence of views as to cause, 178.—III. Measures of basic production, and of trade, 179.— IV. The stability of relative prices, 181.— V. Evidence as to relations of supply and price variations, 183.— VI. Measures of the factors in the Equation of Exchange, 184.— VII. Gold supply and prices, 189.— VIII. Commodity prices and the General Price Level, 190.— IX, X. The role of bank credit and the need of control, 195.— XI. Mechanisms in human affairs, 201.— XII. Results and conclusions, 202.

Price Fluctuations and the Gold Supply

Price Fluctuations and the Gold Supply

The World's Gold Supply Again Considered

QOME fifteen years ago, the writer had the pleasure of undertaking for the Harvard University Committee on Economic Research (predecessor organization of the Harvard Economic Society) a somewhat comprehensive and detailed study of the subject now under consideration; it appeared in this REVIEW for July I920.' The present purpose is simply to review subsequent developments, and to outline the major forces likely to affect future trends therein. For the present survey, it is not essential to dwell upon the detailed geological, mineralogical, and other considerations which have for so long influenced the history of gold production and of course still do so. A fairly detailed analysis of those considerations both in general, and for particular gold fields is already on record in the earlier study. Another reason why such physical factors can properly be given much less emphasis than before is that geological and mineralogical considerations are in a sense dominated, for the time being at least, by a single economic fact: the depreciation and devaluation of important currencies --among them, the United States dollar and the effect of that movement upon the profit margins of gold mining and refining. To deal comprehensively with these matters of currency depreciation and devaluation, the related matters of inflation of bank credit and price levels, and the curious Warren theory of the relationship between gold production and price levels, would lead us too far afield at this time; and they are therefore dealt with only in such incidental manner as is essential to the immediate question under review. Various analyses and critiques of these related economic matters have appeared elsewhere, particularly in the articles by Professor Bullock and Dr. Tucker, in previous issues of this REVIEW.2

Significance of South African Agricultural Development

Most Americans know that the Union of South Africa produces most of the world's annual supply of gold and diamonds. Few of them know that the country, with a land area equal to the four southwestern states of California, Nevada, Utah and Arizona, produces as much wool as all our 48 states-one-tenth of the annual world production; that the Angora goat farmers of the Union share honors with those of the United States and Turkey in producing the world's mohair supply; that 10,000,000 cattle in the Union constitute the nucleus for a vigorous beef and dairy export trade; that South African citrus and deciduous fruit, maturing six months later than that of the Northern Hemisphere, supplies a large part of the English trade during certain months; that South Africa produces sufficient wheat for local demands and a considerable surplus of corn for markets abroad. Sugar, cotton, and tobacco are also produced in small volume. South African production of these products has a definite influence on the prices obtainable in the United States for the American production. It matters little that the South African production is not shipped to the United States. It unquestionably adds to the supply on European markets and, therefore, affects European and American prices. The two sets of prices may be rigidly separated by transportation and tariff differentials but they move up or down together. At certain seasons the effect of South African supplies on American prices is of vital importance for certain products and at other seasons for other products but there are always one or more agricultural areas in the United States which are feeling the effects of South African competition. Any program for a planned American production must be based upon facts regarding the probable production throughout the world, due consideration being given to both qualitative and seasonal characteristics. South African production prospects must unquestionably be embodied in such schedules of estimates. The planning of American agricultural production on the basis of probable world supply and demand is, fortunately, mutually helpful to farmers in those nations whose impending agricultural supplies are given consideration. A glutted foreign market would injure producers of other nations as well as of ours.

Gold Production and the Price Level: The Cassel Three Per Cent Estimate

I. The Cassel method, 647.— Kitchin's estimate, 648.— II. The problem of the base years: cyclical complications, 649; wholesale vs. general prices, 653; international aspect, 654.— III. The problem of the normal gold supply, 655.— IV. The problem of the rate of increase in the demand for gold, 658.— The first sub-assumption, 659; the second, 660; the third, 660.— Bank currency: England, 665; France, 669; Germany, 671; United States, 675.— V. Conclusions, 677.

The Gold Percentage

S HORT term interest rates usually depend upon the ability of commercial banks to lend money; the position of banks, in turn, depends largely upon the gold stock of the country. Therefore, in the last analysis, the supply of gold in relation tocredit liabilities governs interest rates. It is illuminating to analyze the changes which have taken place from time to time in the gold stock, and in the credit structure erected upon the gold stock, in an effort to relate these two important forces to each other. This -relationship is ascertained through the gold percentage, arrived at by dividing the total stock of gold in the country by the sum of bank deposits plus money in circulation. Fluctuations in the gold percentage may-be caused by changes in either or both of these factors, depending upon the degree to which central bank credit policies or other artificial influences are operative at the moment. In the absence of such outside influences the volume of both credit liabilities and gold tends to move in the same direction. Sometimes there may be some delay before movements in one respond to movements in the other; and sometimes one may fluctuate less than the other. These irregularities produce the fluctuations which occur from time to time in the gold percentage. It is such changes in the gold percentage which, in the last analysis and after allowing for other lesser influences, ultimately control interest rates. Of course, there frequently is an interval of time between a reversal in the direction of movement in the gold percentage and its resulting reaction on interest rates. This is because interest rates follow more closely the position of the banks. Banks can readjust their position to changes in the stock of gold only slowly. It is one of the functions of central banks to smooth out such readjustments in the commercial banks by temporarily counterbalancing gold movements. In this manner seasonal or emergency fluctuations in the volume and cost of credit are reduced to a minimum, while cyclical and major changes are accomplished gradually and in an orderly manner. It is doubtful if any credit structure cou'ld have survived a' 20 per cent reduction in gold stock within a sDan of nine months, such as occurred in the United States between September I931 and June I932, without the assistance of a central banking system. The gold percentage is a tool with which to measure the strength or weakness of the credit structure at any given time. It also affords a check on the validity of interest rates, indicating whether or not, and to what extent, the money market is being influenced for the moment by outside forces. The gold percentage is the fundamental factor which must sooner or later be reflected in credit conditions and interest rates. These can only temporarily disregard the gold percentage, and changes in it should always be considered of the utmost significance. Gold percentages are more useful for visualizing the changes which occur in the credit structure of a given country over a period of time than they are for comparing credit conditions in one country with those in other countries at any given time. The customary or average level around which the gold percentage of any given country tends to fluctuate depends to a large extent upon banking practices and national characteristics. For example, countries like the United States and Canada, where deposit banking has been developed to a high degree, can apparently operate safely on a lower percentage of gold than can countries like France and Argentina where bank notes represent relatively a much larger proportion of total credit liabilities (Charts i and 3). Gold functions much more efficiently in the former type of credit structure than in the latter; it does more work, supports a greater volume of transactions, and is more sensitive to control. In this country there are ordinarily about eleven dollars of deposits to each dollar of nioney in circulation, and in Canada, ten to one; in France, at the other extreme, the ratio is less than two to one. In order to maintain confidence in the credit structure of a country, it appears to be necessary to keep much larger gold reserves against currency than against deposits. If the customs and habits of a country are such that the people prefer and demand bank notes, in preference to deposits, as the medium of exchange in transacting

Statistical Background of the Crisis of 1857

ECONOMIC surveys of the United States in the pre-Civil-War period never fail to make note of the revulsion of business which came in the year I857. Sometimes this is indicated as the culmination of a speculative movement of considerable, though uncertain, duration. Sometimes it is spoken of as a peculiar, almost quixotic, affair, deriving immediately from the failure of the Ohio Life Insurance and Trust Company, just as the of i837 is alleged to have flowed directly from the single cause of the famous Specie Circular. Again, where such accounts make allowance for speculative activity as forerunner of the debacle of I857, the chief generative element of this speculation is held to have been the enlargement of gold supplies after the discoveries of the mid-century. Yet little has heretofore been accomplished in the scientific appraisal of business conditions in these years, and in particular little has been done in attempting to array together the several aspects of business experience with the object of discovering the various interrelations of these elements. An important exception to the first statement would be W. L. Thorp's Business Annals; but as his study is non-statistical in character, it lacks close comparability with that here undertaken. In the belief that greater realism may be given the crisis of I857 by the procedure just mentioned, certain data on the volume of trade, and on banking and finance, are here joined to those whiclh have been presented elsewhere upon the course of commodity prices, common stock values, and public land sales; and an effort is now made to reveal some of the differences in these several movements.1 THE VOLUME OF TRADE

The Monetary Theory of the Trade Cycle and Its Statistical Test Cycle and Its Statistical Test

Experience revealed the trade cycle; deductive explanations followed and were invented to fit the statistical evidence, 471. — The trade cycle is above all a periodical fluctuation in manufacturing activity and in the price level, the two fluctuating together, 472. — Statistical records show the correspondence between the fluctuations of consumers' outlay, prices, and production, while theory has arrived at the generalization deductively, 475. — Monetary theory of the trade cycle suffices to account for periodicity of 7 to 11 years. The sequence of events, 477. — The theory depends upon the connection between currency in circulation and the gold supply; but since the War this condition has not been fulfilled, 478. — Tests of the capital-goods and money theories, 483. — Difficult to find statistical test of the psychological theory, 484.

British Opinion on the Gold Standard

The proposal for a controlled currency. — The arguments advanced for it, 185. — Great Britain convinced that practical considerations make it undesirable, 186. — Distrust of the authorities to whom control must be entrusted, 187.—Objections to the gold standard itself not conclusive, 189. — The supply of gold probably adequate, 190. — The power of the Federal Reserve Board not so great as supposed, or likely to be used in drastic ways, 192. — Conclusion, 194.

The World's Gold

AS MUCH gold was produced in the world in the twenty J- odd years from 1894 to I9I7 as m ^e four hundred years ?JL. between 1492 and 1894. This is indicated by the fact that between the years 1492 and 1894 the world's production of gold was something over $8,000,000,000, of which about $4,000, 000,000 remained as the world's gold reserve in 1894. By I9I6 the world's gold reserve had increased to nearly $8,000,000,000, an increase of $4,000,000,000 out of a world production during that period (1894-1916) of about $8,000,000,000. During this period of about twenty years, therefore, about half of the gold produced remained in the available gold reserve of the world, or about the same estimated proportion as between 1492 and 1894. These figures give a most striking illustration of the feverish exploitation of natural resources which characterizes our present day industrial development. After the Californian gold dis coveries in 1848 came those in Australia, Canada, Alaska, Siberia, and other regions. At first the greatest source of this flood of gold was from mining. De Launay estimated that from 1848 to 1875 placers produced 87 percent of the world's production: but these are now essentially exhausted, so that in 1918 Orchard estimated the placer contribution at not more than 10 percent. Then followed the period of rapid exploitation of lode or vein gold mines in various parts of the world?espe cially in North America, South Africa and Australia. The in tensity of gold mining, which was only a symptom of the general intense development of mechanical civilization which charac terized the same period, resulted in a world production, which, ever climbing, in 1896 passed the $200,000,000 mark; in 1899 was over $300,000,000; and in 1906 exceeded $400,000,000. In 1915 the world's production is given at $470,000,000, the high water mark for all time. In 1917 the production was $420, 000,000; in 1918 it dropped to $385,000,000; in 1922 it was about $319,000,000; in 1923 it was about $367,000,000; and in 1924 it rose to $384,500,000. To understand and foresee the trend of developments with regard to the gold supply, production and future reactions on the world's economic problems, it is necessary to realize that

The World's Gold Supply

The World's Gold Supply

The Value of Money

I. § 1. Another formulation of the conditions governing the of 38. — II. §2. The term value of money, 39. — III. § 3. The demand for legal-tender 40. — § 4. The derived demand schedule for legal tender, 42. — § 5. The separate variables in the formula; total resources, 43. — § 6. The proportion of resources kept in legal-tender form, 44. — § 7. The proportion kept in pockets and tills, 48. — § 8. The proportion kept by bankers, 50. — §§ 9, 10. The relation of the present formula to that of the equation of exchange, 52. — IV. §§ 11–19. The supply of legal-tender money under various conditions: inconvertible paper fixed in amount; partial fixity of supply; free coinage; bimetallism; seigniorage; gold exchange standard, 54. — V. § 20. Demand and supply, 58. — § 21. Production and supply of gold, 58. — § 22. Common causes likely to affect the various factors, 59. — §23. The element of time, 61. — § 24. Possible interaction of demand and supply, 63. — VI. § 25. Conclusion, 65.

The Influence of the Gold Supply on Prices and Profits.

The Influence of the Gold Supply on Prices and Profits.