4 The Effect on Speculative Commodities — Wheat, Corn, Oats, Cotton, etc.
This phase of the subject will be dismissed with a few words. If the contentions already made are accepted, it is apparent that all such commodities will gradually seek a higher level. A brief examination of statistics will show that this readjustment has been going on for years. The gradually ascending pivotal point, or average price, is particularly marked in the cheaper cereals,—corn and oats, and also in cotton. This is probably due to the fact that wages have not advanced as rapidly as have prices of living. It is found that in periods of hard times consumption of cheaper foodstuffs and textile fabrics is increased, while the consumption of higher priced commodities and luxuries are curtailed. The wage-earner, therefore, has been in reality living in a regime of hard times, although this fact is easily submerged by steadier employment, by a fictitious appearance of general prosperity, and the ability to spend a larger number of dollars, without realizing fully the loss of purchasing power in the dollars.
It would be out of the question to attempt to enter anything like a comprehensive study of the question of gold production and its effects in a single chapter, or even in a single volume; neither is it necessary to the purposes of this work, for the student who desires a comprehensive education in this regard will find ample means and material ready to his hand. From the standpoint of investment and speculation alone, it is submitted that increasing production of gold is, to use the phraseology of the street, bearish on long time bonds and other securities yielding a limited rate of interest or income, temporarily bearish on railroad stocks, bullish on industrial shares, except as noted, and bullish on speculative commodities.
At the risk of indulging in undue reiteration, attention will again be called to the fallacy of considering such subjects as the one of gold production too remote in concrete effects, or too sluggish in operation to be of importance to the speculator. A thorough understanding of cause and effect bears upon the operations of today, in that it anticipates the results of tomorrow. Through knowledge of influences of this character, serious error may be avoided. For example, one of the profound axioms of the speculative world is that bonds advance first and stocks afterwards. If we understand why bonds have been, and are at present, declining we may be justified in modifying this view and considering the axiom more or less obsolete. He who operates an engine without a clear understanding of its motive power is likely to get into trouble, or perhaps be blown up.
It may be pointed out also, that a too literal acceptance of the suggested effects of this or any other great price influence is highly dangerous. Even while gold production continues to increase rapidly, prices, not only of shares, but of all things, will overleap themselves and will also swing backwards to the other extreme. The cycles are not completed, until both zenith and nadir have been touched. Changes in gold production will not prevent declines in prices; they will, however, interfere with the regularity of the cycles.
This chapter may be fittingly closed with the following list of conclusions reached by Mr. Holt, in the work already mentioned. These conclusions cover all the points herein presented, and others which are of interest and value:
“1—That both the output and supply of gold are likely to increase rapidly for many years.
“2—That, therefore, the value of gold will depreciate as the quantity increases.
“3—That this depreciation will be measured by the rise in the average price level.
“4—That a rising price level, if long continued, is accompanied by rising or high interest rates.
“5—That high interest rates mean lower prices for bonds and all other long-time obligations drawing fixed rates of interest, dividends, or income.
“6—Rising prices increase the cost of materials and of operation and tend to decrease the net profits of all concerns, the prices of whose products or services either cannot be advanced at all, or are not free to advance rapidly.
“7—Rising prices tend to increase the net profits of all concerns that own their own sources of materials and supplies.
“8—Rising prices of commodities tend to cause the prices of all tangible property to rise. This includes lands, mines, forests, buildings and improvements.
“9—Rising prices of commodities and property tend to increase the value of the securities of corporations holding commodities or property.
“10—Rising prices and cost of living necessitate higher money wages, though the rise of wages will follow, at some distance, behind the rise of prices.
“11—As rising prices do not mean increased profits to all concerns, many employers will not concede higher wages without strikes.
“12—Rising prices and wages, therefore, mean dwindling profits and troublous times in many industries, with complete ruin as the final goal.
“13—Because wages will not rise as fast or as much as prices and the cost of living, there will be dissatisfaction and unrest among wage and salary earners.
“14—Rising prices of commodities and property encourage speculation in commodities, stocks and real estate and discourage honest industry.
“15—Thus, rising prices, by diminishing the incomes of ‘safe’ investments in ’gilt-edged’ bonds and stocks and by increasing the profits of speculators encourage extravagance, recklessness and thriftlessness.
“16—As rising prices decrease the purchasing power of debts, and thus aid debtors at the expense of creditors, they discourage saving and thrift.
“17—Rising prices, then, by promoting speculation and extravagance, increase consumption, especially of luxuries, and, therefore, stimulate production.
“18—Rising prices, then, result in what is real prosperity for many industries; but what is for a nation as a whole, artificial or sham prosperity—the result of marking up prices rather than of increasing production.
“19—With prices, wages, rates and industries always imperfectly adjusted to the ever depreciating value of gold, and with instability and uncertainty throughout the financial world, there cannot but be a great shifting around of values and of titles to property.
“20—As this shifting is to the advantage of the debtors—the rich—and to the disadvantage of the creditors—the great middle class—it results in rapidly concentrating wealth in the hands of a comparatively few.
“21—For all of these reasons a prolonged period of rapidly rising prices is reasonably certain to become a period of unrest, discontent, agitation, strikes, riots, rebellions and wars.
“22—A rapidly depreciating standard of value then, if long continued, not only produces most important results in the financial, industrial and commercial world, but is likely to result in changes of great consequence in the political, social, and religious world.
“In view of all the facts, results and possible consequences connected with the increasing output and supply of gold, The Wall Street Journal was right when, on December 4, 1906, it said that ‘No other economic force is at present in operation in the world of more stupendous power than that of gold production.’”