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could have been produced with the use of the same amount of capital and labor, capital and labor will gradually be shifted from its marginal use in gold mining to the production of other things. Here, then, as in the case of the balancing between the monetary and industrial uses of gold, we have a comparative valuation of gold and other things.

Several years ago the Bureau of the Mint undertook an investigation into the relation of the expense of gold mining to the amount of gold produced. Some of the conclusions reached are worth quoting in this connection:

In every mining district there are mines producing at good profits, mines producing at small profits, mines barely paying expenses, and mines operated at a loss, but with the hope that they will do better. Every increase in costs would submerge the latter more deeply, add to the list of the unprofitable, and probably close some of them. . . . A higher scale of working costs will bring losing experiments to an earlier conclusion, reduce profits, and make mining ventures generally less attractive, and thus diminish the output.1

To summarize our conclusions: The law of marginal utility applies in the industrial uses of gold. The particular form of the law of normal value that is operative in agriculture also holds true in gold mining (although it has to be stated in a somewhat different way.) An increase in the supply of gold diminishes its marginal utility in industrial uses, that is, diminishes the valuation put on gold as compared with other commodities. This is bound to affect the value of gold as money, on account of the ease with which the supply of gold can be shifted to one use or the other. The resulting increase in prices may be slow and irregular, but it is none the less certain. The rise of prices, however, cannot continue indefinitely. The increase of prices and wages brings increasing expenses in gold mining. The marginal part of the supply of gold will normally be cut off, a process which will continue until a rise in the value of gold diminishes the expense of producing it.

These suggestions are not put forward as an exhaustive statement of all the relations between the supply of gold and its value, although they are possibly the most important ones. Increases in

1 Report on the Production of the Precious Metals, 1904, p. 41.

the quantity of other kinds of money and improvements in the mechanism of credit, for example, probably have an effect on prices similar to that of an increase in the quantity of gold, in that they economize the use of that metal. Silver and paper money do not

TABLE I

PRODUCTION OF GOLD IN THE WORLD SINCE 1841

(From 1841 to 1885 the estimate is from a table of averages for certain periods, compiled by Dr. Adolph Soetbeer; for the years 1886 to 1906 the production is the annual estimate of the Bureau of the Mint.)

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take the place of an equivalent amount of gold, however, because some gold has to be held in reserve to maintain their convertibility.

The so-called "quantity theory" of the value of gold money has been much discussed in recent years. This is the doctrine that, other things being equal, prices vary inversely as the amount of money in circulation. In reality many different theories of the value of money have been put forward under the name of the quantity theory. The theory just outlined, for example, may be called a conservative form of the quantity theory. Some statements of the theory are open to objection because they (1) place too

much stress on the very doubtful problem of the exact mathematical ratio between variations in the quantity of money and variations in prices, or (2) confuse the "measure" or "denominator" of value with the standard of value, or (3) fail to recognize the necessity of a commodity standard of value, and consequently attach no significance to the influence of the industrial use of the standard commodity on its value. The most extreme form of the quantity theory is that which forms the foundation of the argument for the possibility of fiat money.

The Increase in the Production of Gold. Although probably more gold was produced between 1850 and 1875 than from 1492 to 1850, yet, as Table I shows, the production of gold in any three

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From Journal of Political Economy, Vol. X, p. 580, and Finance Report, 1907, p. 363.

years since 1896 or in any two years since 1902 was as great as the total production in the period first mentioned. Most of this great output of gold, as Table II indicates, comes from relatively few countries. At present the British empire supplies over one half and the United States (including Alaska) nearly one fourth of the total product. The causes of this enormous increase were, in part, the opening up of new gold fields in South Africa, Canada, Alaska, and Colorado, and in part the improvements in methods of extracting gold from low grade and refractory ores, in which connection

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TABLE III

MONEY IN THE UNITED STATES, JUNE 30, 19071

Finance Report, 1907 p. 328.

the development of the "cyanide process" has been of special importance. Dredging for gold in the beds of rivers which drain gold-yielding lands, is a very recent development that promises to be of considerable importance. Notwithstanding the decrease in the value of gold, the bulk of the gold produced in California to-day is from ore bodies that twenty-five or thirty years ago were generally considered worthless.

The effects of this enormous output have been felt in both Europe and America in a general increase of both prices and wages. There are some who expect that the value of gold will continue to depreciate for a long time in the future. Account must be taken, however, of the automatic check which the increase in wages and prices is bound to put on the production of gold by increasing mining expenses. On the other hand, still further economies in productive methods are possible.

QUESTIONS AND EXERCISES

1. Report on the Note Issue systems of Canadian banks, the Bank of England, the Bank of France, and the Imperial Bank of Germany.

2. Make a diagram showing the weekly changes in the total reserves and the surplus reserves of New York clearing house banks for any recent year. (Statistics may be obtained from the annual Financial Review, the Commercial and Financial Chronicle, the Banker's Magazine, or other financial journal.)

3. Construct a simple index number for wholesale prices, in one city, covering the period of a few weeks. (Use the market quotations of a daily paper as data.)

4. If half the gold in the world were destroyed, would prices be doubled?

REFERENCES

(See also references for Chap. XV.)

ADAMS, T. S. "Index Numbers and the Standard of Value," Journal of Political Economy, December, 1901, March, 1902.

1 "There are many mines in operation now at a profit which could not have been worked at a profit ten years ago. There has been an important addition to the gold and silver product by the recovery of these metals from lead and copper ores by modern processes. The most important gains seem to have come, however, through economies in management, particularly by enlarging the scale of operations and by more complete extraction of the values from the ores treated.” Report on the Production of the Precious Metals, 1904, p. 41.

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