Thomas Tooke

Archive for June, 2012|Monthly archive page

Measuring the wages in cigarettes, the low government taxes of 1905 and need of inflation for large governments.

In Tobacco on June 16, 2012 at 6:59 pm

In 1905, a pack of 15 cigarettes had a price of 7.5 cents, you can infer that as the mid price between the sweet Caporal for 10 cigarettes produced by the Tobacco Trust and the competing admiral brand which temporarily sold its 20 cigarettes pack for 5 cents in a failed attempt to undercut the Tobacco Trust.

In 1900, the median household income was in nominal terms 438 USD according to this source, so if you measure that in ounces of Gold which were trading at 18.96 USD in 1900, we have the median income equivalent to  23.10 ounces of Gold. The Median household income today is close to $50,050. One can decide if the households are richer now since they make 31 ounces of Gold instead of 23.1 or if the Gold has to be priced at 2,166 dollars in order to be fairly valued.

If one measures the household income in packs of cigarettes, the median household income works at around 438/ 0.075 = 5,840 packs of cigarettes. How about today? The median price of a pack of cigarettes is probably around 7.5 USD, the median income can be measured as 6,673 packs of cigarettes. Not much change in income if you measure median income either in Gold or in packs of cigarettes.

In 1907, Jacobstein wrote:

“Of the total tobacco revenue collected from 1902 to 1906, fifty per cent was derived from manufactured tobacco (plug, chewing and smoking tobacco and snuff), forty-five per cent from cigars and five per cent from cigarettes. If to these internal revenue receipts we add the custom duties on tobacco ($21,500,000), the total income to the government, from 1902 to 1906, from its taxation of tobacco was $66,000,000 annually, which is about thirteen per cent of the national public revenues from all sources.”

So if we work in reverse the numbers, what do we obtain? 66,000,000 / 0.13 = 507,700,000 USD as the total national government revenues. So how many median household incomes would that be? 507,700,000/438 = 1,159,114 median household incomes. How can we compare that to today´s context?

Since, the population of the United States is around 313,000,000 while it was around 76,000,000 at the time, we could say that in today´s context with 4.11 more people, maybe a rough estimate would be around 1,159,114 * 4.11 household incomes.
With today´s US household income at 50,050 USD, we get 1,159,114*4.11*50,050 = 238.5 billion USD.

So a rough estimate in today´s money of the total national public revenues of 1900 from all sources is 238.5 billion USD. Since the GDP is around 15.094 billions today, this works at around 1.58% of total GDP. The other way to look at that is the following: today the USD budget deficit per month is around 100 billion USD while at time the annual national public revenues from all sources would be around 2.8 months of today´s budget deficit. Interestingly according to this link, our approximation is not far of the mark from theirs at 2.7% of GDP as the total government revenues as a % of GDP in 1900.

Evidently the inflation has nothing to do as “with a small inflation being positive for business environment etc…etc…”. Without inflation the government obligations can´t just be repaid and that has been the situation since the huge accumulation of debt starting post World War I with some abatement post world war II and accelerating in the recent decades.

War Financing with Tobacco Napoleonic Wars, Civil war and Spanish American war. Impact on consumption.

In Tobacco on June 16, 2012 at 2:46 am

It is a recurring fact in history that governments heavily use Tobacco as a tax collection mechanism, here we discuss the instances during which it was used to finance wars along with salient data about taxation and consumption and the higest taxation rates in 1905.

As Jacobstein wrote in 1907.

“The Napoleonic wars for a long time closed European markets to our products. The damage to our trade and commerce resulting from the Berlin and Milan Decrees, the Orders in Council and our own embargo, is a matter of history. Our tobacco trade suffered along with the others. In 1808 our exports fell from 62,000,000 hogsheads to 9,567 hogsheads of lead. Manufactured tobacco exports were similarly affected.

Moreover, these Napoleonic wars burdened European governments, especially England and France, with heavy public debts. To wipe off these debts, import duties were greatly increased on all products partaking of the character of luxuries, including tobacco. The tobacco tax had always been considered a lucrative as well as a justifiable one. These increased duties raised the prices of tobacco to the consumer proportionately, thereby cutting down consumption, or at least checking its rate of increase.  The falling of our exports was no doubt partly due to this factor. In England, for instance, the tax was raised in 185 on imported tobacco, from twenty-eight cents per pound to seventy-five cents per pound. This brought the duty up to nine hundred per cent ad valorem. England´s consumption consequently fell from twenty-two million to fifteen million pounds.”

” The English duties were so high that a special committee was appointed by Parliament to investigate the disturbed conditions of trade resulting from the increased tax. This committee reported that the prices of tobacco were so high that smuggling and adulteration of tobacco were made very profitable. The American Chamber of Commerce of Liverpool presented a petition to the committee requesting a reduction of duties on tobacco, on the ground that consumption, and hence trade, would increase for England and the United States. This Parliamentary investigation committee declared its belief that ” the annals of taxation do not exhibit an instance of such a heavy impost in any country as the present duty on tobacco.” (Nine hundred per cent ad valorem.) The like was true, though not to the same extent, in France, Austria, Spain and Italy, where the “Regie” was in vogue, and the government fixed prices arbitrarily. In our country the best snuff or manufactured tobacco could be bought at retail in 1840, for twenty-five cents per pound; whereas, the price in England was seventy-five cents per pounds for snuff and forty-five for manufactured tobacco; and in France the retail price was thirty-five cents per pound for the ordinary tobacco of both kinds used.”

From Jacobstein again:

“When, however, the influence affecting price is more permanent one, as a high tariff or internal revenue tax, then the reaction upon consumption is more noticeable. For instance, in the period from 1865 and 1868 when our internal revenue tax was increased from eleven cents to thirty cents per pound, consumption fell from one and three-tenths pounds to one pound per capita. The increase in the tax, during the Spanish-American War, on “manufactured tobacco” from six to twelve cents per pound, was accompanied by a decrease in consumption from three and nine-tenths to three and three-tenths per capita. ”

From Herbert Myrick and J.B. Killeberry.

” The United States internal revenues tax for the two years ended June 30th, 1864 was $1.50 per thousand on cigars valued at not over $5 per M, increasing to $3.5 on cigars valued at $20, an average of $2.37 per M on cigars of all descriptions. After June 30th, 1864, the tax was increased, for war purposes, to $3 per M, on cheroots and cigars valued at not over $5 per M; valued at over $5 and not over $15 per M, 8$  valued at $15 to $30; $15 per M; valued at $30 to $45, $25 per M. Cigarettes valued at not over $5 per 100 packages of 25 each, $1 per 100 packages; valued above that sum, $3; cigarettes made wholly of tobacco, $3 per M. By the act of March 3rd, 1865, cigars, cheroots and cigarettes made wholly of tobacco, or any substitute therefor, were taxed $10 per M, and cigarettes, valued at not over $5 per 100 packages of 25 cent. These war taxes were reduced by the act of July 13th, 1865, and March 2nd, 1867, and again July 20th, 1868. Under the later act, cigars and cheroots of all descriptions were taxed $5 per M; cigarettes weighing not over 3 pounds per M, were taxed $1.5, and heavier than that, $5. These rates prevailed until March 3rd, 1875, hwen cigars and cheroots were taxed $6 per M and cigarettes $1.75. These rates were again reduced March 3rd, 1883, to $3 per M for cigars  and cheroots of all descriptions and 50 cents for cigarettes weighing not over 3 pounds per M. These latter rates are still in effect. ”

The tariff on tobacco imported into the United States on leaf, or manufactured, was 6 cents per pound and snuff 10 cents per pound from 1789 to 1794, when it was advanced to 10 and 12 cents respectively, and remained there until 1846, except it was 20 and 24 cents from 1812 to 1816. In 1846, a tariff of 30 per cent ad valorem was imposed on leaf tobacco, which was made 24 per cent in 1857 and and 25 per cent in 1861 but in 1862 was raised to 25 cents per pound, and in 1866 to 35 cents per pound, continuing at that rate until 1874, when it was made 30 per cent ad valorem. From 1866 to 1883, the duty on snuff and manufactured tobacco was 50 cents per pound.

“The import duty on cigars and cheroots was $2.5 per thousand until 1842, when the rate was fixed at 40 cents per pound, which was changed to 40 per cent ad valorem in 1846 and 30 per cent in 1857 but in 1866-1867 was $3 per pound and 50 per cent ad valorem. This was changed to $2.5 per pound, and 25 per cent ad valorem, in 1868, and continued at that figure until 1883. ”

A quick comment: the Napoleonic wars were also a steep trade war between nations when trade collapsed. Tobacco consumption and imports were a key source of revenues during civil war. In  several instances those increases in taxes had the effect of reducing consumption.

To summarize from Jacobstein:

Here are few interesting set of figures dating from 1905 with the rate of taxation apparently impacting consumption.

Jacobstein writes in 1907:

“In France and Italy the rate of profits, or the tax, represents about eighty per cent of the gross selling price of the finished product, as compared with a fifteen to twenty per cent tax in our own country. Where the rate of profits is so high, the consumers are compelled to pay unreasonably high prices for their tobacco. For there is no good reason why this particular industry should be thus singled out and exploited by for government revenues.”

Tobacco: Importance of Tobacco taxes for the colonies around the American revolution period.

In Tobacco on June 16, 2012 at 2:35 am

The Tobacco was not only important for England in the early days of the American colonies, but also for the colonies taxes as well.

As Jacobstein wrote in 1907.

“The direct and indirect effect of the tobacco industry upon other social institutions must be passed by with a brief notice. Politically, the large plantation is responsible for a representative rather than a democratic government in the southern colonies; for it was inconvenient for settlers widely scattered, as a result of the large plantation system, to come together as was the case in the town meeting of the New England colonies. On the fiscal side, it might be shown how the particular methods of raising revenues were resorted to because of the existence and importance of the tobacco industry. The chief revenues came from an export duty and a poll tax; the export tax, besides being easily collected, was lucrative because so large a part of the chief crop of tobacco was exported. The ease with which it could be collected, and the difficulty of concealing the commodity in attempting to escape taxation, partly explains also the wide use of taxes on tobacco by the European government. ”

“At the outbreak of the American Revolution, tobacco was second on our list of exports in value, reaching in 1775 over one hundred million pounds, or about four million dollars. This product alone represented over 75% of the total value of goods exported from Virginia and Maryland. As a result of our independence, over 75% of this tobacco was carried directly to the continent, no longer exclusively in English vessels or by English merchants, but by Dutch and French ships as well. England´s revenues from her impost on tobacco was a handsome one. The tariff rates were very high, averaging from two hundred per cent to four hundred per cent ad valorem duty.  As early as 1686 with a duty of four and three quarter pence per pound, (the price of tobacco being about two pence) she received from this source exclusively about two million dollars. In 1764 the Crown of England thought it worth while to pay three hundred and fifty thousand dollars for the seigniorial right over the Isle of Man to prevent smuggling into England via that place. In 1700 it reached three millions five hundred thousand dollars. So far as the revenue on tobacco consumed in England is concerned, England lost nothing by our independence. Social wealth, however, she did lose by the shifting of trade profits from the pockets of English Merchants to Continental Merchants. The Tobacco trade of Glasgow, which had been the leading tobacco center of the world, was ruined.

Tobacco: government taxes and monopoly in the early days.

In Tobacco on June 16, 2012 at 1:47 am

It is often assumed that the heavy taxing of Tobacco is a recent phenomenon. The study of History brings counter intuitive results.

It is to be noted that the Government have always being meddling with Tobacco.

As Jacobstein wrote in 1907.

” A European Market for tobacco had existed for about fifty years before permanent English settlements were made in America. At the opening of the seventeenth century its sale in England was large enough to arouse anxiety among the Bullionists, who hated to see the precious metals leaving the country in exchange for “worthless weed”. In order to check its consumption, Parliament increased the import tax on tobacco from two pence to six shillings ten pence per pound. That tobacco trade had gained some importance at this early date may be inferred from the fact that by 1601 some individuals thought it worth while to buy a monopoly on the manufacture and sale of tobacco pipes.

Fortunately for the colonists, there were economic and political forces at work abroad cooperating with their own efforts to capture and develop the market. England´s practical commercial policy laid emphasis on the necessity of having a favorable balance of trade, in order to prevent too much bullion from flowing out of the country. The House of Commons voted unanimously (1620) ” that importation of Spanish tobacco is one of the causes of want of money within the kingdom.” There,  when it was learned that tobacco could be grown in the Anglo-American colonies, Parliament decided to cut off importation of Spanish tobacco, which in 1621, amount to 60,000 pounds. In 1621 Parliament enacted a law practically prohibiting the importation of foreign tobacco by levying discriminating duties in favor of colonial tobacco and against all foreign tobacco. This preferential tariff remained in vogue during the entire colonial period, and was of the important factor in building up the tobacco industry on this continent. ”

“Later developments of the tobacco trade fully justified England´s policy, for she not only was able to import from her American colonies sufficient tobacco for home consumption, but profited greatly by supplying Europe with her surplus. ”

“Nor was the King himself disinterested in the expansion of tobacco trade. For in spite of his “Counterblaste” against the use of tobacco, King James I was not opposed to increasing his income by the sale of a monopoly in the trading of tobacco. Under the pretense that a monopoly enjoyed by a few individuals would check the consumption of tobacco, the King was able to harmonize his moral repulsion to tobacco with personal financial gain. In 1621 the patent yielded James I annually as much as 16,000 pounds. Out of deference to a protest from Virginia planters against the abuse of the Tobacco Monopoly, the patent was withdrawn in 1621, but again farmed out in 1625. The farmers of the customs demanded a tax of one shilling on each pound of tobacco imported into England. The colonists, which provided for a tax of only five per cent on all imported goods and maintained that the monopoly granted to the “Farmers of Revenue” was equivalent to an additional and illegal tax. The Virginia Company fought so stubbornly against the monopoly that the King yielded and finally withdrew all monopoly rights form the “Farmers of Revenue.”

If it was to the King´s interest to have the tobacco trade grow, since the value of the monopoly privilege varied directly with the extent of the business done, all the more so was it to the interest of the Virginia Company to encourage it.

In the first charter of Virginia (1606) the London Company was allowed to impose a tax of two and one-half per cent. and five per cent on all goods “trafficked bought or sold” by English citizens or foreigners respectively. It was by no mere coincidence that the Virginia company was always back of legislation that shut out foreign goods from England´s market whenever Virginia´s products could be substituted. Mr. Sandys, who was instrumental in pushing through this legislation, especially the prohibitory act of 1624, was the first treasurer of the Virginia Company. ”

Here a personal comment: It is clear that the Tobacco trade was never a trade which escaped the government regulation or taxes. It was from the beginning a powerful source of taxes and far from being a freely trade-able commodity, it was always traded under the watch of the different forms of government during the last couple of centuries.

More on Tobacco and money

In Commodities on June 16, 2012 at 1:15 am

In a recent blog post I promised I would provide some information about Tobacco prices during the deflationary era post 1866, which has nothing to do with today´s deflationary definition. Today, debt derangement and forced liquidation due to excess debt create temporary lower prices during a rush to liquidity. This is not the true definition of deflation, this is debt derangement driven deflation. A true deflation does not have to be associated with crisis. During the whole period 1873 until 1896, there was a general fall in prices associated with a massive increase in output.

The most interesting point is that while we have shown in a previous post that processed tobacco prices kept increasing in the last 50 years, tt did just the opposite post the inflationary peak associated with the greenback episode and it happened while consumption exploded.

First of all let´s debunk the idea that larger quantities produced are associated with higher prices. Here is a long series of price of the Tobacco during the colonial period. Tobacco is a non trivial topic in the history of the United States, since it was the crop the sustained the first colonies.

Here are the price series collection by Jacobstein in 1907.

The prices are in British sovereigns (silver standard) and then in Spanish silver dollars (as the United States were on a Mexican Silver coinage well into the XIX century).

Let us now investigate more specifically the price series of Tobacco from the beginning of the civil war until after the policy of the currency contraction of McCulloch, the subsequent demonetization of Silver and finally the return of the specie payment in 1879.

Here is a table of prices from a book written by Herbert Myrick and J.B. Killebrew written in 1910.

“In this table, 100 is the basis of values, or the index number. It represents the average wholesale price of leaf tobacco for the year 1860. For the United States, this average is based on the mean wholesale quotation for the year, of all grades of leaf in the New York city and Cincinnati markets. For London, it is the average of the wholesale quotations on Virginia leaf. For Hamburg, it is the average of wholesale prices of both imported tobacco values, we add the index numbers for the United States only, or wheat, cotton, wool, and the general average for all farm products. Average comparative prices for the first six months are given, as compiled by American Agriculturist. ”

It is fairly clear that the Tobacco price follows the pattern of every other soft commodities which spiked during the Greenback period to later abate and retrench as the deflation imposed by demonetization Silver and tight increase in Gold monetary basis against a large increase in output. As a reminder here is the historical data on Greenback price of Gold.

There is however a bit of a mystery on the price of Virginia Leaf quoted in London, we will come back to later. Another price series shows the same monetary phenomenon.

From the same authors:

“This table shows the average wholesale quotation of the best grades of Kentucky leaf at New York city in January, and again in October. The same facts are given for Virginia leaf on the London market in January and July. The yearly average wholesale price of all leaf tobacco at Hamburg, is then given. Also the average value per pound of the leaf tobacco exported each year from the United States. ”

The London market again displays a pricing which is puzzling while all other price series are in agreement. The London Market and the export markets are somewhat hard to reconcile.

Another author, Jacobstein gives more information about the export prices.

While the quantities increased the price did not move much, following the pattern of other commodities and Gold price against Greenback as discussed previously.

So we have a increase in export unit and a decrease in value.

“Though steadily increasing, our exportation of manufactured products is still slight compared with our leaf exports. To begin with, the markets of France, Italy, Spain and other “Regie” countries, including Japan, are closed to us, since the governments in these countries exercise a monopoly over the manufacture and sale of tobacco products: England´s market is largely non-competitive, as the result of an agreement with English manufacturers, whereby the Trust is not to compete in Great Britain. Germany is closed to us because of her high tariff rates: thirty cents per pound on manufactured goods and only nine cents on raw leaf. In countries that do not discriminate against our manufactured products we can not compete because of the difference in the cost of labor, especially in cigars, in which machinery is more important than labor, we enjoy no technical advantages sufficient to offset the difference in general labor costs and foreign tariff duties. Consequently our exports to Europe are very insignificant, amounting all told, in 1905, to $635,000 which comprises only eleven per cent of our total exports of manufactured tobacco products, and of this one-half is shipped to the United Kingdom, partly for transhipment.”

So the export price of Virginia Leaf in London is actually somewhat of a puzzle with two different series, one very stable, the other looking like the price in US dollars. It is not to be excluded that somewhat, the currency used for measurement where the dollar and the pound respectively in those two series. However overall, the price in the United States is quite consistent.

The decline in prices was in an environment of booming production and consumption.

Now the interest of Tobacco as a reliable measure of inflation versus deflation, is emphasized by those words from Jabocstein in 1907.

” All statistics seem to point to one conclusion, that tobacco has become a fixed charge in the budget of the tobacco consumer. Although not a necessary of life in the same sense that bread and clothes are, tobacco is no longer regarded as a luxury. In a period of thirty years the demand has not only not suffered a decline, but its rate per capita has augmented. This can not be said even of those commodities which are regarded as of greater necessity, such as wheat, cotton and coffee. Tobacco consumption suffers very slightly in periods of depression, while its rate of increase is gradual in periods of prosperity. ”

To make the point a little bit more clear, here is by comparison the chart of M1 and Tobacco price in the last 50 years, within in a context of  a lot less explosive demand environment.

The large increase in consumption came with lower prices in the late XIX century while the moderate increase in consumption came with a large price increase in the second half of the XX century. The tentative conclusion seems to be that it has not to do much with the demand, the money once again as witnessed in other large monetary expansion episodes is likely the culprit.

Inflation as a monetary phenomenon during the greenback period.

In Monetary depreciations, The Greenback inflationary period on June 9, 2012 at 8:48 pm

As Mitchell wrote in 1908:

“When two countries have similar monetary systems and important business relations with each other, the movements of their price-levels as represented by index numbers are found to agree rather closely.”

This comment from Mitchell raises the question about the very different inflation indexes between Hong-Kong and the US despite sharing the same currency in the last question. Obviously the method of computation of those indexes include different items.

“This agreement is so strong that similarity of movement is usually found even when comparisons are made with materials so crude as index numbers compiled from unlike lists of commodities and computed on the basis of actual prices in different years.  It is therefore a highly significant fact that the  movements of the price-level in the United States during the years of the paper standard were almost wholly unlike the contemporary movements of the price-level in England and Germany. ”

“To facilitate comparisons between the movements of the price-levels in these three countries, Professor Falkner had Sauerbeck´s English table, and Soetbeer´s German table recomputed on the basis of his own American table — namely, actual prices in 1960 == 100. The results — reproduced in Table 6 — show a general agreement between the English and German index numbers and marked differences between both of these index numbers and the Americna index numbers during the period of the greenback standard. These differences are greatest during the years of high premiums on gold and decline with the premium as the date of  resumption is approached. After resumption, indeed, the figures indicate a closer agreement between relative prices in the United Sates and Germany than between relative prices in England and Germany. ”

Analysis of the commodities price during the 1860-1880 period.

In Commodities on June 9, 2012 at 4:06 pm

While Mitchell identifies events which impacted the desire to hoard Gold in connection to war developments, Mitchell links the developments in Gold and Commodities in general. However the development in commodities prices follows somewhat a different path.

Mitchell writes:

“Price were fairly constant throughout 1860, but fell sharply in the spring and summer of 1861, apparently because of the unsettled business conditions due to the secession of the Southern States and the prospect of civil war. Towards autumn a reaction began, probably initiated by large government purchases of supplies. The upward movement continued through 1862, save for a slight backset in April, and through the first quarter of 1863, the chief cause probably being the advance in the premium on gold – itself due to the decline in the community´s valuation of the irredeemable paper dollars in which prices were quoted.  It will be noticed that the median did not rise above 100 until October, 1862, though the other declines indicate a strong forward movement as early as January. The financial successes of the spring of 1863 and the military successes of July caused a great appreciation in the value attributed to the government´s notes and produced a slight fall in prices; but this improvement was only temporary. Prices started upward again late in 1863, rose rapidly throughout 1864 and reached their maximum in January, 1865, when 59 out of 90 commodities – almost two thirds — were quoted at double or more than double the prices of five years before. Even during this period of most rapid advance, however was not without exceptions:– the 8th decile shows a decline from July to October, 1864, and the 9th from October, 1864, to January, 1865. ”

“The end of war brought a fall of prices almost without a parallel in violence and generality. The median declined from 216 in January, 1865, to 158 in July, and all the other declines went down with it, the smallest decline being 48 points (the 2nd decile). This fall was followed by a reaction in the second half of the year which carried prices in January, 1866, back about to the level of April, 1864. From this time on until the autumn of 1871 the general trend of pries was strongly downward, though the fall was by no means uniform and was interrupted by several temporary reactions. The lively speculative movement of the early 70´s, which caused so sharp a rise in English and German prices, interrupted this fall in the United States, though the advances scored in 1872 and the first part of 1873 were irregular. ”

“After the great crisis of the autumn of  1873, prices began to fall again – slowly at first, more rapidly after 1874. In January, 1878, the medium dipped below 100 for the first time since 1861, and the fall continued until the middle of 1879. The lowest point touched by the median was 84 in April, but comparisons of the other declines show that the range of prices was on the whole somewhat lower in the following July. ”

“This great fall of price between January, 1865, and July, 1879, was coincident with irregular appreciation in the specie value of the paper dollar- an appreciation which reached its limit with the resumption of specie payments, January 1st, 1879. During these 14 years all the gain in prices made during the four years of war was lost, and something more. The final movement of the price-level which the table shows, was due to a cause quite unconnected with the currency — namely, the European crop failures of 1879 — . “

The link between gold prices and commodities.

In Commodities, The Greenback inflationary period on June 9, 2012 at 3:25 pm

In the 1913-1920 massive stagflation that the US witnessed, the Gold price was artificially tied to the paper. The bullion was not freely shipped overseas, the specie was moved out of the circulation and sequestered in the central bank for “patriotic motives”, so the Gold price was artificially repressed downwards. This created massive problems in the late 1920s, forcing a sharp devaluation in the US against Gold. The problem was recognized as early as 1920 by economists like Kemmerer who advocated for a new price of Gold in order to restore the ratio of the monetary base and deposits to the Gold reserves. This has been discussed in previous posts. So in the 1913-1920 episode commodities and Gold had their separate ways because of a repressed system and artificial low parity of Gold. We had again the same in the Bretton Woods episode, an artificial parity which proved non sustainable either because the principle advocated by the currency school were not followed.

In the greenback episode, we have an interesting way to check the link between commodities and Gold.  In that period, the rest of the world was in the last days of a bimetallic standard in France, and on a Gold standard in the UK. At the same time commodities were freely traded and measured in greenback, also Gold was freely traded against the greenback.

Mitchell in 1908 provides an interesting study about the link between Gold prices and Commodities during the greenback episode.

” The one topic which can be treated on the basis of these tables is the connection between the fluctuations of the price of gold and the fluctuations of the price of gold and the fluctuations of the relative prices of commodities and labor. And this topic, of course, cannot be taken up until the tables of relative prices and wages have been presented. ”

” On studying the table on finds that the wholesale price-fluctuations of 1860-1880 were characterized (1) by extraordinary diversity in the degree of rise and fall of different commodities, and (2) by a strongly market upward trend culminating in January, 1865, and a strongly market downward trend culminating in July, 1879. Both of these characteristics require analysis. ”

” Some commodity had a relative price less than 100 on every date except January, 1866, and some commodity stood above 300 every date after 1861. ”

Mitchell continues:

“The narrowest range after 1861 was 259 points in the scale of relative prices (October, 1870); the widest range was 1321 (July, 1864, when cotton had a relative price of 1410); and the average range was 422.5 points. The extremely high and extremely low relative prices are shown, however, but few commodities. Four-fifths of the list are distributed over an average range of 94.4 points- less than a quarter of the average range of 94.4 points-less than a quarter of the average extreme range:– and two-fifths over an average range of but 33.7 points.

Inflation Today

In Uncategorized on June 4, 2012 at 3:57 pm

I usually do not comment on current events. But since this charade goes on and on about inflation deflation, I want to post here the most visible proof that there is maybe deflation in certain areas of the economy, but there is one commodity, which was used in the XVII and part of XVIII century as a form of currency in Virginia ( , which was used as a form of currency in Weimar republic and during the second world war and which is still used in jails as a form of currency which is screaming inflation. I am talking about Tobacco and cigarettes. There is one index on Bloomberg which shows the price evolution of processed tobacco, the supply is very stable and demand is very stable. The price of Tobacco went up 28 times since 1959. In the first chart we have M1 and processed Tobacco, in the last we have the recent 15 years on Tobacco price. For anyone doubting about the effect of monetary expansion on the most  non substitutable commodity, with the most stable demand and supply, which the speculator can not distort since there are no future contracts here is the proof.

This is the most obvious indictment of the Fed. We have a 6.2% increase annually since 1959, fitting perfectly the M1 Index. This is a regime which steals constantly from the depositors (except during Volcker era, which naturally put back Gold in its box). Volcker was the only sound man in command in the last couple of decades.

So is the Processed tobacco commodity 28 times more valuable? Or is it the money which is dubious along with the ~economic growth~which has to be put into a completely different context?

Tobacco companies do not lower cigarette prices in deflation, but increase them easily in inflation environment, dividend paying gold if you will, with no risk of confiscation, and a nice put in case of real deflation (the dividend does not increase but it does not decrease either in true deflation, –I am actively looking for data series during 1873-1896 apologies–), but this is besides the point. The point was to prove inflation once and for all. Now another chart, we have British American Tobacco versus the Barbaric Relic in the last 10 years.

And finally to close the debate I think about whether we have inflation outside of the ~civilized economy~, here the price of processed Tobacco commodity in the last 15 years. No one can claim substitution (there is none), no one can claim large increase in demand, no one can claim supply disruption, no one can claim speculation because traders can not trade this index (yet). The Fed is the culprit.

A more detailed account of Gold fluctuations related to the event developments

In Uncategorized on June 3, 2012 at 9:14 pm

As Mitchell further wrote:

” The first period shows five well market subdivisions. (1) January to April, 1862, when the hope of ending the war in the spring was high, the premium was small and steady. (2) From April, 1862, to February, 1862, the occurred an almost unbroken advance in the premium connected with the failure of McClellan´s peninsula campaign, the second issue of the greenbacks, the administration´s losses in the autumn elections, Chase´s depressing finance report, Burnside´s defeat at Fredericksburg, and the third legal tender act. (3) From March to August the premium fell, mainly because of Mr Jay Cooke´s success in selling bonds, the victory of Gettysburg, and the capture of Vicksburg and Port Hudson. ”

“(4) From September to July, 1864, the premium rose again because of disappointment over Lee´s escape, lack of military progress, the dilatoriness of Congress in voting taxes, the Treasury´s futile campaign against speculators in gold, and the difficulty in selling bonds. (5) Finally the fall of the fall of the premium from August, 1864, to May, 1865, was brought about by the victories of Grant, Sherman, and Sheridan which put an end to the war. ”

One should then draw his own conclusions about the prospects of a war on the price of Gold.