Thomas Tooke

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.

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