Thomas Tooke

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.

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