Thomas Tooke

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Polybius today

In Commodities on June 16, 2013 at 9:50 pm

In previous posts I put data recorded by Polybius (200 BC) about the prices of certain commodities one to the other, I also recorded data from Mitchell during the civil war. Today it seems that we have a repeat of tracking prices, interestingly between Food Commodities and Silver from 2008 until recently. This relationship has broken post the 5 sigma move on Gold. A large gap is forming, would the tracking return at some point one way or the other? (food tracking silver down or the other way around silver gaping up is hard to say) History does suggest so. Evidently when Silver was money, nothing happened. As Thomas Tooke mentioned over a full century, the average price of wheat only increased by 0.5% (not per year, over 100 years).

Silver and Food, Gap forming


The sequence of Price increases during the Greenback standard period

In Commodities, Inflationary Periods on August 12, 2012 at 8:43 pm

As we have seen before Gold, the commodity form of money was the first to spike up and indicate rise in prices. What happens next is to compare the behavior of Food and Non Food commodities during this inflationary period.

Those charts describe the behavior of food and non food commodities with the median of each category across time with the data on lower deciles on the left and higher deciles on the right.  Initially the non-food commodities increase in price faster than the food commodities.

However food commodities increase in price and peak around January 1865 at around the same as the Gold peak in price.

How did Gold track commodities during the Greenback period?

In Commodities, The Greenback inflationary period on August 12, 2012 at 8:05 pm

How Gold and commodities evolve one against the other in a paper standard. There is fortunately a precedent which is quite instructive, and this precedent is the Greenback era. There are plenty of interesting statistics. Wesley C. Mitchell provides a context of price fluctuations between commodities and Gold. As we will see, in fact Gold and commodities have move in tandem with the Gold price anticipating the increase in price and being sensitive to political developments.

In the tables below, Mitchell provides a range of commodities price in deciles and measures if the Gold is above or below the median increase in commodities price. Non surprisingly, as a commodity form of money Gold evolves in the middle of the distribution of commodities prices.

As we can see initially, Gold races off faster than commodities, as the range of price by the end of 1862 climbs between the 6th and 8th decile of commodities.

As we can see after a flare up in January 1865, Gold starts to lag commodities for the rest of 1865.

While the Greenback standard is referred as a high inflationary period, in fact it is nothing compared to today´s situation as the government debt to GDP stood at only 50% at the top of the war. Had the war lasted longer though, the currency would probably have been destroyed. It is notable to see the price of Gold contract, however one should know the events related to this lower price of Gold in paper. McCulloch implemented his policy of contraction in 1866.

As one can see, the policy of repaying the debt and contracting the currency made price lower. This type of deflation was not a debt-derangement deflation event, but a reduction of the circulation in order to reward those who had carried the greenback and had suffered dear prices. (How different times! Today, which politician would care about rewarding the savers in paper money, only Volcker cared!). 1873 is marked by a global contraction and the demonetization of Silver, hence cash is getting harder on top of the policy implemented. In fact in 1873, in order to fight a bit the effects of the contraction, more greenback were issued.

The year 1874 is marked by a slight rebound in Gold price from the contraction days of 1873. However the policy of contraction is maintained until 1879, when the Gold is brought back to its initial parity with paper and the convertibility is restored.

What commodities to buy during a war period?

In Commodities on August 4, 2012 at 5:26 pm

As previously mentioned Gold and commodities seem to be joined at the hip, yet with a great disparity of prices across the board. An interesting question which might be relevant today is to look at what commodities would benefit from a conflict? Is a ~war premium~ on oil warranted, is it a new phenomenon ? The historical series of the Greenback episode are instructive in that respect.

Mitchell wrote in 1908.

“The widest range of commodity prices was 1321 points (in July 1864, when cotton had a relative price of 1410, which meant that the war had the result of making the price increase many folds. “Evidently such an outcome was due to the disruption of production and shipments of cotton farms in the South. Would today a disruption of the Straight of Ormuz generate anything else than a large spike in price?

But one can be more creative, as we know China controls a large portion of the rare earth supplies of the world, should a conflict result in some tariff hikes, and constraints in supply, the hoarding and backwardation resulting from this set of global trade constraints would probably mimic what Thomas Tooke described as one of the key reasons for price hikes of commodities during the bank restriction episode.

As Thomas Tooke reflected in 1838 on the price hikes during the bank restriction in the UK:

“The remaining question is, what effects are to be ascribed to war as regards supply? And the answer may be, in general terms, that it is the tendency of war to diminish supply. The mode in which was may be calculated to operate to this effect, is 1st, by a diminution of production, and 2ndly, by increased cost of production, and by impediments to commercial communication. ”

Here one must reflect upon that reality. As we well know Silver is used for electronics heavily and for solar panels and other key technologies.  In case of a conflict, we might see the US dollar getting strong and Gold getting strong if the former is wrongly perceived as safe while the later somewhat less disputable from a typical historical response. In the end people are free to decide what they believe is the best store of value and they might decide that what the government decide is the mean of exchange is a very poor store of value.  But let us consider Silver now. If Gold were to spike with a conflict, Silver might spike for monetary reasons as well, but what would happen to the flow and constraints in trade of the metal which is a critical component for maybe many high-tech applications not only strategic but also part of the backbone of our modern economic system?

Thomas Tooke in 1838 writes:

“It will be readily admitted, that the immediate and obvious tendency of a state of war is to abstract a portion of the capital and labour, which would otherwise have been employed in reproduction; and if, from the course of military operations, or from arbitrary government exactions,  and apprehension should be superadded of insecurity of property, there will be a further cause for diminished production; so that dearth and impoverishment are likely to be the consequences of a state of war in a country thus situated. It is probable that circumstances of this kind operated in diminishing and deteriorating the cultivation among some of the states of the continent of Europe, in different periods of the war. In the early part of the war, the extensive military operations were calculated to diminish the produce of the Netherlands, Germany, and Italy; and, at the same time, the political convulsions attending the revolutionary period might affect the extent and quality of cultivation of the land in France.

In the subsequent periods of the war the course of military operations can hardly have failed to diminish the produce of Poland, Prussia, Saxony,and Russia, as likewise of Spain, Portugal, and Italy. And while causes like these were, perhaps,operating in a diminished reproduction in some of the countries alluded to, there were circumstances arising out of the war, which, beyond all question, added greatly to the cost of production in this country; these were—

1. The increased rate of interest of money, which, more especially as regarded all outlay as fixed capital, formed an important element in the calculation of the price at which reproduction could be continued, or a new production afforded.
2. The increased rates of freight and insurance, which applied to the whole period of the war, but which in the last six years of it amounted (as will be seen when the period comes under consideration) to an enormous charge on all importations from the continent of Europe. And, although the greatest charge under this head applied to our foreign trade, there was also a great increase of freight and insurance attaching to our coasting trade, forming no inconsiderable item in the cost of all commodities, the more bulky ones especially,such as corn, coals, building materials, &c. conveyed coast-wise. “

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.

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 — . “