Approximately one-third of this immense mass of securities represents promises to pay gold at various dates in the future, and the value of the commodity which these bonds promise to pay is falling with every advance in the average price of other commodities. Standard railroad bonds which, fifteen years ago, were selling on a 31⁄2 per cent. basis, have now fallen in price until they yield between 44 and 434 per cent., and their decline is persistent. During the past year, the decline in the prices of all kinds of bonds has been noteworthy. Every variety of bonds-railroad, industrial, municipal-has suffered from the depreciation of investments. On the other hand, this same period which has witnessed such a marked decline in the value of bonds has shown an even more pronounced advance in the prices of stocks. The average price of 36 standard railroad and industrial stocks in 1896 was $62.50; in May, 1912, this average price had almost doubled, rising to $118. The reason is as follows: A share of stock represents a right to participate in the distribution of profits of the corporation. These profits tend to increase during periods of rising prices, because the costs of production and distribution, including a large amount of fixed expense, as, for example, interest, depreciation, etc., do not advance to correspond with the increase in the selling value of the product. Every business which depends upon the sale of a commodity has felt the stimulating influence of rising prices. Even the public-service corporations, whose prices and rates are fixed by law and custom-the railroads, street-railways, gas, electric light, and water companies-have profited enormously from the immense business which the advance of prices has so greatly assisted to produce. It is no wonder, therefore, that the prices of the stocks which promised their holders participation in this recent flood of industrial profits should have scored such rapid advances. Here, then, is the situation. The advance of prices shows no sign of stopping. With every increase in commodity prices, the purchasing power of gold declines. Every form of corporate debt, every variety of bonds, is a promise to pay this commodity which is so rapidly depreciating in value. Of necessity, therefore, prices of bonds decline as the prices of commodities advance. On the other hand, rising prices mean rising profits, and the prices of stocks which participate in those rising profits advance far more rapidly than bonds decline. The conclusion is inevitable, and Mr. Price has no hesitation in emphasizing it in the strongest possible terms. If the advance of prices is to continue, the investor should discriminate against all bonds, mortgages, and notes which are simply contracts to deliver at a future date so many grains of gold, since the purchasing power of that gold is constantly diminishing, and should prefer agricultural, timber, and mineral lands, and corporation stocks. In other words, if the depreciation of gold is to continue, the prices of bonds must persistently depreciate. Any one buying a security carrying a fixed income, whether a bond or a preferred or guaranteed stock, must face the probability of a fall in the price of his investment. On the other hand, those who put their money into property or certificates of interest in corporations which give them the right to participate in the profits of industry, can look forward to a steady appreciation in the money value of their investments. These statements challenge attention. I have stated them in the baldest possible manner, so that the issues which they raise can be set forth with entire distinctness. If the depreciation of gold continues, bonds must come down and stocks must rise. If a survey of the situation shall lead us to the conclusion that the depreciation of gold will at no distant date work its own remedy in arresting the increase in the production of gold, then these pessimistic utterances can be subject to the moderating influence of a heavy discount. XXIII PRICE MOVEMENTS SINCE 1865 In the previous chapter we reviewed the pessimistic conclusions expressed by Mr. Theodore H. Price concerning the future of bond prices. These conclusions are, in effect, that the prices of fixed interest bonds will continue to decline, while the prices of commodities and land will continue to advance, and they are based upon the assumption that the supply of gold will continue to increase for an indefinite period. In order to see what basis there is for this conclusion, it is necessary to examine into the history of gold production and prices. This is not the first experience the world has had with high prices. In fact, the prices of 1911, measured by the quotations of forty years ago, are extremely moderate. The highest prices ever reached since accurate records have been kept were in 1873, when the average of 45 staple articles of commerce stood at III per cent. of the average from 1867 to 1877, which was taken as the standard. From this point, during the next twenty years, |