known table of English prices is that of Mr. Augustus Sauerbeck, published annually in the Journal of the Royal Statistical Society since 1886. He uses as the base line the average prices of the years 1867-1877 and computes his index numbers by a simple unweighted arithmetical average. The Sauerbeck index number is criticized because it includes only thirty-seven articles,1 and these are all staple raw products, such as wheat, coal and iron.. The Soetbeer index number was made from the commodities entering the port of Hamburg and covered the period from 1847 to 1891. Soetbeer took the total quantity and price of each article and computed the average price on a simple arithmetical basis.

The most important table of American prices is that prepared by Dr. Roland P. Falkner for the Senate Committee on Finance in 1893. In compiling this table ninety commodities were used for the period 1840-1891 and between 1860 and 1891 two hundred and twenty-three commodities were included. Prices for the year 1860 were selected as the base and by using the method of the arithmetical mean, tables were made both from weighted and unweighted prices. The principal groups included in the two hundred and twenty-three articles were: food, cloths and clothing, fuel and lighting, metals and implements, lumber and building materials, drugs and chemicals, house furnishing goods, and miscellaneous articles such as powder, rubber, soap and starch. To show the effect of price changes upon the working classes Dr. Falkner compiled price tables in which various articles were weighted according to their importance in the average family budget. It will be remembered that from 1862 to 1879 the standard money of this country was not gold, but the depreciated greenback. In order to show what the index number would have been if gold had been the actual standard, Falkner in his table reduced the greenback prices for the years. 1 The Sauerbeck index number as continued in the London Statist is based on 45 commodities.

1862-1879 to the gold standard, using the premium on gold as the measure of the depreciation of paper money.

The price tables of the Falkner Report extended only to 1891, but the Department of Labor subsequently issued a series of wholesale prices from 1890 to 1899. In 1902 that Department began a new series, based upon the period 1890-1899, which with some modifications has been continued by the Bureau of Labor Statistics. In 1914, however, the Bureau adopted a new computation, using as the base (100) for its index numbers the wholesale prices of the latest year.1 The Bureau explains that this change was made "for the purpose, first, of utilizing the latest and most trustworthy price quotations as the base from which price fluctuations are to be measured, and, second, to permit of the addition of new articles to those formerly included in the index number."

Other convenient tables of prices are those published each month by Dun's and Bradstreet's, the former including 350 articles, the latter 106. In both cases the index number is obtained by the simple process of summation, that is, by adding together the prices of all articles included. Tables showing the movement of prices in Canada are published by the Canadian Department of Labor.

No system of index numbers yet devised can be said to give an accurate indication of changes in the purchasing power of money over a long period of years. In the first place the index number shows the relation of the value of money to commodities only, and takes no account of such important items as wages and rent. To determine the value of money with respect to labor it would be necessary to construct an index number based upon wages, but wages vary so widely in different communities and in different employments that it is difficult, if not impossible, to determine the average rate of wages. Then, again, index numbers are based upon wholesale prices rather than retail

1 See Bureau of Labor Statistics (1915), Bulletin 181, p. 239. The present series is based on the year 1913 to provide a pre-war standard for measuring price changes.

prices, due in part to the difficulty of obtaining reliable data for retail prices. Though a rough correspondence exists between wholesale and retail prices, the relation is not sufficiently close or constant to make an index number based on wholesale prices an accurate reflection of the purchasing power of money with respect to all goods. Still further, changes in human wants are constantly going on, so that commodities of great importance in one period may become of slight importance in another period, while entirely new articles may come into use. These changes must be taken into account if the index number is to serve its purpose. Frequent revisions of the tables may meet this difficulty in part, but under such conditions absolute accuracy cannot be expected.1

Index numbers are constructed with reference to the purpose to be served. If, for example, we want to know the effect of changes in the price level on the workingman retail prices should be used and rents and wages should be taken into account. But if the purpose is simply to indicate the changes in the general purchasing power of money, then wages and rent can be excluded, for they are already counted in the prices of commodities. For this purpose, too, wholesale prices serve just as well as retail prices. In general, it may be concluded, a table based upon the prices of representative articles of general consumption serves fairly well to indicate changes in the value of money.

49. Transmission of price changes.—It is a familiar economic phenomenon that price changes are not uniform or instantaneous, but spread in waves from commodity to commodity and from country to country. This can best be understood by tracing the effect of new supplies of gold. When the miner sends his gold to the assay office and then to the mint he receives at once the money equivalent for it at the rate of $18.60 an ounce. This money he will either spend or deposit in a bank. If he

1 See Annual Bulletin of the U. S. Bureau of Labor Statistics on Wholesale Prices.

spends it, his purchases of goods will quicken the demand for them and so tend to raise retail prices. The merchant who receives the money uses it to replenish his stock and his buying will tend to increase wholesale prices, and so on through the entire business cycle. If the miner, instead of spending his money, deposits it in a bank similar results will follow. With increased gold reserves the banks will have larger funds available both for time loans to merchants and for call loans to stock exchange brokers.1 Lower interest rates, which are likely to accompany increased bank reserves, will quicken stock exchange transactions in securities, and increase dealings in, and the prices of, speculative staples such as cotton and grain. The merchant and the manufacturer, also, find it easier to borrow money, and so with rising prices and improving markets the demand for general merchandise and for labor is stimulated. In a period of rising prices like that of recent years, wages are generally last to respond to the change. The wageearner and the recipients of fixed incomes, therefore, are at a disadvantage in that they have to pay higher for all commodities while their money incomes remain fixed or advance but slowly. In general it may be said that a rise in price is felt first in speculative securities and commodities, then in the wholesale business, next in the retail trade, and last in wages and rent.

The disturbance of prices caused by a large increase in the supply of money without a corresponding increase in exchanges is transmitted not only from commodity to commodity and from group to group, but also from country to country. The country producing and using the new supplies of gold will ordinarily be the first to feel the effect of the resulting rise in prices, but it cannot permanently retain more than is needed, unless the new gold is substituted for other forms of money which are retired to make a place for it. Rising prices in the gold-producing country will tend to increase imports and decrease exports of merchandise and so create an international balance that 1 Johnson: Money and Currency, p. 128.