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The determinants of gold hoarding in Argentina, 1900-1914 Preston, David Frank 1969

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THE DETERMINANTS OF GOLD HOARDING IN ARGENTINA, 1900 - 1914 by DAVID FRANK PRESTON B.A. , Queen's University, 1967 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS in the Department of Economics We accept.this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA August, 1969 In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f t h e r e q u i r e m e n t s f o r a n a d v a n c e d d e g r e e a t t h e U n i v e r s i t y o f B r i t i s h C o l u m b i a , I a g r e e t h a t t h e L i b r a r y s h a l l m a k e i t f r e e l y a v a i l a b l e f o r r e f e r e n c e a n d S t u d y . I f u r t h e r a g r e e t h a t p e r m i s s i o n f o r e x t e n s i v e c o p y i n g o f t h i s t h e s i s f o r s c h o l a r l y p u r p o s e s may b e g r a n t e d b y t h e H e a d o f my D e p a r t m e n t o r b y h i s r e p r e s e n t a t i v e s . I t i s u n d e r s t o o d t h a t c o p y i n g o r p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l n o t b e a l l o w e d w i t h o u t my w r i t t e n p e r m i s s i o n . _ , Economics D e p a r t m e n t o f The U n i v e r s i t y o f B r i t i s h C o l u m b i a V a n c o u v e r 8, C a n a d a August, 13, 1969 ABSTRACT The t h e s i s s e t s out to determine the causes of the g o l d h o a r d i n g and d i s h o a r d i n g i n A r g e n t i n a between 1900 and 1914. I t was found t h a t g o l d ( d i s ) h o a r d i n g was p a r t of a mechanism whereby the money supply was a l t e r e d t o meet demand through the exchange of g o l d pesos f o r paper. S p e c u l a t i o n was impor-t a n t o n l y i n l a t e 1913 and 1914 when the p o s s i b i l i t y emerged t h a t paper would become i n c o n v e r t i b l e , the p r i c e of g o l d would r i s e and c a p i t a l gains would accrue to g o l d h o l d e r s . F i v e assumptions were made: (1) t h a t the money supply was a f u n c t i o n of the g o l d stock, (2) t h a t the demand f o r money was a f u n c t i o n of the l e v e l of income, (3) t h a t the N e o c l a s s i c a l e x p l a n a t i o n of the determination of income f i t t e d A r g e n t i n a d u r i n g t h i s p e r i o d , (4) t h a t p r i c e and money income l e v e l s were given on world markets, and, (5) t h a t the l e v e l of exports determined the l e v e l of income. In A r g e n t i n a d u r i n g the p e r i o d 1900 - 1914, g o l d served two f u n c t i o n s : (1) i t p r o v i d e d the money supply, and (2) i t balanced the i n t e r n a t i o n a l accounts. The t h e s i s argues t h a t although A r g e n t i n i a n s were c o n s t r a i n e d by f i x e d l e v e l s o f p r i c e s and income and by the r u l e s of the g o l d standard they were able t o a l t e r the r e a l supply of domestic currency by ( d i s ) h o a r d i n g g o l d from t h e i r i private stocks. Hoarding was found to be correlated with the velocity of money. Consequently i t is argued that gold was used to adjust the money supply toward the level of income regardless of what the level of income was. Gold was also found to be correlated with income, although less highly than with velocity. Consequently gold tended to be dishoarded in years after a good spring crop when paper was needed to buy land and real estate and to expand production. In this way gold acted as a precautionary asset which could be used to make advantageous purchases and which was secure in value, the two criterion suggested by Keynes. However, gold behaved in the opposite way to the precautionary balance described by Friedman who fe l t that the asset would be dishoarded when income was low. Other possible determinants of gold (dis)hoarding were tested and rejected. Two proxies for the interest rate, r a i l -road receipts, and the note issue (the money supply) were correlated with gold (dis)hoarding but the coefficients were not significant. The thesis also suggested that the definition of balance of payments equilibrium should allow for a persistent gold import which would provide a domestic money supply. In equilibrium the rate of gold import equals the rate of growth of income i f a constant velocity of money i s desired. A second subconclusion was that the international import of gold responded to demands for i i reserves made by the countries doing the trading. Although these demands were satisfied in the long run, they were not satisfied in the short run, and gold (dis)hoarding took place. i i i TABLE OF CONTENTS Page Tit l e Page Abstract... i Table of Contents iv List of Tables v Acknowl edgment vi Introduction. 1 Chapter 1 - Historical Background and the Assumptions of the Model 4 Chapter 2 - Determinants of Gold Import 31 Chapter 3 - The Private Demand for Money and Gold 40 Chapter 4 - Application of the Model to Argentina 52 Bibliography 64 Appendix A - The Size of the Money Supply - The Arithmetic 70 Appendix B - Gold Imports in the Short run - The Arithmetic 72 iv LIST OF TABLES TABLE PAGE 1 Argentine Actual and Potential Note Issue, 14 1900 - 1914 2 Changes in the Size of Private Gold Hoards, 16 Argentina, 1904 - 1914 3 The Money Supply in Argentina, 1908 - 1914 19 4 The Velocity of Money in Argentina, 1884 - 1914 22 5 Potential and Actual Velocity of Money, 54 1900 - 1914 6 Deviation of the Velocity of Money about the 58 Average Velocity of Money 7 The Sign of the Change in Gold Imports 74 v ACKNOWLEDGMENTS I would like to express my appreciation to Dr. P.A. Neher, Department of Economics, University of British Columbia who provided direction during the preparation of this thesis. Appreciation is extended to Miss Sheila MacBain who proof-read the thesis and suggested many invaluable improvements. I am indebted to Miss Linda Lavergne who typed the draft and to Miss Anneliese Berger who did the final manuscript at very short notice. v i INTRODUCTION The economic features of Argentina in the period 1880 - 1900, were the opposite of those that were to prevail from 1900 - 1914. While the earlier period had been one of slow, uncertain economic growth, the later one saw rapid, sustained expansion. Whereas the export and landed class, the dominant p o l i t i c a l group, adopted a flexible exchange rate in the f i r s t period because i t was in i t s economic interest, when economic conditions changed the group ensured that the gold standard was resumed (Conversion Law of 1899). A.G. Ford, the principal source on the gold standard in Argentina, has noted that, despite the stability of the period of expansion, there was substantial gold hoarding and dishoarding (defined as the movement to and from private holding of gold) in Argentina.** This thesis seeks to explain this gold hoarding and dishoarding. It i s suggested in this thesis that gold (dis)hoarding in Argentina was determined by the demand for money under the gold standard and was highly correlated with the velocity of money (defined as the ratio of money income to money supply). Five assumptions are made about the Argentine economy: (1) that the money supply was a function of the gold stock; (2) that money demanded was a function of the level of exports; *A.G. Ford, The Gold Standard 1880 - 1914; Britain and Argentina, (Oxford University Press, 1962), p. 97 1. 2 (3) that the levels of money income and price were given on world markets; (4) that the level of income was a function of the level of exports; and (5) that the Neoclassical explanation of income determination applied to Argentina during this period. The hypothesis i s developed from these five premises. Since gold imports were determined by the balance of international payments, by assumption the money supply also depended upon the inter-national accounts. However, the demand for money depended upon the level of income and the level of exports. In the long run the supply of gold via the international accounts grows at the same rate as the level of income and the level of exports; but in the short run this equation need not hold and the demand for money (on these assumptions) does not equal the supply. The balancing item in these circumstances i s the private stock of gold. This paper argues that gold flowed to and from private holdings in response to demands for domestic paper. The private demand for gold in Argentina in the period 1880 - 1900, can be explained by speculation against changes in the value of the paper peso. Chapter 1 of this paper contrasts the period under flexible exchange rates (1880 - 1900) with that under the gold standard (1900 - 1914). It also demonstrates that the choice of exchange rate depended upon the exporters and the 3 landed class who were able to select by legislation the system which caused the distribution of income to shift in their favour. In the second half of Chapter 1 the assumptions of the model used subsequently in the thesis are discussed. Building on the five assumptions, Chapter 2 develops the conditions of gold import in both the short and long run. It w i l l be found that in the long run the rate of growth of gold imports equals the rate of growth of income and of the demand for money. In the short run the size of the gold import need not equal the change in the demand for money. Chapter 3 examines the demand for money and for gold and suggests that in the short run gold (dis)hoarding f i l l s the gap between the demand for money and the supply of money. Chapter 4 provides s t a t i s t i c a l substantiation for these propositions, draws conclusions and makes some observations for further study. CHAPTER 1 HISTORICAL BACKGROUND AND THE ASSUMPTIONS OF THE MODEL The central feature of the political-economic structure of Argentina between 1880 and 1914 was the dominance of the exporting and landed class. According to Ford this group was able to alter the exchange rate system to that which shifted the distribution 2 of income in i t s direction. * Under a flexible exchange rate, Ford argues, income shifted toward the exporters i f the rate was depreciating. He claimed that this shift was caused by two factors: (1) the gold value of income from exports was rising more rapidly than costs which typically were paid in paper; and (2) debts which were payable in paper could be repaid at lower real cost. Consequently when the paper peso began to depreciate the exporters applied pressure to adopt a flexible exchange rate. When paper began to appreciate they sought to f i x the rate. Monetary reforms legislated in 1881 by the Argentine govern-ment established parity between the gold and paper pesos but this rate was inappropriate and a premium soon appeared on gold. Ford believed that the failure to maintain parity between gold and the paper peso was due to the pressure on the paper peso caused by the 2* Ibid, P. 90 - 1 4 5 a d v e r s e b a l a n c e o f payments and t h e s p e c u l a t i o n a g a i n s t t h e p r i c e 3. o f paper. By 1884, t h e attempt t o m a i n t a i n t h e p r i c e o f paper had r e s u l t e d i n a net d r a i n o f 77 m i l l i o n paper pesos i n g o l d . Of t h i s amount 50 m i l l i o n was absorbed i n t o p r i v a t e h o l d i n g s i n t h e e x p e c t a t i o n t h a t t h e p r i c e o f g o l d would r i s e f u r t h e r and c a p i t a l g a i n s would a c c r u e t o g o l d h o l d e r s . The remainder o f t h e g o l d withdrawn from t h e banks was used t o f i n a n c e t h e d e f i c i t i n t h e b a l a n c e o f payments. I n 1885, s p e c i e payments were suspended and A r g e n t i n a adopted a f l e x i b l e exchange r a t e as a r e s u l t o f p r e s s u r e from t h e e x p o r t e r s . F o r d s t a t e s t h a t two l a t e r e v e n ts brought a f u r t h e r d e p r e c i a -t i o n o f t h e v a l u e o f paper c u r r e n c y . The f i r s t was t h e e x p a n s i o n -a r y b a n k i n g and c r e d i t p o l i c y w h i c h was p u rsued by t h e Celman a d m i n i s t r a t i o n , e l e c t e d i n 1887. D e s p i t e heavy i n f l o w s o f funds from abroad and s u c c e s s i v e e x p o r t booms, t h e g o l d p r i c e o f paper 4. f e l l . The second event was t h e s h a r p f a l l i n e x p o r t s and l o a n s i n 1889. T h i s c o u p l e d w i t h s t e a d i l y r i s i n g i m p o r t s and debt i n t e r e s t payments, l e d t o a sharp d e c l i n e i n t h e p r i c e o f t h e paper peso. D u r i n g t h e 1890's, c a p i t a l i m p o r t s t o A r g e n t i n a were n e g l i g i b l e and, a l t h o u g h e x p o r t s r o s e s t e a d i l y , t h e paper peso 5. f a i l e d t o s t r e n g t h e n . 3 " I b i d . , p. 136. 4 ' I b i d . , p. 141 - 2. 5" I b i d . , p. 143. 6 F o r d shows t h a t i n A r g i n t i n a t h e l a s t two decades o f t h e n i n e t e e n t h c e n t u r y were c h a r a c t e r i z e d by l i m i t e d economic growth and by i n s t a b i l i t y o f t h e do m e s t i c c u r r e n c y but t h a t t h e p e r i o d 6. a f t e r t h e t u r n o f t h e c e n t u r y w i t n e s s e d s u b s t a n t i a l growth. T h i s growth, based on t h e i n c r e a s e d p r o d u c t i o n o f g r a i n , beef and h i d e s , had begun b e f o r e 1900 and had caused an improvement i n t h e b a l a n c e o f payments and an a p p r e c i a t i o n o f t h e paper peso. The e x p o r t e r s responded by p r e s s i n g f o r a r e t u r n t o c o n v e r t i b i l i t y i n o r d e r t o p r e v e n t f u r t h e r i n c r e a s e i n t h e p r i c e o f paper and adv e r s e s h i f t s i n t h e d i s t r i b u t i o n o f income. A c c o r d i n g t o t h e C o n v e r s i o n Law o f 1899, g o l d was f r e e l y c o n v e r t i b l e i n t o paper a t t h e r a t e o f 100 paper t o 44 g o l d pesos 7. (which was t h e p r e v a i l i n g r a t e a t t h e t i m e ) . A c o n v e r s i o n fund was e s t a b l i s h e d w i t h a l i m i t o f 30 m i l l i o n g o l d pesos and t h e c h i e f bank, t h e Bank o f t h e N a t i o n , was e n t r u s t e d w i t h t h e fund d e p o s i t . G o l d i m p o r t s c o u l d be exchanged a t t h e C a j a de Con-g v e r s i o n o r t h e y c o u l d be d e p o s i t e d w i t h t h e commercial banks. P a p e r , i n s t e a d o f g o l d , was t h e o n l y c u r r e n c y i n A r g e n t i n a between 1900 and 1914. I f g o l d was exchanged f o r paper o r d e p o s i t e d i t l e d t o e x p a n s i o n o f t h e money s u p p l y s i n c e t h e banks were r e q u i r e d t o h o l d a t l e a s t 25% o f t h e i r d e p o s i t s i n c a s h . I f z e r o g o l d 6 ' I b i d . , p. 143 7 I b i d . , pp. 9 5 - 6 g They c o u l d a l s o be h e l d p r i v a t e l y ( hoarded). I n t h i s case t h e y d i d not l e a d t o an expanded money s u p p l y . 7 ( d i s ) h o a r d i n g i s assumed A r g e n t i n a i n e f f e c t , behaved a c c o r d i n g t o t h e r u l e s o f t h e g o l d s t a n d a r d i n a l l o w i n g g o l d i m p o r t s t o a l t e r t h e d o m e s t i c s u p p l y o f money. E x p a n s i o n between 1900 and 1914 was e x t e n s i v e . F o r d r e p o r t s t h a t i m p o r t s grew a t 7.5% per annum, note i s s u e i n paper pesos a t 8.8%, r a i l r o a d r e c e i p t s a t 9.5%, home consumption o f wheat 9. a t 5.4%, and t h e p o p u l a t i o n a t 4.0%. F e r r e r shows a r i s e i n g r o s s p r o d u c t o f 5.5% per annum and a p o p u l a t i o n i n c r e a s e o f 4.2%; income per c a p i t a grew a t 1.3% per annum.^' Renewed c a p i t a l e x p o r t s accompanied t h e e x p a n s i o n ; f o r e i g n i n v e s t m e n t i n c r e a s e d 11. from 1,013 m i l l i o n g o l d pesos i n 1900 t o 3,240 i n 1913. F e r r e r c l a i m e d t h a t i n c r e a s e s i n t h e c a p i t a l s t o c k amounted t o 6% per 12. annum w h i l e i n v e s t m e n t was 39% o f g r o s s p r o d u c t . S m i t h i e s showed t h a t i n v e s t m e n t c o n s t i t u t e d 45% o f g r o s s n a t i o n a l p r o d u c t 13. and t h a t 40% o f t h e c a p i t a l s t o c k was f o r e i g n - o w n e d . F o r d b e l i e v e s t h a t wages and i n t e r e s t r a t e s i n A r g e n t i n a remained c o n s t a n t because t h e r a t e o f i m m i g r a t i o n and t h e r a t e o f c a p i t a l i m p o r t were h i g h and t h e s u p p l y s c h e d u l e s o f l a b o u r and 9. I b i d . , p. 167 . A l d o F e r r e r , The A r g e n t i n e Economy, ( B e r k e l e y , U n i v e r s i t y o f C a l i f o r n i a P r e s s , 1967), p. 120. 11. I b i d . , p. 106. 1 2 ' I b i d . , p. 102. 13. A r t h u r S m i t h i e s , "Economic Growth: I n t e r n a t i o n a l Comparisons American Economic Review, v. 55, P r o c e e d i n g s , May 1965. 8 14. c a p i t a l were e l a s t i c . S i n c e c a p i t a l went p r e d o m i n a n t l y i n t o h o u s i n g and t r a n s p o r t a t i o n , mortgage banks were t h e c e n t r a l 15. f i n a n c i a l i n s t i t u t i o n s . Domestic s a v i n g s were low, c l a i m s F o r d , w i t h most o f them g o i n g out o f t h e c o u n t r y i n immigrant 16. r e m i t t a n c e s w h i c h were 20% o f e x p o r t v a l u e s . The remainder o f domestic s a v i n g s went i n t o t h e banks and mortgages. There were n e t g o l d i m p o r t s i n e v e r y y e a r u n t i l 1914 as e x p o r t s and c a p i t a l i m p o r t s grew s t r o n g l y . The paper peso c o n t i n u e d t o be h e a l t h y and t h e r e was no apparent t h r e a t t o t h e o p e r a t i o n o f t h e g o l d s t a n d a r d . However, i t began t o appear toward t h e end o f t h e p e r i o d t h a t t h i s r a t e o f growth c o u l d not be m a i n t a i n e d . Because c a p i t a l i m p o r t s r o s e , debt s e r v i c e payments i n c r e a s e d from 59 m i l l i o n g o l d pesos i n 1900, t o 168 m i l l i o n i n 1911 -12, but f e l l t o 160 m i l l i o n i n 1912 - 13, and t o 139 m i l l i o n i n 17. 1913 - 14. F o r t u n a t e l y , as F o r d p o i n t s o u t , r i s i n g e x p o r t v a l u e s p r e v e n t e d debt s e r v i c e from r i s i n g above 35% o f e x p o r t p r o -18 ceeds. " On t h e o t h e r hand, t h e c a p i t a l i n f l o w was o n l y 7 1 % o f 19. g r o s s p r o f i t s and i n t e r e s t (most o f t h e l a t t e r went a b r o a d ) . 14. F o r d , op. c i t . , p. 155 15. I b i d . , p. 120 1 6 * I b i d . , p. 128 17 I b i d . , p. 156 1 8 , I b i d . , p. 156 1 9 * I b i d . , p. 156 9 The collapse came in 1913 and 1914. As a consequence of the failure of the wheat crop, the value of exports f e l l by 30%. At the same time the prices of imports and capital imports (as 20 represented by London Issues to Argentina) f e l l . * After mid -1913 gold flowed from Argentina, there was domestic pressure against the paper peso, and a flight into gold. Following precedent, the exporters legislated a return to inconvertibility. The central features of the years 1880 - 1913 were, f i r s t , the contrast between the stagnation of the earlier period (1880 -1900) and rapid growth in the latter period (1900 - 1913) and, second, the a b i l i t y of the exporting group to alter the exchange rate system to suit their economic interests. As long as the paper peso was depreciating the exporters were content with a flexible exchange rate since the fal l i n g value of the paper peso reduced their real costs which were accrued in paper. When the paper peso strengthened and appreciated, or threatened to appreciate, exporters sought to secure adherence to the gold standard in order to prevent further increases in the price of paper and further adverse shifts in the distribution of income. Throughout both periods there was considerable movement to and from private holdings of gold. In the years 1880 - 1900 gold (dis)hoarding in Argentina can be explained by the attempt to earn capital gains from holding gold which is rising in price. 2 ° * Ibid, p. 159 10 From 1900 t o 1913 t h e p r i c e o f g o l d was f i x e d and t h e r a t e o f economic growth was h i g h . There were net g o l d i m p o r t s i n every y e a r . Under t h e s e c o n d i t i o n s why were A r g e n t i n i a n s w i l l i n g t o h o l d g o l d ? T h i s t h e s i s argues t h a t g o l d was h e l d as a p r e -c a u t i o n a r y b a l a n c e w h i c h c o u l d be ( d i s ) h o a r d e d and exchanged f o r g o l d when t h e im p o r t o f g o l d from abroad d i d not p r o v i d e a s u p p l y o f paper e q u a l t o t h e demand. I n o r d e r t o demonstrate t h i s p r o p o s i t i o n t h e f o l l o w i n g model i s dev e l o p e d : THE ASSUMPTIONS OF THE MODEL S e v e r a l c r i t i c a l assumptions a r e made i n t h i s t h e s i s t o d e s c r i b e t h e economy o f A r g e n t i n a , a s m a l l c o u n t r y on t h e g o l d s t a n d a r d . The assumptions made i n t h e model a r e : (1) A r g e n t i n a f o l l o w e d t h e r u l e s o f t h e g o l d s t a n d a r d : (a) t h e p r i c e o f t h e c u r r e n c y was f i x e d i n terms o f g o l d , (b) t h e money s u p p l y was dependent on t h e s i z e o f t h e g o l d s t o c k ; (2) t h e demand f o r money i n A r g e n t i n a depended p r i m a r i l y on t h e l e v e l o f income; (3) t h e A r g e n t i n e p r i c e and money income l e v e l s were g i v e n i n w o r l d m arkets; (4) t h e l e v e l o f e x p o r t s d e t e r m i n e d t h e l e v e l o f income; and (5) t h e N e o c l a s s i c a l e x p l a n a t i o n o f income, as deve l o p e d 21 primarily by Swan, Solow, Meade and Borts, applied to Argentina. Each of these assumptions must be explained and appraised c r i t i c a l l y . ASSUMPTION 1 THE COUNTRY FOLLOWED THE RULES OF THE GOLD STANDARD The Price of the Currency The price of the currency was fixed in terms of gold. Between 1884 and 1899 the gold peso was fixed in terms of ounces of gold but the paper peso fluctuated in gold pesos. According to the Conversion Law of 1899, the price of the paper peso was set at 22 100 paper to 44 gold pesos. "The excess demand for foreign exchange was met through international flows of gold rather than through changes in the price of gold. The Size of the Note Issue The note issue (the proxy for the money supply) was dependent on the stock of gold held at the Caja. Since the paper value of the gold held by the Caja in 1899 was 295 million paper pesos, the note issue of that year had the same value. Subsequent exchanges of gold for paper at the Caja lead to an equal expansion of the note issue. 21 * See T. Swan, "Economic Growth and Capital Accumulation," Economic Record, XXXII (1956), 334 - 61; Robert M. Solow, "A Contribution to the Theory of Economic Growth," Quarterly Journal of Economics, LXX (Feb. 1956), 65 - 94; and James E. Meade, A Noeclassical  Theory of Economic Growth, (London: George Allen and Unwin Ltd., 1961) 22. See above, p. 6 12 Hence M = qG where M i s t h e money s u p p l y (note i s s u e p l u s bank d e p o s i t s ) , G i s t h e s t o c k o f g o l d and q i s t h e f u n c t i o n a l r e l a t i o n s h i p o f t h e money s u p p l y t o note i s s u e . S i n c e t h e r e was no domestic p r o d u c t i o n o f g o l d i n A r g e n t i n a , t h e s o u r c e o f a l l new g o l d must be t h e i n t e r n a t i o n a l a c c o u n t s , i . e . , g o l d i m p o r t s . There a r e two ways i n wh i c h g o l d i m p o r t s d i d not l e a d t o an e q u a l e x p a n s i o n o f t h e money s u p p l y where t h e money s u p p l y i s d e f i n e d as t h e sum o f p r i v a t e l y - h e l d note i s s u e and bank d e p o s i t s . F i r s t , not a l l g o l d i m p o r t s l e a d t o i s s u e o f paper s i n c e some o f t h e g o l d was hoarded i n s t e a d o f b e i n g exchanged f o r paper a t t h e C a j a . Second, t h e r e l a t i o n s h i p o f t h e t o t a l money s u p p l y and t h e note i s s u e was not f i x e d because t h e former i s a f f e c t e d by t h e r e s e r v e / d e p o s i t r a t i o s o f t h e banks and the c a s h / d e p o s i t p r e -f e r e n c e s o f p r i v a t e i n d i v i d u a l s . Appendix A demonstrates t h e a r i t h m e t i c o f t h e r e l a t i o n s h i p between t h e money s u p p l y and t h e s t o c k o f g o l d a t t h e C a j a . The two means by wh i c h g o l d i m p o r t s do n o t l e a d t o a p r o p o r t i o n a t e i n c r e a s e i n t h e money s u p p l y w i l l be d i s c u s s e d . G o l d H o a r d i n g : Gold h e l d by p r i v a t e i n d i v i d u a l s i n A r g e n t i n a a f f e c t e d t h e s i z e o f t h e note i s s u e by b e i n g w i t h h e l d from ex-change f o r notes a t t h e C a j a . I n h i s book F o r d does n ot d w e l l a t l e n g t h w i t h g o l d h o a r d i n g e x c e p t when n a t i o n a l economic c r i s e s i n t h e c o u n t r y caused abnormal p r i v a t e a c c u m u l a t i o n o f g o l d i n e x p e c t a t i o n t h a t paper would become i n c o n v e r t i b l e and t h e p r i c e o f gold would r i s e . He suggests that gold had l i t t l e impact on the supply of notes since, i n the main, gold imports were converted into paper. To demonstrate this proposition Ford introduced the concept of potential note issue: "(potential note i s s u e ) . . . i s the note issue which would have resulted i f a l l net gold imports (less the quantity absorbed by the Conversion FundJ had been deposited at the Caja i n exchange for notes." He thus suggests that potential note issue i s the sum of a l l gold imported into Argentina whether i t i s held p r i v a t e l y , deposited with the banks, or exchanged for paper at the Caja. The difference i n size between the actual and the potential note issue i s the amount of gold withheld from the Caja. Ford compared actual with potential note issues and asserted that there was a close relationship between t o t a l domestic gold holding, public and private, ( i . e . , potential note issue) and actual note issue and consequently that the leakage from the Caja 24 (the gold withheld) was i n s i g n i f i c a n t . * Table I, derived from Ford, shows the percentages of potential note issue that were real i z e d . The lowest percentage of t o t a l potential note issue r e a l i z e d was 87% i n 1911 and 1912 ( i f the c r i s i s year of 1914 i s ignored). Ford concluded that: "....the balance of payments as represented by the net 2 3 ' Ford, Op. C i t . , p. 98 2 4 ' Ibid, p. 98 TABLE I ARGENTINE ACTUAL AND POTENTIAL NOTE ISSUE 1900 - 1914 (MILLIONS OF PAPER PESOS)  (1) (2) (3) (4) (5) (6) (7) (8) ACTUAL POTENTIAL ACTUAL INCREMENT INCREMENT (4) AS POTENTIAL DIFFERENCE NOTE NOTE AS A % TO ACTUAL TO POTENTIAL A % MINUS BETWEEN ISSUE ISSUE OF POTENTIAL NOTE ISSUE NOTE ISSUE NOTE ISSUE OF (5) ACTUAL NOTE ISSUE (4) AND (5) 1900 295 310 95 0 0 0 15 0 1901 295 310 95 0 0 0 15 0 1902 296 317 93 1 7 14 21 ;6 1903 380 379 100 84 62 135 -1 -22 1904 408 423 96 28 46 61 15 16 1905 498 480 104 90 57 158 -18 -33 1906 527 506 104 29 26 112 -4 14 1907 532 545 98 5 39 13 13 17 1908 581 598 97 49 53 93 17 4 1909 685 740 92 104 142 74 55 38 1910 716 817 88 31 77 40 101 46 1911 723 838 87 7 21 33 115 14 1912 800 928 87 77 90 8 120 -;5 1913 823 938 88 23 10 230 115 -5 1914 803 966 83 -20 28 163 48 NOTES; DATA AT 31. DECEMBER SOURCE; COLUMNS (1) - (3) FORD, A.G., OP. CIT., P. 96 COLUMNS (4) - (8) DERIVED FROM IBID, P. 96 15 import of gold did determine for the most part the Argentine note issue and the variations in i t during this period."25. As a consequence Ford believed that the impact of gold hoarding was not great. Ford ' s logic and use of statistics are unconvincing. It should be noted that the percentage of potential issue (calculated in column 3 of Table I) that was actually realized declined steadily after 1906. Column 6 of Table I shows the increment to actual note issue in each year as a percentage of the increment to potential note issue in the same year. The percentage of the increment to potential issue that was actually realized was less than 50% in 1907, 1910, 1911 and 1912, and was low in every year after 1906 except 1908 and 1913. Column 7 of Table I shows the absolute difference between actual and potential note issue (which is also the amount of gold that was withheld from the Caja). This shows that the value of the gold that did not arrive at the Caja increased substantially after 1906. In only one year after 1906 (i.e., in 1913), did the increment to actual note issue exceed that to potential issue. In a l l other years the gap between actual and potential note issue expanded. In summary, Ford has concealed the effect of the gold that was withheld from the Caja because he used total figures instead of examining the increments to actual and to potential note issue. * Ibid, p. 96 n TABLE II CHANGES IN THE SIZE OF PRIVATE GOLD HOARDS ARGENTINA 1904 - 1914  ANNUAL ^ CHANGE. IN GOLD HOARDS (GOLD PESOS) (PAPER PESOS) 1904 -4.1 -9.3 1905 -6.9 -15.7 1906 +6.1 +13.9 1907 +5.3 +12.0 1908 -5.9 -13.2 1909 -2.9 -6.8 1910 +19.9 +45.3 1911 +11.7 +26.6 1912 - 4.2 -9.6 1913 +0.3 +0.7 1914 +40.2 +91.1 NOTES: NEGATIVES ARE DISHOARDING (NET LOSS TO PRIVATE GOLD STOCK) SOURCE: CALCULATED FROM FORD, OP. CIT., P. 97 Table II shows the amount of gold that was withheld from the Caja by being held in private hoards. Statistics were available in Ford only for the years 1904'to 1914. The large increase in hoards in 1914 can be explained by speculation against an increase in the price of gold when exports and loans to Argentina (London Issues) f e l l sharply. Gold hoarding in other years, when economic conditions were more stable, was, nevertheless, substantial and i t i s this hoarding that this thesis seeks to explain. It should be noted that gold hoarding is of the sam magnitude as the gap between actual and potential note issue. Column 8 of Table I shows the difference between the increment to actual and the increment to potential note issue in each year. Column 1 of Table II shows the gold (dis)hoarded in the same years. The 2 6 values of these two sets of figures are roughly the same magnitude. Gold (dis)hoarding was not insignificant in i t s impact on the supply of money in Argentina. The relationship of total money supply to actual note issue; The previous section (see "The Price of the Currency") demonstrated that not a l l of the gold imported found i t s way into the Caja and 26 * It should not be expected that the figures w i l l be exactly the same size in each year. This can be explained by the observation that gold hoarding w i l l be found to be a function of the velocity of money. Gold (dis)hoarding is used to adjust the actual note issue to the level determined by the level of income and not to the potential note issue which reflects the rate of gold import and not the level of income. 18 i n c r e a s e d t h e note i s s u e . T h i s s e c t i o n examines t h e r e l a t i o n s h i p between t h e note i s s u e ( i . e . , t h e g o l d s t o c k a t t h e Caja) and t h e s u p p l y o f money, d e f i n e d t o i n c l u d e b o t h n o t e s and d e p o s i t s . The a r i t h m e t i c o f t h i s r e l a t i o n s h i p i n A r g e n t i n a i s s e t out i n Appendix A. I t i s shown t h a t t h e r e were t h r e e ways i n w h i c h t h e r a t i o o f money s u p p l y t o a c t u a l n ote i s s u e may d i f f e r : (1) t h e p e r c e n t a g e o f t h e note i s s u e d e p o s i t e d w i t h t h e banks may change; (2) t h e banks' r e s e r v e r a t i o (cash r e s e r v e s / d e p o s i t s ) may change; o r (3) t h e amount o f g o l d d e p o s i t e d w i t h t h e banks may change and a l t e r t h e s i z e o f t h e r e s e r v e s . (1) T a b l e I I I i n d i c a t e s t h e v a r i a b l e s i n v o l v e d i n t h e r e l a t i o n s h i p between t h e n o t e i s s u e and t h e t o t a l money s u p p l y . Column 1 shows t h a t t h e p e r c e n t a g e o f t h e note i s s u e d e p o s i t e d w i t h t h e banks r o s e from 1908 t o 1913 (even i f t h e low f i g u r e f o r 1908 i s i g n o r e d ) . C o n s e q u e n t l y t h e r e was a n e t i n c r e a s e i n t h e s i z e o f t h e money s u p p l y due t o t h e l a r g e r p r o p o r t i o n o f t h e note i s s u e b e i n g d e p o s i t e d w i t h t h e banks, l e a d i n g t o an e x p a n s i o n o f d e p o s i t s v i a t h e r e s e r v e / d e p o s i t r a t i o . (2) T a b l e I I I , Column 2 shows t h a t t h e r e s e r v e r a t i o f e l l from 1909 t o 1911, but r o s e i n 1912 and 1913. I n o t h e r words, f o r a g i v e n p r o p o r t i o n o f n o t e i s s u e d e p o s i t e d w i t h t h e banks, t h e money s u p p l y i n c r e a s e d r e l a t i v e t o t h e n o t e i s s u e d u r i n g t h e f i r s t p e r i o d but f e l l d u r i n g t h e l a t t e r . TABLE III THE MONEY SUPPLY IN ARGENTINA 1908 - 1914 (1) (2) (3) (4) (5) (6) PER CENT BANKS GOLD ABSORBED TOTAL ACTUAL RATIO OF NOTE ISSUE RESERVE/DEPOSIT BY BANKS MONEY NOTE OF HELD BY BANKS RATIO (m. gold pesos) SUPPLY ISSUE 4:5 (%) (%> (m. paper pesos) 1908 40 n/a +12.9 n/a 581 1909 47 41.8 +23.1 1,520 685 2.22 1910 47 37.6 + 1.8 1,711 716 2.44 1911 47 36.6 - 5.0 1,762 723 2.44 1912 48 37.5 + 6.3 1,897 800 2,37 1913 53 40.8 - 7.0 1,849 823 2.25 1914 51 42.3 -41.5 _ _ _ SOURCE: COL. (1), FORD, OP. CIT. , p. 107 COL. (2), Ibid, p. 107 COL. (3), Ibid, p. 97 COL. (4), calculated for 1912 by deriving the note issue held by the public from per cent held, and adding this to bank deposits. Figures for the other years calculated by subtracting the change in money supply (adding for 1913) - FORD, OP. CIT., p. 107. COL. (5), Ratio of Col. 4 to Col. 5. (3) G o l d d e p o s i t e d w i t h t h e banks was p o s i t i v e from 1909 t o 1910 but n e g a t i v e i n t h e r e m a i n i n g y e a r s . S i n c e g o l d s e r v e d as a r e s e r v e a g a i n s t t h e e x p a n s i o n o f d e p o s i t s , t h e money s u p p l y expanded from 1908 t o 1910 but c o n t r a c t e d a f t e r w a r d . U n f o r t u n a t e l y d a t a f o r t h e t o t a l money s u p p l y ( d e f i n e d as c a s h h o l d i n g s p l u s d e p o s i t s ) a r e a v a i l a b l e o n l y f o r t h e p e r i o d 1909-13. C o n s e q u e n t l y a c t u a l note i s s u e i s used as a p r o x y f o r t h e t o t a l money s u p p l y . An e s t i m a t e must t h e r e f o r e be made o f th e b i a s i n t r o d u c e d t o t h e a n a l y s i s t h r o u g h t h e use o f t h i s p r o x y . Comparison o f t h e s i z e o f t h e t o t a l money s u p p l y w i t h a c t u a l n o te i s s u e can be made o n l y f o r t h e p e r i o d 1909-13 when d a t a f o r b o t h s t a t i s t i c s a r e a v a i l a b l e . The r a t i o o f t o t a l money s u p p l y t o a c t u a l n o t e i s s u e i n each y e a r i s shown i n T a b l e I I I . The average o f t h e s e r a t i o s i s 2.34:1. I f i t i s assumed t h a t 2.34:1 i s t h e l o n g - r u n average about w h i c h t h e c u r r e n t r a t i o f l u c t u a t e d we can s t a t e i n wh i c h d i r e c t i o n use o f t h e note i s s u e b i a s e d t h e i n d e x f o r t h e money s u p p l y . S i n c e t h e s t a t i s t i c a l a n a l y s i s below c o r r e l a t e s g o l d ( d i s ) h o a r d i n g w i t h t h e v e l o c i t y o f money we must det e r m i n e t h e d i r e c t i o n i n w h i c h v e l o c i t y i s b i a s e d t h r o u g h t h e use o f n o t e i s s u e i n s t e a d o f t o t a l money s u p p l y i n t h e denominator o f t h e v e l o c i t y e x p r e s s i o n . T a b l e IV shows t h e v e l o c i t y o f money between 1900 and 1914 w i t h v e l o c i t y d e f i n e d as t h e r a t i o o f e x p o r t s t o n o t e i s s u e . 21 I n 1909 and 1913 note i s s u e was h i g h r e l a t i v e t o th e money-s u p p l y s i n c e t h e r a t i o was l e s s than 2 .34 :1 (Table I I I ) and v e l o c i t y was above average (Table I V ) . Hence i f t o t a l money s u p p l y were used i n t h e v e l o c i t y i n d e x , v e l o c i t y would have been h i g h e r t h a n i t was. I n 1910 and 1911 note i s s u e was low r e l a t i v e t o t o t a l money s u p p l y ( r a t i o g r e a t e r t h a n 2 .34 :1 i n T a b l e I I I ) and v e l o c i t y was below average (Table I V ) . I t t o t a l money s u p p l y were used i n t h e v e l o c i t y i n d e x , v e l o c i t y would have been lower t h a n i t was. I n 1912, however, note i s s u e was h i g h r e l a t i v e t o t h e t o t a l money s u p p l y , i . e . , t h e r a t i o was s l i g h t l y l e s s t h a n 2 . 3 4 : 1 , but v e l o c i t y was above aver a g e . I n t h i s case a l o n e , v e l o c i t y would have been c l o s e r t o , r a t h e r t h a n f u r t h e r from, t h e mean v e l o c i t y i f t o t a l money s u p p l y were used i n t h e denominator o f the v e l o c i t y i n d e x . The o v e r a l l impact o f u s i n g n ote i s s u e i n s t e a d o f t o t a l money s u p p l y i n t h e v e l o c i t y e x p r e s s i o n i s t o dampen t h e f l u c t u a t i o n s i n v e l o c i t y . C o n s e q u e n t l y i f t o t a l money s u p p l y were used i n s t e a d o f n o t e i s s u e t h e f l u c t u a t i o n s i n v e l o c i t y under t h i s d e f i n i t i o n would have been l a r g e r t h a n under t h e d e f i n i t i o n used i n t h i s a n a l y s i s and t h e c o r r e l a t i o n o f v e l o c i t y and g o l d ( d i s ) h o a r d i n g would have been h i g h e r t h a n shown below. F u r t h e r m o r e i f i t i s assumed t h a t t h e s e same r e l a t i o n s h i p s between a c t u a l note i s s u e , t o t a l money s u p p l y and v e l o c i t y h e l d f o r t h e p e r i o d 1904-1909 as w e l l as f o r 1909-13 t h e c o n c l u s i o n s r e a c h e d i n t h i s a n a l y s i s , i . e . , t h a t g o l d ( d i s ) h o a r d i n g i s c l o s e l y a s s o c i a t e d w i t h t h e v e l o c i t y o f money, would have been r e i n f o r c e d . TABLE IV THE VELOCITY OF MONEY IN ARGENTINA 1884 - 1914 1884 2.48 1900 1.18 1885 2.54 1901 1.29 1886 1.75 1902 1.36 1887 2.02 1903 1.32 1888 1.72 1904 1.48 1889 1.70 1905 1.48 1890 0.93 1906 1.27 1891 0.89 1907 1.27 1892 0.91 1908 1.43 1893 0.65 1909 1.32 1894 0.78 1910 1.18 1895 0.91 1911 1.02 1896 0.89 1912 1.36 1897 0.78 1913 1.34 1898 1.02 1914 0.98 1899 1.43 SOURCE: Velocity of money i s the ratio of export (Ford, Op. Cit., p. 195) to note issue (Ford, Op. Cit.. p. 195) 23 ASSUMPTION 2 THE DEMAND FOR MONEY IS ASSUMED TO DEPEND PRIMARILY UPON THE LEVEL OF INCOME.  27 The quantity theory expression * is adopted to describe the demand for money, Mv = PZ r where M i s the money supply, P i s the price level, v is the velocity of money, and is the level of real income. This expression i s a general one which allows for other determinants of the demand for money than income. It w i l l be demonstrated later that income is the most important of the possible determinants. Because this thesis seeks to relate the private demand for gold to the demand for money (through velocity), some features of the quantity expression w i l l be developed. Given, Mv = PZr, taking logarithms, log M + log v = log P + log and differentiating M'+ v' = P' + Zr', where the slash marks denote percentage changes. In other words the sum of the rates of change of money and velocity equals the sum of the rates of change of prices and income. 27 " M. Friedman, "The Quantity Theory of Money: 'A Restatement'", Studies in the Quantity Theory of Money, (Friedman, ed., University of Chicago Press, 1956). 24 The Quantity Theory expression can be generalized for the open economy. Total domestic money income (Z) is the sum of domestically produced goods consumed by domestic (P Y^) plus production of investment goods used domestically (P 1^) plus exports (p X). Z = P Y, + P. I, + P X. y d i d x This expression can be inserted into the quantity theory equation, (Mv = Z) thus, Mv = P Y, + P. I, +P X. y d i d x By changing the expression to absolute changes, multiplying by one C Mv etc.,) and dividing by Z the following is V Mv > derived: (Mv)' = y (P Yd)» + i (P i Id)« + x < P x X)', and M' + v ' = y P « + y Y , ' + i P . ' + i I , ' + x P 1 + x X1, J y J d i d x ' where y d z i d Z P X x Since y + x + i = 1, and Z = Y. + I, +X, r d d ' where Z is real gross.domestic money income, M + v = (yP' + IP. ' + xP ' ) + Z ' w i x r . If the rate of change of prices i s equal in a l l sectors, the expression is the same as for the closed economy, i.e., M« + v» = P' + Z ' The sum of the rates of change of the money supply and velocity is equal to the sum of the rates of change of the universal price level and real income. In a large country domestic policy can be invoked to alter the value of these variables. Give the demand for cash balances represented by the velocity function, the money supply or the level of real income can be altered to achieve the desired price level. With a given level of the nominal money supply and of real income, individuals adjust their cash balances in accordance with their velocity function. If individuals hold too large cash balances, they attempt to get r i d of their excess balances but in doing so they drive up the level of prices u n t i l they are satisfied with the real value of their cash balances. A small country facing a large world does not have the same policy options. In the case of Argentina the levels of money income and of prices were given exogenously (see Assumption 3). The money supply was determined by the inflow of gold from abroad. In order to adjust their cash balances to the specifications of the velocity function, Argentinians were able to exchange gold for paper or paper for gold, i.e., to (dishoard). This thesis demonstrates that this mechanism of adjustment was in operation. The velocity function can also be used as an index of the 28 stability of the currency. Kindahl * examined the situation in the United States during the period of rapid inflation which preceded the resumption of specie conversion in 1879. He argued that the premium on gold must be zero for a stable return to convertibility. Otherwise there would be increased inflation as gold imports caused increases in the supply of the undervalued currency. In order to achieve gold parity, either the money stock or the velocity of money must f a l l or real income must rise. (In the quantity expression high M* must be offset by a f a l l in v or M or a rise in to prevent further increases in P. ) Since velocity was determined by individuals' preferences and since the money supply was not altered, the burden of adjustment f e l l on real income. Kindahl claimed the equilibrium was attained because real income grew up to the money stock by the resumption date. A similar situation developed in Argentina in the late 1890?s when the return to specie conversion was being contemplated. After 1887 there had been an immoderate monetary policy which had caused 28 S.K. Kindahl, "Economic Factors in Specie Resumption in the United States, 1865 - 1874", Journal of P o l i t i c a l  Economy, v 69, 1961, pp. 30-48 decreases in the value of the paper peso in terms of gold. Consequently velocity had fluctuated substantially in a downward direction to 1893 (Table IV). After that date restrictions were placed on the growth of the money supply and velocity rose u n t i l the enactment of the Conversion Law in 1899. Since the velocity of money at that time was close to the long-run average, the shift to convertibility was stable as long as the international accounts continued to provide gold at the same rate as the growth of real income. This condition was f u l f i l l e d u n t i l late 1913 and early 1914 when confidence in the paper peso:; f e l l and there was a run on gold. (Ford noted that prior to this date confidence was high 29 and speculation was non-existent). * Table IV demonstrates that the velocity of money was relatively constant from 1900 to 1913 and substantiates the hypothesis that the currency was stable. ASSUMPTION 3 THE LEVELS OF MONEY INCOME AND PRICES IN ARGENTINA WERE GIVEN BY WORLD MARKETS This can be demonstrated by the following argument taken from Borts. Interest rates are assumed to be given in the world market since London was the commercial center of the world and Argentina occupied only a small part of the market. The return to capital in the export industry i s given by rP. = P f. v i x l ) 29 * Ford, Op. Cit., p. 96, notes that confidence in the paper peso was higher after 1900 andthat speculation in gold ceased. 28 where r i s the interest rate, P^ i s the price of capital goods, P is the price of exports and f. i s the marginal physical product of capital in the export sector. The prices r, P., and P are given X X exogenously; therefore i s determined. If there i s no tech-nological change in a production function which has constant returns to scale, the labour/capital ratio and the. marginal physical product to labour in the export sector (f^) are determined. With given prices for exports, P. , the money wage in the export sector (P..f.) X X X is given and, on the assumption of a competitive wage market, the money wage in the domestic sector is determined. Furthermore i f the capital stock i s fixed and the labour/capital ratio in the export sector does not change because of the assumption of homogeneity the level of employment in the export sector i s determined. At a given moment the total supply of labour is fixed; consequently, the level of employment (and of output) in the labour-intensive domestic sector are given. The value of output is the sum of the payments to labour and to capital in both sectors. ASSUMPTION 4 THE LEVEL OF EXPORTS DETERMINES THE LEVEL OF INCOME This can be written as Z = bX, where Z i s the level of income, X i s the level of exports, and b is a constant. This assumption i s important because exports are used as a proxy for the level of income in the demand for money equation and in the velocity function. The use of a proxy was made necessary by the absence of income data, consequently, i t was not possible to demonstrate the validity of this assumption by s t a t i s t i c a l means. The minimum condition, for using exports as a proxy i s that exports and income grow at the same rate; a stronger condition is that exports determine income. Intuitively i t might be argued that the stronger condition i s met because investment which went into the export sector, and domestic output which depended on the income multiplier, are both determined by the success of exports. However, Assumption 5 shows that a l l variables grow at the same rate in equilibrium. Consequently exports and income grow at the same rate which satisfies the minimum condition that exports and income change proportionately. ASSUMPTION 5 THE NEOCLASSICAL EXPLANATION OF INCOME IS ASSUMED TO HOLD IN ARGENTINA31*  The chief assumptions of the model are; (1) the economy is at f u l l employment (Ford suggests that this was 32 true in Argentina. * ) ; and Ferrer, Op. Cit.,p. 120, estimates that exports were 25-30 per cent of total G.N.P. but this does not demonstrate the direction of causation. 31 The analysis follows Borts, Op. Cit..p. 341 - 59 32 * Ford, Op. Cit., p. 115 30 (2) there i s not technological change in a production function which i s homogeneous of the f i r s t degree. The result i s that the ratio of labour to capital i s constant. From this the conditions of long-run equilibrium can be derived: the rate of growth of income, exports, the capital stock, investment and savings w i l l equal the rate of growth of the labour force. Chapter 2 builds the conditions of long-run gold import upon these assumptions. These five assumptions are used in the theoretical analysis of the import of gold in the short and long run in Chapter 2 and in the discussion of the private demand for money and gold in Chapter 3. CHAPTER 2 DETERMINANTS OF GOLD IMPORT This chapter examines the conditions of gold import. The f i r s t part w i l l use Assumption 2 (that the desired money supply is a function of the level of income as set forth in Chapter 1), to deduce the rate of gold import in the long run. It w i l l be argued that equilibrium in the balance of payments should provide for a persistent secular gold import. The second part w i l l examine the flow of gold as a short-run balancing item in the balance of payments. GOLD FLOWS IN LONG-RUN EQUILIBRIUM International gold flows serve two functions in a country like Argentina on the gold standard. First, they serve to balance the international accounts by acting as payment for the excess of payments over receipts on non-gold account. Second, gold imports are the base for the money supply since the rules of the gold standard dictate that balance of payments surpluses (and gold inflows) must be accompanied by monetary expansion; and deficits (and gold outflows) must be accompanied by contraction. Given the assumptions of the model i t can be shown that both of these functions are performed in long-run equilibrium. The analysis applies to any small country on the gold standard where the country has no gold production. 31 BALANCING THE INTERNATIONAL ACCOUNTS In a small country a persistent balance of payments surplus is consistent with long-run equilibrium. The discussion of the Neoclassical model under Assumption 5 (above, Chapter 1) pointed out that in the long-run exports, imports and capital imports grow at the same rate. Gold imports can be shown to grow at this same rate under conditions of long-run equilibrium.' In Argentina gold was the only short-run equilibrating device for equating receipts and payments. The short-run capital market was non-existent and Argentina was unable to pursue an independent interest-rate policy.*"* The paper peso was not an international currency and did not act as an equilibrating item. Consequently the excess of receipts over payments was taken in gold. The following identity relates gold imports to the other items in the international~accounts; G = (X + K ) - (N + D), n n ' where is the net gold balance, X i s visi b l e exports, is net capital import (or security exports), N i s v i s i b l e imports, and D i s interest payments on foreign debt. This identity states that gold imports are equal to the difference between receipts and expenditures on current and capital account in the balance of payments. l' Ford, Op. Cit., p. 167 - 8. Taking f i r s t differences of the identity, 4G f l = AX - / I N + 4 K n - zvD multiplying through by one, _ Gn x „ N , „ Kn - D A Gn — = A X — - A N — + A K — - A D — Gn x N n Kn D and dividing by G^> G 1 = xX• - nN1 + k K 1 - dD', n n n ' where the slash marks denote percentage changes. The small letters denote the following ratios: X X = G n k = n G n N n = G n n The equation states that in the long run the rate of growth of gold imports is equal to the sum of the products of the rates of growth of each component in the balance of payments and the ratio of that component to gold imports. Since x - n + k - d = l , and since in long run (by Assumption 5 discussed in Chapter 1), X' = K 1 = N1 = D', therefore G ' = X1, n ' 34 i.e., the rate of gold import i s equal to the rate of export of goods and services. Secular gold imports and a balance of payments surplus are consistent with long-run equilibrium. A BASE FOR THE MONEY SUPPLY Gold imports serve as a base for the money supply. It can be shown that the gold import which is desired to serve as a base for the money supply grows at the same rate as the economy and as the balance of payments surplus. Assume, as above, that the money supply is a constant multiple of the size of the gold stock. M = gG, where M is the size of the money supply, g i s a constant, and G is the size of the gold stock (at the Caja). Assume also that money demanded in the long-run i s a constant proportion of money income, Mv = PZ r, where v i s the velocity of money, P i s the price level and Z^ is the level of real income (Assumption 2). Therefore the rate of growth of the gold stock must equal the rate of growth of income, i.e., G' = Z». Assume that there is no domestic production of gold and that there i s no gold hoarding. Therefore, where G i s gold import and i s the addition to the gold stock. It can be shown by substitution that the rate of growth of gold imports must also equal Z; hence, , Gn = G ' = Z 1 = x'. to n In other words the demand for gold imports to provide a money supply grows at the same rate as the level of income and exports. This i s the same result that was obtained 1 (above p.33) for the rate of growth of gold import due to the persistent balance of payments surpluses. In long-run equilibrium the supply of gold via the international accounts to a small country on the gold standard equals the demand for gold to provide a money supply. Definition of balance of payments equilibrium must take into account that in a dynamic economy gold imports perform both functions. The traditional analysis has considered gold imports to be a sign of disequilibrium. Johnson, for example, offered this definition of disequilibrium, "(disequilibrium).... is defined by changes in the o f f i c i a l reserves associated with imbalances between foreign receipts and foreign payments of residents of the country."z* When two static states are compared, gold imports are interpreted as evidence of disequilibrium. Ford, too, defines equilibrium 3 as the absence of gold flows. " However in a growing economy, 2 H.G. Johnson, "Toward a General Theory of the Balance of Payments", International Trade and Growth, (London: George Allen and Unwin, 1958), p. 155 3* Ford, Op. Cit., p. 129when the demand for money is rising, a new definition i s required. For the purposes of the thesis, equilibrium is regarded as being achieved when gold flows take place at the rate required by the demand for money.^* The provision of gold through the international accounts is not a random event determined by the state of the balance of pay-ments but is a result of demands made by the economy. Johnson demonstrates this proposition by examining the accounting identity for the balance of payments. ~** He begins by stating that gold imports are the difference between total income accruing to domestics and total expenditure by domestics, i.e. , G n = Z - E, where G n i s gold imports, Z is money income, and E is total expenditure by domestics. The relationship between this expression and the balance of payment equation can be obtained by breaking down Z and E into their components, Z = Z + Y d + I d + f where X i s exports, Y^ is domestically produced goods consumed by domestics, and 1^ ^, is net investment in domestic industry by domestics and foreigners. ^* Given the assumptions of this model, the analysis suggests that a growing economy on the gold standard must import increasing absolute amounts of gold;. Either world gold production must keep pace with monetary demands or there must be changes in the price of gold or in the gold/fiat money ratio. Otherwise gold must be demonetized. 5* Johnson, Op. Cit., p. 155 f f and E = N + Y, + I, c u+ D, d d •+ f" ' where N i s imports of consumer goods and services, Y^ is domestically produced goods consumed by domestics, and 1^ ^ is interest pay-ments on foreign debt. Subtracting E from Z gives the balance of payments equation, Z - E = G n = (X - N) + ( I f - D) where I f = I f ' - I f " . This i s the same expression as the accounting identity described on page 32 above. However Johnson argues that this approach suggests a positive role for gold flows. Instead of acting passively to balance the accounts as a residual item in the international accounts, gold flows result from demands made by the countries involved. Gold flows represent the excess demand for the currency by domestics and foreigners. Since internal demand, i.e., the demand for domestic goods by domestics, cancels out, only the items in the international accounts are l e f t . Consequently gold flows take place in response to the excess demand for one currency over the demand for another. Williamson has noted in the same vein that in a growing economy the demand for real balances and for gold is similar to the demand for capital and for import goods. "During periods of rapid growth and concomitant capital inflow and trade deficit a tendency toward increased demand for real balances i s expected". 5 J.G. Williamson, "Real Growth, Monetary Disturbances and The -Transfer Process", Southern Economic Journal V 29 (January, 1963), p. 178 This demand f o r money results i n gold flows to s a t i s f y these demands. Like the other items i n the balance of payments gold i s imported to s a t i s f y demands and i s not just a residual which balances the international accounts. GOLD FLOWS IN THE SHORT RUN Due to the i n a b i l i t y of humans to predict the future, there i s a lag i n the short run between the establishment of demand for gold and the gold flows that r e s u l t . In the long run the gold flows tend toward those desired u n t i l i n long-run equilibrium they are equal. Appendix B l i s t s the possible directions of change i n the short run i n the size of the gold import as a r e s u l t of the changes i n the other items i n the balance of payments i d e n t i t y . Appendix B i s intended to emphasize the wide range of p o s s i b i l i t i e rather than to provide a framework f o r analysis of Argentina since the wide fluctuations i n the international accounts means that Argentina switched from category to category from one period to another. GOLD FLOWS IN THE SHORT AND LONG RUN In the short run, gold flows i n response to demands i n the economy; but the demand f o r currency i s not quite s a t i s f i e d due to the imperfect foresight of mankind. In the long run the lags are worked out and gold flows i n at the rate given by the growth of the economy. If the gold flows i n the short run are not adequat to meet the demand, how are the demand and supply equated? Chapter 3 w i l l suggest that gold (dis)hoarding performed this function. CHAPTER 3 THE PRIVATE DEMAND FOR MONEY AND GOLD This chapter deals simultaneously with the demand for gold and for money (1) because they are both currencies (one of which is international) which were freely convertible in the period 1900 - 1914 in Argentina and (2) because the demand for money and gold were complementary. It w i l l be argued that the demand for money was a function of the level of income and that gold was hoarded or dishoarded in order to maintain the functional relation ship between money and income. THE DEMAND FOR MONEY AND GOLD Milton Friedman has provided a general demand equation which can be applied to money or to gold.*"* He adopted the Classical identity, Mv = P Z r, which is described under Assumption 2 (see above, Chapter 1). He furnished this identity with analytic content: by hypothesizing causal relationships. The central features of his approach are (1) that the velocity of money (the ratio of money income to the money supply) i s a stable function of a limited number of variables, and 1 # M. Friedman, "The Quantity Theory of Money - A Restatement", M. Friedman, ed. Studies in the Quantity Theory  of Money, (Chicago, University of Chicago Press, 1956), p. 3 41 (2) t h a t t h e t h e o r y i n v o l v e s t h e demand f o r money and i s not a 2. t h e o r y about r e a l o u t p u t , money income, o r t h e p r i c e l e v e l . He p o i n t s o u t t h a t t h e l a t t e r v a r i a b l e s r e q u i r e a d d i t i o n a l i n f o r m a t i o n t o e s t a b l i s h t h e i r d e t e r m i n a n t s . By t h i s method Friedman has a l t e r e d v e l o c i t y from an i d e n t i t y t o a t e s t a b l e h y p o t h e s i s about r e a l w o r l d b e h a v i o u r . The demand f o r money i s e x p r e s s e d as: = v ( r b , r e , l d P f£ , w, u ) , M Pdt p where r t , i s t h e bond i n t e r e s t r a t e , r e i s t h e r a t e o f r e t u r n on l d P e q u i t i e s , l s t h e r a t e o f change o f t h e g e n e r a l p r i c e l e v e l , Z r ^— i s t h e l e v e l o f permanent r e a l income, w i s w e a l t h , and u i s a t a s t e v a r i a b l e . The Friedman f o r m u l a t i o n w i l l be d i s c u s s e d w i t h r e f e r e n c e t o t h e s i t u a t i o n i n A r g e n t i n a . INCOME The c l a s s i c i s t s assumed t h a t t h e v e l o c i t y o f money (the r a t i o o f income t o money su p p l y ) was c o n s t a n t i n t h e s h o r t r u n s i n c e payments i n s t i t u t i o n s do not change and t h e money s u p p l y i s a 3 . f u n c t i o n o f income. T h e r e f o r e , argued t h e c l a s s i c i s t s , w i t h f u l l employment, p r i c e s changed p r o p o r t i o n a t e l y w i t h n o m i n a l money b a l a n c e s i n t h e s h o r t r u n . A l t h o u g h an i n d i v i d u a l c o u l d not change t h e p r i c e l e v e l , i n d i v i d u a l s i n t o t a l c o u l d do so by 2. I b i d . , p. 147 3 Members o f t h i s s c h o o l o f tho u g h t i n c l u d e R i c a r d o , M a r s h a l l , P i g o u and F i s h e r . 42 i n c r e a s i n g , or d e c r e a s i n g , money b a l a n c e s t h a t were s h o r t o f , or i n excess o f , d e s i r e d money b a l a n c e s . T h i s caused t h e p r i c e l e v e l t o f a l l o r r i s e , u n t i l r e a l b a l a n c e s bore t h e d e s i r e d r e l a t i o n s h i p t o income. Friedman p o i n t e d out t h a t i n d i v i d u a l s i n t h e U n i t e d S t a t e s c o u l d a l t e r t h e i r r e a l b a l a n c e s i n the. manner d e s c r i b e d by t h e c l a s s i c i s t s b u t he a l s o n o t e d t h a t t h e n o m i n a l money s u p p l y was 4. de t e r m i n e d by t h e money a u t h o r i t y . Friedman's d e s c r i p t i o n o f th e U n i t e d S t a t e s d i f f e r s from t h a t f o r A r g e n t i n a . The A r g e n t i n e c o u l d a l t e r h i s no m i n a l b a l a n c e s by exc h a n g i n g g o l d f o r paper. W i t h a g i v e n p r i c e l e v e l he a d j u s t e d h i s r e a l b a l a n c e s p r o -p o r t i o n a t e l y . C o n s e q u e n t l y t h e A r g e n t i n e s had c o n t r o l over t h e money s u p p l y t o t h e amount o f g o l d h e l d i n t h e i r p r i v a t e s t o c k s . I n t h e l o n g r u n Friedman's e m p i r i c a l work f o r t h e U n i t e d S t a t e s (1870 - 1955) s u g g e s t e d t h a t t h e v e l o c i t y o f money had an income e l a s t i c i t y o f 1.8, i . e . , t h a t a one p e r c e n t change i n t h e demand f o r money r e s u l t e d from a 1.8 p e r c e n t change i n income, when money was d e f i n e d t o i n c l u d e b o t h t i m e and demand d e p o s i t s as w e l l as 5. c a s h . When money i n c l u d e d o n l y demand d e p o s i t s and c a s h , t h e income e l a s t i c i t y o f t h e v e l o c i t y o f money was 1.0. I n o t h e r words, 4 " M. Friedman, "The Demand f o r Money:. Some T h e o r e t i c a l and E m p i r i c a l R e s u l t s " , J o u r n a l o f P o l i t i c a l Economy, V. 67 (Aug., 1959), p. 330. 5 ' I b i d . , p. 328 - 9 43 t h e demand f o r money grows a t l e a s t a t t h e same r a t e as t h e l e v e l o f income i n t h e l o n g r u n . I n t h e s h o r t r u n Friedman found c o n t r a d i c t o r y r e s u l t s . The v e l o c i t y o f money w i t h r e s p e c t t o c u r r e n t income conformed p o s i t i v e l y t o t h e income c y c l e : when 6. income r o s e , v e l o c i t y r o s e , when income f e l l , v e l o c i t y f e l l . T h i s b e h a v i o u r i s o p p o s i t e t o t h a t o f t h e l o n g r u n . Friedman i n v o k e d t h e concept o f permanent income t o r e c o n c i l e t h e l o n g w i t h t h e s h o r t r u n . A c c o r d i n g t o t h i s approach money i s t r e a t e d as an a s s e t w h i c h l i k e o t h e r l u x u r y goods, grows more 7. r a p i d l y t h a n income and causes v e l o c i t y t o f a l l i n t h e l o n g r u n . PRECAUTIONARY OR ASSET DEMAND FOR MONEY The co n c e p t o f permanent income i s t h e key t o t h e e x p l a n a t i o n o f t h e demand f o r money i n t h e s h o r t and t h e l o n g r u n a c c o r d i n g t o Friedman. Permanent income i s t h e r e t u r n on t h e s t o c k o f w e a l t h , w, (which i s b r o a d l y d e f i n e d t o i n c l u d e a l l s o u r c e s o f income, b o t h human and non-human), ZP i . e . , W = — C 1 r where r i s t h e g e n e r a l i n t e r e s t r a t e and Zp i s t h e permanent income. Thus w i t h a c o n s t a n t i n t e r e s t r a t e , income and w e a l t h v a r y p o s i t i v e l y and permanent income i s t h e l e v e l o f income e x p e c t e d from p a s t t r e n d s . 6. M. Friedman, -"The Q u a n t i t y Theory ", p. 147 7. ' Friedman, "The Demand f o r Money....", p. 336 44> Friedman suggests that consumption is a function of permanent 8 income. * When current income f a l l s below permanent income, the level of consumption i s maintained by drawing down asset balances. When a transient increment to income raises current income above permanent income, the increment i s added to asset balances rather than being consumed. Friedman also suggests that the demand for money i s a function of permanent income. Because permanent income fluctuates less than current income, the demand for money may change more than permanent income but less than current income. Friedman concludes that velocity moves inversely with permanent income in both the long and short run. Following this approach, money i s a pre-cautionary balance which i s built up in upswings and f a l l s in troughs. Keynes has developed a precautionary demand for money which is similar to that of Friedman.1^* He explains the motives for holding precautionary balances. Keynes states that money is held: "To provide for contingencies requiring sudden expenditures and for unforeseen opportunities of advantageous purchases, and also to hold an asset of which the value i s fixed in terms of money to meet a subsequent l i a b i l i t y fixed in terms of money."11. 8* Ibid, p. 333 9* Ibid, p. 334 ^* J. M. Keynes, The General Theory of Employment, Interst and Money (London, MacMillan, 1964) U * Ibid, p. 170 45 The need f o r t h i s a s s e t t o make f u t u r e payments i s based upon " . . . . t h e d e s i r e f o r s e c u r i t y as t o t h e f u t u r e c a s h e q u i v a l e n t o f 12. a c e r t a i n p r o p o r t i o n o f t o t a l r e s o u r c e s . " The c h i e f d e t e r m i n a n t s o f t h e amount h e l d a r e t h e l e v e l o f economic a c t i v i t y and o f money income. The h i g h e r t h e l e v e l o f income and a c t i v i t y , t h e l a r g e r a r e t h e b a l a n c e s h e l d , because l a r g e r b a l a n c e s can be a f f o r d e d and because l a r g e r payments must be made. The Keynes d e f i n i t i o n has two p a r t s . The a s s e t (1) must be shown t o be h e l d a g a i n s t c o n t i n g e n t p u r c h a s e s o r a g a i n s t l i a b i l i t i e s , and (2) i t must be shown t o have a f i x e d and s e c u r e v a l u e i n terms o f money. The demand f o r money and f o r g o l d i n A r g e n t i n a over t h e p e r i o d 1900-1914 i s a p p r a i s e d by t h i s a u t h o r as a p r e c a u t i o n a r y a s s e t b a l a n c e w h i c h meets t h e s e two c r i t e r i a . P r o v i s i o n f o r C o n t i n g e n c i e s and L i a b i l i t i e s The b e h a v i o u r o f the demand f o r money i n A r g e n t i n a was s i m i l a r t o t h a t i n t h e U n i t e d S t a t e s . U n f o r t u n a t e l y t h e d a t a was not s u f f i c i e n t i n t h e c a s e o f A r g e n t i n a t o t e s t b o t h t h e narrow and bro a d d e f i n i t i o n s o f t h e money s u p p l y . However i t i s p o s s i b l e t o a s s e r t t h a t t h e v e l o c i t y o f money d i d f a l l i n A r g e n t i n a i n t h e l o n g r u n but changed p o s i t i v e l y w i t h t h e income c y c l e i n t h e s h o r t r u n . T h i s agrees w i t h Friedman's h y p o t h e s i s t h a t t h e demand f o r money was a f u n c t i o n o f t h e l e v e l o f a "permanent" income and t h a t money was h e l d as a p r e c a u t i o n a r y b a l a n c e t o m a i n t a i n t h e l e v e l o f consumption. 1 2 * I b i d . , p. 170 4'6-Gold, however, was also highly correlated with the velocity of money. Chapter 4 w i l l demonstrate that gold (dis)hoarding in Argentina was positively related to velocity, i.e., gold was dis-hoarded when velocity rose and hoarded when velocity f e l l . Gold moved from private holdings in order to make advantageous purchases. This relationship can be explained by the pattern of payments and receipts during the year. The Argentine economic year was divided into two parts. According to Ford and Williams, the crop was shipped in the early part of the year, but costs were laid out in paper in the later months leading 13 up to December. " As a result, gold flowed in during the f i r s t half of the year but paper payments were made in the f a l l in anticipation of the crop to be harvested in the new year. After a good year paper was required for purchases of land and real estate. One source of this paper was gold which was dissaved (or dishoarded). Williams notes this sequence of payments and receipts when he claims that during the period of depreciating paper (1885 - 1897) i t was in the interests of the exporters for the gold premium to rise 14 since costs were laid out in paper before receipts came in. * A pair of references in Ford suggest that there was an air of 13 * Ford, Op. Cit.. p. 170; J. H. Williams, Argentine International  Trade Under Inconvertible Paper, 1880 - 1900 (Cambridge, Harvard University Press), 1928, p. 160 1 4 * Williams, Op. Cit., p. 160 speculation and expansion in the second half of the calendar year. He notes that cash/deposit ratios tended to f a l l from June to December during the period of expansion from 1900 - 1912, and that the severe monetary stringency of 1913 led to a f a l l in rents and to a cutback in land speculation.* - 3* Furthermore, the chief destina-tion of the small domestic savings was mortgage and real estate 16 purchases (otherwise savings went into immigrant remittances * ) . A l l these factors suggest that there was pressure on savings when expansion was contemplated. In summary the Argentine monetary system allowed individuals to expand the money supply by exchanging gold for money in order to obtain cash to make purchases of land and real estate. Gold balances were built up when no expansion was undertaken but exchanged for paper when expansion was planned. An Asset of Fixed Value Gold also meets the Keynesian criterion that the precautionary asset must be fixed in value. First the price of gold was fixed in sterling and this relationship was maintained independent of events in Argentina. Gold could be exchanged for sterling in times of crises in Argentina. Second, since the strongest p o l i t i c a l group, the exporters, favoured a depreciating paper because i t reduced their costs in paper, gold holders could expect that i f the peso price of gold in paper did change, that movement would be up and 1 3 * Ford, Op. Cit., p. 171, 184 1 6 * Ibid, p. 128 not down. Third, although confidence in the banks grew during this period, this trust was tentative and the Argentinians were quick to withdraw their deposits in favour of gold when cr i s i s 17 loomed in 1913 - 1914. * These conditions suggest that gold was prized for the stability of i t s value. The private demand for gold in Argentina was based upon the precautionary motives presented by Keynes since there were opportunities for advantageous purchases and since gold was fixed in value. The amount of gold held was determined by the marginal benefits of holding a secure asset to make advantageous purchases and the marginal costs of the interest foregone. SPECULATIVE DEMAND FOR MONEY AND GOLD Keynes has suggested that speculation might explain the demand for money. Speculation is defined as having "....the object of securing profit from knowing better than the market what the 18 future w i l l bring forth". * Keynes argued that speculation was 19 directed specifically against the interest rate on bonds. * People prefer bonds to money when interest is high since (1) the opportun-i t y cost of holding money is large, and (2) the price of the bond is expected to rise and bring capital gains. When the interest 1 7 ' Ford, Op. Cit., p. 97 18 * Keynes, Op. Cit., p. 170 19 Keynes, Op. Cit.„ p. 170 ff 50 rate i s low individuals hold cash. At some low level of the interest rate the demand for money becomes i n f i n i t e l y elastic -increases in the money supply would be absorbed into balances indefinitely. This i s the "liquidity trap." Speculation could be directed against any asset. Ford points out that speculation against the paper currency may have caused 20 the large private accumulation of gold in 1883 - 4 and 1913 - 4. In both instances the balance of payments went heavily against Argentina leading to expectations that paper would become in -convertible and depreciate. In Chapter 2 i t was contended that i f gold flows were not sufficient to satisfy monetary demands the alternatives were gold price increases, gold/fiat money ratio 21 decreases, or the demonetization of gold. * Because gold was the chief international currency and Argentina had no control over i t , the latter two possibilities were more plausible. Either of them led to capital gains. Although speculation may explain periods of c r i s i s in Argentina i t is not plausible to argue that i t can explain the large move-ments of gold to and from private hoards. Inconvertibility did not appear to be a danger in the period 1900 - 13 and the f i r s t major gold outflow was not u n t i l late 1913. Throughout the period there were net gold inflows in every year and exports grew at rapid rates. Under such conditions speculation in gold does not appear to explain private gold holding. 20 u* Ford, Op. Cit.. pp. 136,-163 2 1 ' Above, p. 36 51 It also seems unlikely that individuals speculated in paper. Fi r s t , i t w i l l be shown (Chapter 4) that velocity was relatively constant. Second, a return to inconvertibility would only happen i f depreciation of the currency was expected since appreciation was against the economic interest of the dominant p o l i t i c a l group. Third, there were relatively stable prices for goods. Therefore the demand for money cannot be explained by the attempt to avoid losses in the real value of paper money balances. In conclusion, i t seems saft to ignore the possibility that speculation can explain the demand for either money or gold in the period of prosperity. THE DEMAND FOR MONEY AND FOR GOLD On the basis of the preceding discussion the following motives for private demand for gold and money in Argentina are suggested. The demand for both was determined by the level of income. The demand for money was a function of the level of income and the two are highly correlated as Chapter 4 w i l l demonstrate. Gold acts as a precautionary balance but in the opposite way to that suggested by Friedman. Gold is dishoarded when the money supply was in-sufficient to meet the demand for money determined by the economic prospects for the next year. The motivational complex w i l l be verified empirically in the next chapter. CHAPTER 4 APPLICATION OF THE MODEL TO ARGENTINA Chapter 2 and 3 developed the theoretical bases for the empirical investigations to be undertaken in this chapter. Chapter 2 developed the conditions of gold import and suggested that although the gold import in the short-run did not meet the demand for money the demand was met in the long run. Chapter 3 argued that the Argentinian was able to adjust the supply of money by (dis)hoarding gold. This chapter w i l l demonstrate empirically that in the short run gold dishoarding was used to alter the money supply in order to make purchases of real estate and land. GOLD FLOWS IN THE LONG RUN Gold imports to Argentina over the period 1900 - 1913 were more than sufficient to satisfy the demand for money. Two factors suggest this - the constancy of the velocity of money and the percent potential note issue realized. The velocity of money was remarkably constant over the period 1900 - 1913 but there was a slight downward trend (see Table V).. This f a l l in velocity can be explained a la Friedman by treating money as a luxury good which is accumulated as income flows. It also reflected the growing confidence in the paper peso as the Argentine economy continued to grow. 52 Another measure of the extent of gold flows and the impact on the money supply i s what Ford calls the potential note issue. "(Potential note issue)....is the issue which would have resulted i f a l l net gold imports (less the quantity absorbed by the Conversion Fund) had been deposited at the Caja in exchange for notes."I* The potential note issue is the cumulative sum of the gold import after 1899 and the note issue of 1899. The ratio of exports to potential note issue is a proxy for the potential velocity. This ratio f e l l substantially between 1900 and 1914 (Table V). It i s concluded that gold imports were more than sufficient to satisfy the monetary demands of the Argentines. The excess gold was absorbed into private holdings (see Table I and the discussion of Assumption 1). Note also that gold hoarding was particularly heavy after 1909. The Argentinians found that the money supply was growing sufficiently rapidly to meet their requirements for expansion and they decided instead to add incoming gold to their private stocks. GOLD FLOWS IN THE SHORT RUN . As Chapter 2 and Appendix B demonstrate, short-run gold flows are the net of the other items in the balance of payments. Since Argentina was very dependent upon agriculture for i t s international trade, changes in exports and capital imports were violent and Ford, Op. Cit. , p. 96 n. 54 TABLE V POTENTIAL AND ACTUAL VELOCITY OF MONEY IN ARGENTINA, 1900 - 1914 (USING EXPORTS AS A PROXY FOR INCOME AND NOTE ISSUE AS A PROXY FOR THE MONEY SUPPLY) ACTUAL POTENTIAL VELOCITY VELOCITY (RATIO OF EXPORTS (RATIO OF EXPORTS TO ACTUAL NOTE TO POTENTIAL NOTE ISSUE) ISSUE) 1900 1.18 1.17 1901 1.29 1.22 1902 1.36 1.27 1903 1.32 1.32 1904 1.48 1.41 1905 1.48 1.52 1906 1.27 1.30 1907 1.29 1.22 1908 1.43 1.39 1909 1.32 1.22 1910 1.18 1.05 1911 1.02 0.89 1912 1.36 1.18 1913 1.34 1.18 1914 0.98 0.82 SOURCE: Col. 1. Ratio of exports to actual note issue calculated from Ford, Op.t Cit., p.95 Col. 2. Ratio of exports to potential note issue calculated from Ibid., p. 95 .55 imports of consumer goods and investment goods followed suit. * A formula to demonstrate how imports of goods and capital imports respond to changes in the level of exports yet provide in the long run the required gold reserves to back the currency was beyond the scope of this thesis but is a possibility for further study at a more advanced level. Instead of considering this broader mechanism, this thesis considers only the use of the private stock of gold to adjust the money supply. FORD ON GOLD HOARDING Ford did not examine the private demand for gold in depth during this period in Argentina but he did make some comments in passing. He felt that income was the chief determinant of gold hoarding. "Gold would move to and from private sources as confidence varied which might well be assumed to vary with changes in prosperity and economic activity (for example, rising activity brings a net addition to the stocks of gold in the Caja as private hoarders diminished their gold stocks through growing confidence in paper currency); secondly, according to the needs of internal activity for paper rather than gold or cheques was generally used for transactions."3. Ford assumed the level of income to be a test of both the level of economic activity and of confidence in the paper peso. He argued * Exports f e l l in four years: 1906, 1910, 1911 and 1914. Imports f e l l in three years: 1902, 1908 and 1914. London Issues for Argentina f e l l in five years: 1902, 1904, 1911, 1913 and 1914. ' Ford, Op. Cit., p. 167 that when income was high the demand for the paper peso was high --(1) because the Argentinians had confidence in the paper peso, and (2) because they needed domestic currency to conduct transactions. The opposite i s true when income f a l l s . Ford supports his argument by finding the correlation co-4 efficients of income and gold (dis)hoarding. He finds a correlation coefficient r = +0.85 between gold hoarding and the f i r s t difference in exports (which was the only available proxy for income) for the period 1904 - 1914. I recalculated his statistics and discovered a correlation coefficient of r = +0.83 for the same time span. It should be noted that 1914 was a year of unusual gold hoarding and of crop failure in Argentina. There was heavy gold export in the second half of 1913 which cancelled the heavy import in the f i r s t half. Thus i f 1914 is excluded from the calculation the correlation i s lower. r = +0.67; and i f both 1913 and 1914 are excluded the correlation is r = +0.67. Ford 's failure to take the uniqueness of 1914 into account reduces the impact of his analysis. We must look to see i f there aren't higher correlations with gold (dis)hoarding elsewhere. 4* Ibid., p. 47 57 GOLD (DIS)HOARDING AND VELOCITY This section w i l l demonstrate that the relationship between gold (dis)hoarding and the velocity of money i s closer than that between gold (dis)hoarding and income, particularly when 1914 is excluded from the calculations. This changes the emphasis from the need to finance changing levels of income to the need to finance discrepancies between the supply of cash and the :demand for money which i s determined by the level of income. Notes on the Methodology The simple correlation test used by Ford does not establish lines of causation between the variables. However, a regression would produce the same coefficients since the t-test i s the same. The direction of causation seems clear in the analysis. It is lik e l y that the velocity of money (or income) determined gold (dis)hoarding rather than vice-versa. A problem in performing the correlations of gold (dis)hoarding and note issue was that gold (dis)hoarding appeared on both sides of the correlation since (dis)hoardingwas part of the note issue. The solution to this d i f f i c u l t y was to remove from note issue that part which was due to gold (dis)hoarding in that year and then to recalculate velocity. The assumption i s made that the individual was concerned with what his money supply would have been i f he hadn't (dis)hoarded. The correlations were higher after this operation. TABLE VI DEVIATION OF THE VELOCITY OF MONEY ABOUT THE AVERAGE VELOCITY OF MONEY IN THE PERIODS, 1904-1912, 1904-1913 AND 1904-14 ARGENTINA 1904 - 1912 1904 - 1913 1904 - 1914 DEVIATION DEVIATION DEVIATION FROM FROM FROM MEAN MEAN MEAN HOARDING HOARDING HOARDING HOARDING HOARDING HOARDING INCLUDED INCLUDE© INCLUDED INCLUDED INCLUDED INCLUDED 1904 +0.16 +0.19 +0.16 +0.19 +0.20 +0.23 1905 +0.16 +0.21 +0.16 +0.21 +0.20 +0.25 1906 -0.05 -0.09 -0.05 -0.09 -0.01 -0.05 1907 -0.05 -0.07 -0.05 -0.07 -0.01 -0.05 1908 +0.11 +0.15 +0.11 +0.15 +0.15 +0.19 1909 0.00 +0.02 0.00 +0.02 +0.04 +0.06 1910 -0.14 -0.20 -0.14 -0.20 -0.10 -0.16 1911 -0.30 -0.33 -0.30 -0.33 -0.26 -0.29 1912 +0.04 +0.07 +0.04 +0.07 +0.08 +0.11 1913 +0.02 +0.02 +0.06 +0.06 1914 -0.30 -0.38 SOURCE: Calculated from Ford, Op. Cit., pp. 95, 96 59 Notes on the Data Statistics were not available for the Argentine money supply or for Argentine total income. Consequently the proxy used for income was the level of exports. The discussion of Assumption 5 (Chapter 1) jus t i f i e d the use of exports for income. The proxy used for the money supply was note issue. The discussion of Assumption 1 (Chapter 1) established that use of the actual money supply rather the proxy, the note issue, would have reinforced the correlation for the years 1908 - 1913. Correlation of Gold (Dis)hoarding and Velocity The correlation of gold (dis)hoarding and the velocity of money is high both when 1913 and 1914 are included and when they are not; r = +0.88 (1904 - 1914), r = +0.84 (1904 - 1913), r = +0.84 (1904 - 1912). These coefficients are higher than those between hoarding and income. Removal of theeffects of gold (dis)hoarding from the note issue alters the velocity of money to the level i t would have been at i f there had been no private gold holding. The coefficients are: r = +0.91 (1904 - 1914) r = +.0.88 (1904 - 1913) r = +0.88 (1904 - 1912). 60 The improvement in the coefficients when (dis)hoarding i s removed from the note issue i s marginal but in the direction that conforms the hypothesis. The coefficients with gold (dis)hoarding included in note issue are lower because the situation which the (dis)-hoarding is intended to correct has been corrected in the desired direction. Gold (dis)hoarding reduced the deviation between the current velocity and the average velocity during the period. The degree to which this happened i s demonstrated by Table VI. The f i r s t column for each period indicates the deviation from the mean velocity i f the results of gold (dis)hoarding are included in note issue and the second column shows the deviation i f gold (dis)hoarding is removed. This deviation was reduced in the extremes by 80% in 1906 and 1907 and by 0% in 1913 when gold (dis)hoarding is included. The partial movement toward the mean velocity suggests that Argentinians were satisfied with a velocity that fluctuated' about the average. This is in agreement with Friedman's argument that in the United States the demand for money is a function of a concept of income which fluctuated less in percentages terms than the level of exports. Gold (dis)hoarding was used to adjust the money supply toward the level of income but not so much as to make the velocity of money a constant. 61 The correlation between note issue and the level of income (exports) was high: r = +0.79 (1904 - 1914), r = +0.87 (1904 - 1913), r = +0.83 (1904 - 1912). This supports the argument that the demand for money is dependent upon the level of income. The velocity of money did conform to the income cycle. The correlation coefficients are: r = +0.80 (1904 - 1914), r = +0.66 (1904 - 1913), r = +0.66 (1904 = 1912). These coefficients are of the same magnitude as the coefficients for income and gold (dis)hoarding. This i s not surprising because gold (dis)hoarding was more highly correlated with the velocity of money than income. The failure of the correlation of velocity and income to be higher emphasizes that gold (dis)hoarding was used to adjust the money supply toward the income level (whatever i t s level) rather than to finance changes in the level of income. Other correlations did not provide significant results. The correlation between velocity and gold (dis)hoarding using r a i l -road receipts as a proxy for income did not yield significant results except for 1904 - 1914. r = +0.68 (1904 - 1914), r = insig. (1904 - 1913), r = insig. (1904 - 1912). 62 The correlation of gold (dis)hoarding and changes in actual note issue was not significant. This result substantiates earlier conclusions. What was important to the Argentine gold holder was not the size and direction of the changes in the note issue but i t s changes in size and direction with respect to changes in income. Another variable which might explain gold (dis)hoarding i s the interest rate. According to this approach gold would be ex-changed for other assets when the interest rate on these assets rose and increased the opportunity cost of hold gold. Unfortunately the data was not available to demonstrate directly the correlation coefficients of (dis)hoarding with the interest rate. In Argentina during this period i t might be expected that the interest rate was dependent upon the level of income (exports). However, income did not correlate with (dis)hoarding more strongly than velocity. Capital imports, which respond to changes in the interest rate, were also used as a proxy. However, the correlation of gold (dis)hoarding and gold imports was not significant. This suggests that gold holdings were not responsive to the interest rate. In conclusion, the private holding of gold in Argentina was most highly correlated with velocity, particularly when the effects of gold (dis)hoarding are removed. The demand for money was most highly correlated with income. These correlations substantiate the hypothesis that private stocks of gold were held as a precautionary balance which could be (dis)hoarded in order to bring the supply 63 of money to i t s desired relationship to income. The short-run inequality between the demand and supply of money was due to the failure of gold imports to respond perfectly to demands for gold to back the Argentine currency. In the long-run, as long as gold was being produced in sufficient quantities, the import of gold took place at the rate determined by the rate of growth of the economy. Two pos s i b i l i t i e s for study at a more advanced level emerged from the preparation of this thesis. The f i r s t is a learning model to relate the import of gold to the demand for money which would make allowance for gold (dis)hoarding as a short-run safety device to equate the demand for money (and gold) with the supply. The second i s a model to relate expectations about the crop to the demand for money (and gold). Both of these analyses were beyond the scope and level of sophistication of this master's thesis but might be done i f research were undertaken to obtain data not available in the sources used above. 64 BIBLIOGRAPHY ECONOMIC HISTORY - BOOKS Bloomfield, A.I., "Short-term Capital Movements Under the Pre-1914 Gold Standard". Princeton Studies in International Finance. No. 11 International Finance Section, Department of Economics, Princeton. Ferrer, Aldo, The Argentine Economy, translated by Marjorie M. Arquidi, Berkely, University of California Press,1967. Ford, A.G., The Gold Standard, 1880 - 1914: Britain and Argentina, Oxford, At the Clarendon Press, 1962. Friedman & Schwartz, A Monetary History of the United States, 1867 - 1960. National Bureau for Economic Research, Princeton, N.J., Princeton University, 1963. Joslin, D., A Century of Banking in Latin America, London, Oxford University Press, 1963. Kemmerer, W. G., Gold and the Gold Standard, New York, McGraw-Hill, 1944. T r i f f i n , Robert, The Evolution of the International Monetary System: Historical Re-appraisal and Future Perspectives International Finance Section, Department of Economics, Princeton University, P r i n c e t o n ; 1964. Viner, Jacob, Canada's Balance of International Indebtedness, 1900 -1913, Cambridge Mass., Harvard University Press, 1924. Williams, J.H., Argentine International Trade Under Inconvertible Paper, 1880 - 1900, Cambridge Mass., Harvard University Press, 1928. Yeager, L.B.,International Monetary Relations, New York, Harper & Row Inc., 1966. 65 THEORY OF THE DEMAND FOR MONEY - BOOKS Ackley, Gardner, Macroeconomic Theory - New York, MacMillan, 1961. Cagan, Philip, "The Monetary Dynamics of Hyperinflation", Studies in the Quantity Theory of Money, Friedman ed., Chicago, 111., University of Chicago Press, 1956. Friedman, Milton, "The Quantity Theory of Money - A Restatement". Studies in the Quantity Theory of Money, Friedman ed., Chicago, University of Chicago Press, 1956. , A Theory of the Consumption Function. A Study by the National Bureau of Economic Research, Princeton, N.J.^ Princeton University Press, 1957. Hicks, Jj, , C r i t i c a l Essays in Monetary Theory, Oxford, At the Clarendon Press, 1967. Markowity, H.M., Portfolio Selection, London, John Wiley, 1959. Mieselman, David, The Term Structure of Interest Rates, New York, Prentice-Hall, 1962. Sammelson, P.A., Foundations in Economic Analysis, Cambridge, Harvard University Press, 1961, pp. 117-124. Selden, R.T., "Monetary Velocity in the United States", Studies in the Quantity Theory of Money, Friedman ed., Chicago, University of Chicago Press, 1956. INTERNATIONAL TRADE THEORY - BOOKS Johnson, H. G. , "Towards a General Theory of the Balance of Payments", International Trade and Economic Growth, London, George Allen and Unwin, 1958. Kindleberger, C.P., Internationl Economics, 3rd Edition, New York, Richard Irwin Inc., 1963. Niehans, J., "Interest Rates and the Balance of Payments," Trade, Growth and the Balance of Payments, Baldwin ed., New York, Rand McNally, 1965, pp. 230 - 48. 66 ECONOMIC HISTORY - PERIODICALS Chandavarkar, A. G. , "The Nature and Effects of Gold Hoarding in Underdeveloped Countries", Oxford Economic Papers, N.S. 13, June 1961, pp. 137 - 168. Ford, A.G., "Capital Exports and Growth for Argentina, Economic Journal, V 68. 1958, pp. 589 - 93. , "Capital Exports and Growth for Argentina," Economic Journal, V 70, 1960, pp. 630 - 3. , "Notes on the Transfer of Overseas Lending and Grants," Oxford Economic Papers,N.S. 14, 1962, pp. 94 - 102. , "The Working of the Gold Standard Before 1914, Oxford Economic Papers, N.S. 12, Feb., 1960, pp. 52-77. Hay, K.A.J., "Money and Cycles in Post-Confederation Canada", Journal of P o l i t i c a l Economics, V 75, No. 3, 1967, pp. 263 - 73. Ingram, J.C., "Growth and Capacity in Canada's Balance of Payments", American Economic Review, Vol. 57, March 1957, pp. 93 - 104. Kindahl, J.K., "Economic Factors in Specie; Resumption in the United States, 1865 - 1879", Journal of P o l i t i c a l  Economy, V 69, 1961, pp. 30 - 48. Knapp, John, "Capital Exports and Growth", Economic Journal, V. 67, Sept. 1957, pp. 432 - 444; , "Capital Exports and Growth for Argentina; A Comment", Economic Journal, V. 69, 1959, pp. 593 - 97. Macesich, "Quantity Theory and Income-Expenditure Theory", Canadian Journal of Economics and P o l i t i c a l Science, V.30, 1964, pp. 368 - 390. Rosenburg, "Capital Imports and Growth - the Case of New Zealand", Economic Journal, V. 71, 1961. Smithies,A., "Economic Growth - International Comparisons" American Economic Review, V. 55, Proceedings, May 1955. 68 Taussing, F.W., "International Trade Under Depreciated Paper", Quarterly Journal of Economics, V. 37, 1917, pp. 380 - 403. Williamson, J.G., "Real Growth, Monetary Disturbances and the Transfer Process, The U.S. Case, 1879 - 1900", Southern Economic Journal, V. 29, Jan. 1963, pp.167-80. DEMAND FOR MONEY - PERIODICALS Baumol, W.I., "The Transactions Demand forCash", Quarterly Journal  of Economics, V. 66, Nov. 1963, pp. 545 - 556. Brunner, Karl, "Institutions, Policy and Monetary Analysis," Journal of P o l i t i c a l Economy, V. 73, 1965, pp 197-218. , "Report on the Commission of Money and Credit", Journal of P o l i t i c a l Economy, V. 69, 1961, pp.605-20. Brunner and Meltzer, "Demand and Supply Functions for Money," Journal of Finance, V. 19, 1964, pp. 240 - 284. Catt, A.J.L., "Idle Balances and the Motives for Liquidity", Oxford Economic Papers, N.S. 14, 1962, pp. 124 - 138. Chow, G., "On the Long-run and Short-run Demand for Money", Journal of P o l i t i c a l Economy, V. 74, April; 1966, pp. I l l - 129. Friedman, Milton, "The Demand for Money: Some Theoretical and Empirical Results", Journal of P o l i t i c a l Economy. V. 67, Aug. 1959, , "Interest Rates and the Demand for Money", Journal of Law and Economics, V. IX, Oct., 1966, pp. 71 - 86. Hamburger, M.J., "The Demand for Money by Household, Money Substitutes and Monetary Policy", Journal of P o l i t i c a l  Economy, V. 74, Dec. 1966, pp. 600b - 24. Johnson, H.G., "Recent Developments in Monetary Theory", Essays in Monetary Theory, London, Allen and Unwin Ltd., 1958. 69 Lee, T.H., "Alternative Interest Rates and the Demand for Money: The Empirical Evidence", American Economic Review, V. 57, Dec. 1967, pp. 1168 - 83. Marty, A.L., "Money in a Theory of Finance", Journal of P o l i t i c a l Economy, V. 69, 1961, pp. 56 - 62. Mayer, T., "The Empirical Significance of the Real Balance Effect", Quarterly Journal of Economics. V. 73, 1959,pp.275-91. , "Multiplier and Velocity Analysis: An Evalution", Journal of P o l i t i c a l Economy, V. 72, 1964, pp. 563-75. Tiegen, R.L., "The Demand and Supply of Money", Readings in Money, National Income and Stabilization Policy, Smith and Tiegen, Hourewood, 111., Irwin Coi,, 1965. Tobin, J., "Money, Capital and Other Stores of Value", American Economic Review, V. 51, 1961, pp. 26 - 37. Tussing, D.A., "Can Monetary Policy Influence the Availability of Credit?", Journal of Finance. V. 21, 1966, pp. 1-15. Van Home, James, "Interest Rate Risk and the Term Structure of Interest Rates", Journal of P o l i t i c a l Economy, V. 73, 1965, pp. 345 - 351. Walters, A.A., "The Demand for Money - The Dynamic Properties of the Multiplier", Journal of P o l i t i c a l Economy, V. 73, No". 3, 1967, pp. 293 - 99. , "Professor Friedman on the Demand for Money", Journal of P o l i t i c a l Economy, V. 73, No. 3, 1965, pp. 545 - 51. INTERNATIONAL TRADE - PERIODICALS Borts, G.H., "A Theory of Long-run Capital Movements", Journal of P o l i t i c a l Economy, V. 62, Aug. 1964, pp. 341 - 358. Johnson, H.G., "The Transfer Problem and Exchange Stability", International Trade and Economic Growth, London, Allen and Unwin, 1958. APPENDIX A THE SIZE OF THE MONEY SUPPLY - THE ARITHMETIC A proper d e f i n i t i o n of the money supply should include both bank deposits and cash. The size of the money stock depends upon the preferences of individuals to hold gold notes and deposits and upon the cash/deposit ra t i o s of the banks. An arithmetical demonstration of the constitution of the money stock aids i n explaining t h i s point. Suppose: n i s the proportion of notes held by the public 1 - n i s the proportion of note issue deposited with the banks, d i s the proportion of the gold stock deposited i n the banks, c i s the proportion of the gold stock held at the Cajha. j i s the deposit/cash r a t i o of the banks, M i s the t o t a l money supply N i s note issue G i s the gold stock, R i s t o t a l bank reserves, the t o t a l money supply equals the note issue held by the public plus deposits M = nN + JR. 71 But note issue i s equal to the proportion of gold stock held by the Caja, N = cG, and reserves are equal to the sum of the note issue and the gold stock deposited at the bank, R = ( (l-n)N + dG ). Therefore, M = ncG + j(!-n)N + jdG, = ncG + j(.l-n)cG + jdG, «? G(nc + jc - njc +jd), = G(c(n + j - jn) + jd). The money supply is a constant multiple of the gold stock only i f the expression in brackets i s a constant. Therefore,the money supply depends on the decision of individuals to hold gold notes and deposits and on the banks deposit/reserve ratio. APPENDIX B 72 GOLD IMPORTS IN THE SHORT RUN - THE ARITHMETIC Receipts are the sum of exports and capital imports in an export economy like Argentina, a - x • i £ > Hence the rate of change of receipts is equal to the rate of change of exports times the proportion of exports to total receipts (x) plus the rate of change of capital imports times the ratio of capital imports to total receipts ( i ) , R = xX + i l r f. If capital imports and exports are growing at the same rate, the rate of growth of receipts i s equal to that rate, since X = I, and x + i = 1. In equilibrium i t i s equal to the rate of growth of gold imports. Similarly the rate of growth of payments is equal to the sum of the rate of growth of each of i t s components times the ratio of that component to total payments, P* = nN* + qD*. In equilibrium P* = N* = D* = X* = I * f = G*^. Note that this is compatible with increasing absolute gold imports. Gold imports are equal to the difference between P and R. Hence the rate of growth of gold imports i s equal to the sum of 73 the rate of growth of receipts times the ratio of receipts to gold imports plus the rate of growth of payments times the ratio of payments to gold imports, G*n = SS*' - • PP* Gn G~ n. For expositional purposes this expression is awkward. Therefore the equation was divided by and the absolute change in gold imports was treated as a function of receipts and payments alone, A G = RR* - PP* n Table VII classifies the possible ways in which changes in receipts and payments determine changes in gold imports. (1) In Part A balance of payments surplus (R> P) situations are considered; in Part B, deficits. In Part A gold inflows are positive; in Part B negative. (2) Growing economies are listed on the l e f t hand side where the rate of growth of receipts is postive; declining economies are on the right. (3) In the upper row of each part the rate of growth of receipts exceeds that of payments and in the lower rows the reverse i s true. The results of the chart can be summarized as follows: The desired rate of growth of gold imports i s positive in a growing economy. This condition i s met when, T A B L E V I I T H E S I G N OF T H E CHANGE I N GOLD IMPORTS ( G = 4 <AG ) m 74 P A R T A ( B A L A N C E OF PAYMENTS S U R P L U S ) P O S I T I V E (1) R* P O S I T I V E P * P O S I T I V E GROWTH R A T E (2) R* P O S I T I V E P * N E G A T I V E R**P* P*>R* P O S I T I V E P O S I T I V E I F R? P * > P/ R N E G A T I V E I F R* / P * < P/ R P O S I T I V E N E G A T I V E GROWTH (3) (4) R* N E G A T I V E R* N E G A T I V E P* P O S I T I V E P* N E G A T I V E N E G A T I V E P O S I T I V E P O S I T I V E I F R* / P * < P/ R N E G A T I V E I F R* / P * > P/ R P A R T B ( B A L A N C E OF PAYMENTS D E F I C I T ) R*>P* P O S I T I V E I F P O S I T I V E I F RW P / R P O S I T I V E - R * / P * < P / R N E G A T I V E I F N E G A T I V E I F R*/P*< P/ R R* / P ^P/ R R*>P* N E G A T I V E N E G A T I V E N E G A T I V E 75 given (1) R > P, i f (a) R*> P* > 0, or i f (b) R* 7 0 P^*> or i f (c) P*>R*>0, and R* P . P* R In cases (a) and (b) gold imports may be larger or smaller than those desired depending on the rate of growth of exports. In case (c) although gold is being received at present the balance of payments is moving toward a def i c i t position. Nevertheless, given the second condition (R*^ P), gold imports are increasing P* R along with income. When the balance of payments i s in d e f i c i t i t i s possible for gold imports to be increasing, i.e., for gold exports to be fal l i n g . The most obvious case occurs when receipts are growing faster than payments, given ^ P > R i f (a) R*^ P*> 0 and R* P P* R or i f (b) R*;> 0 7P*. but not i f (c) P*> R*'>Q-In cases (a) and (b) the balance of payments is moving to a surplus position but in case (c) the defi c i t i s being reinforced. It seems lik e l y that 1(c) would become 2(c) in time and that 2(a) would become 1(a) as the balance of payments position switched. This probability demonstrates a deficiency of the model - i t is not sufficiently dynamic. On the other hand there has been developed 76 a set of models which show the changes in the balance of payments as a result of changes in income, exports, capital flows etc. Some of these are listed in the bibliography. In recent centuries the instances of declining economies has been negligible but in the interests of symmetrical presentation the results are listed. When economies are declining (and velocity is assumed constant) less gold i s desired for monetary purposes. This condition is met when (3) R>P, not i f (a) P* < R*<0, but i f (b) R*< 0<P*, or i f (c) R*< P*< 0 and R* . P . P* R It i s also met i f (4) P > R, i f (a) P*< R*< 0 and R* P P* R , (b) R*< 0 < P* (c) R* < P*< 0. Discussion of these cases i s not warranted by the Argentine case and will not be undertaken since the changes in the items in the balance of payments were violent. Although the net gold import is known in any given year, i t is not possible to discover whether this is due to rising or f a l l i n g receipts or payments. 

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