Sec. 2. #Gold production, first half of nineteenth century.# We have now to note some great changes in the production of gold in the nineteenth century, changes both absolute and relative to that of silver.  The market ratio of the two metals had been gradually changing before 1792 and continued to change.  Gold was slowly becoming more valuable in terms of silver and the legal ratio of 15 to 1 in the United States (at which both metals were admitted free to the mint) proved to have undervalued gold.  Gold largely left circulation and silver and bank notes formed the greater part of our circulating medium.  Then, in 1834, soon after the production of gold had begun to increase somewhat more rapidly than that of silver, the legal ratio of the United States was changed to 16 to 1.  This brought a good deal of gold back into circulation and gradually drove out most of the silver (the heavier coins disappearing first).

In the decade 1841-50 the average annual value of the gold production had, for the first time since the early sixteenth century, exceeded that of silver.  Then, from 1848 to 1850, came the great gold discoveries in California and in Australia.  In 1851 the value of gold produced was one and one-half times that of silver; in 1852 was three times, and in 1853 four times as great; and then slowly declined, but continued every year as late as 1870 to be over twice as great.  This caused the displacement of silver by gold and drove out a large proportion of the silver coins of smaller denominations.  This led to the law of 1853, authorizing subsidiary coinage (on government account only) of lighter weight.[2] Let us observe the effect on prices that was brought about by the discoveries of 1848-49, and, first, we must consider briefly the method of measuring and expressing general changes in prices.

Sec. 3. #Concept of the general price level.# The price of any good is some other good or group of goods given for it in trade.[3] The standard unit of money coming to be the most convenient expression for price (whether or not money be actually passed from hand to hand in that particular trade), prices usually are monetary prices, and more specifically are prices in gold, or in silver, or in whatever constitutes the standard money unit.  But the price of each good is a definite, separate fact, which expresses the ratio at which that commodity is sold.  The price of any particular kind of goods may fluctuate in either direction as compared with the prices of other goods at the same time.  For example, iron and many other goods may rise while wheat and many other goods fall in price.  There is, therefore, no such thing as an actual general change in the prices of goods in terms of money, but it may be seen that the prices of large classes of goods, often of nearly all goods, change upward or downward at the same time and in the same general direction.  We thus have need to distinguish between changes in the valuations of particular kinds of goods in terms of each other and general changes in the valuation of a number of different goods in terms of the monetary unit.