Sec. 4. #Index numbers.# The process of calculating general prices and changes in them has in it, inevitably, something of arbitrariness and incompleteness.  For not all prices can be included, but only those of articles of somewhat standardized grades and those that are pretty regularly sold in markets where prices are publicly quoted.  Any list of articles that can be selected is of unequal importance to different persons and classes of persons, at different places, at different times, and for different purposes.  And yet the study of general prices as shown by any broadly selected list reveals changes which in some measure affect the interests of every member of the community.

General prices are conveniently compared from one time to another through the use of index numbers.  An index number of any article is the per cent which its price at any certain date is of its price at another date (or of the average for a series of prices) taken as a base or standard.  Thus if the average price of cotton in the base year were 10 cents (taken as 100) and the price rose to 12 cents, the index number would be 120. A tabular index number is the per cent which the price of a selected group of articles at any certain date is of the price of the same group of articles at a date which has been taken as the base.[4]

The principal index numbers of the leading countries are here shown.  The fact that from 1862 to 1879 inclusive prices in the United States were expressed in an irredeemable paper standard makes comparisons for that period misleading.  A better idea is obtained by using as the base for each of the several series, the average of prices in each country for the years 1890 to 1899.

Sec. 5. #Gold production and monetary legislation, 1850 to 1879#.  The unprecedented increase in gold production between 1849 and 1853, and the continuance of production in volume about four-fold as great as that of the decade 1840-49 was reflected at once in a rise of prices.  This was a period of prosperity in business culminating in the crisis of 1857 (felt more or less in all the leading countries).  This prosperity accelerated the effect of increasing quantities of the standard money.  Credit was stimulated and the rate of circulation and the efficiency of money were increased.  Prices rose to a temporary maximum in 1857 and then fell as a great international financial crisis occurred.  The great new supplies of gold had been readily taken ("absorbed”) into the monetary circulation of the world, to meet the needs of rapidly growing commerce and industry.  In the European countries,[5] prices in terms of gold, tho fluctuating somewhat, kept at about the same level from 1860 to 1870.  The years 1871 and 1872 were very prosperous and showed rapidly rising prices which reached a maximum in 1873, when a financial panic occurred.

In that very year, just as the gold production for the first time since 1851 had fallen below $100,000,000, several notable changes in monetary legislation were made which made gold more important in the circulation of a number of countries.