National Monetary Commission. Publications. (A series of over forty monographs by different authors, giving as a whole the best available history of banking in the United States and the best accounts in English of the banking institutions of other countries.) PRATT, S. S. The Work of Wall Street. SUMNER, W. G. History of Banking in the United States. CHAPTER XVI OTHER PROBLEMS IN MONEY AND BANKING The Value of Money. We have not as yet answered one very important question, and that is, "What determines the value of money?" Now by the "value of money we mean the purchasing power of money as reported or expressed by the money prices of other things. There is no such thing in fact as "the general purchasing power of money," although we have found it convenient to use that and similar expressions. Money has, in reality, a large number of different values, expressed by the different quantities of different things that it will purchase. If the price of wheat is one dollar per bushel, then one value — the wheat value of money is a bushel per dollar. Similarly, the purchasing power of money in sirloin steaks may be four pounds per dollar. But how are we to blend sirloin steaks, wheat, and other things into one concept? The notion of the general value of money is simply a useful abstraction, based on a broad view of all its different specific values. When we fix our attention upon changes in the various purchasing powers of money, however, we are able to make a distinction between changes that are widespread and general, and changes that affect only one or two commodities. For example, a new invention may decrease the price of a particular commodity, without affecting the prices of other things except (if the demand for the commodity is elastic) by shifting demand from other things to the commodity in question, an effect which would usually be slight so far as the price of any one of these other things is concerned, for the demand would very likely be shifted from many different lines of consumption. Or, if the demand for the commodity in question is relatively in elastic, a diminution in its price may increase the demand for other things. But there are, on the other hand, price fluctuations which are widespread and which show a general trend in one direction or the other, and these we may call, with substantial accuracy, changes in the value of money. What are the underlying causes of these general changes in the values of money? The Nature of the Problem. Our first impulse, perhaps, is to suggest that there is no new problem here, that the value of money is to be determined in the way that other values are determined, and to seek to frame an explanation in terms of marginal utility and the general laws of supply and demand. But the task is not so simple as that. The analysis of marginal utility, it is true, formed the basis of our explanation of the shifting of demand from one commodity to another, but it does not help us to explain the demand for money. Marginal utility depends upon the capacity of things to satisfy human wants, and money does not directly satisfy a single human want, except the abnormal wants of the miser. We want money only as we want the things that money will buy for us. And when we turn to "supply and demand we find at first little help. For, it will be remembered, when we were discussing the relations between the prices of things and their supply and demand, we arbitrarily limited ourselves to the consideration of one commodity at a time. That is, we assumed that the money price of the one commodity we were considering was alone variable, and that the prices of all other things remained, for the time being, constant. The consumer whom we pictured as willing to buy a certain amount of a commodity at a certain price or a larger amount at a lower price, was, by our premises, merely comparing variable dollars' worths of the commodity in question with fixed dollars' worths of other things. All the values of money, save one, were held constant, so that the imaginary consumer simply had to compare the utility of larger and smaller marginal dollars' worths of the one commodity with their cost measured in a dollar that represented perfectly definite amounts of all other things. Now the problem of the value of money (understood as the problem of general changes in the different values of money) cannot be approached in. that way. For the problem of the value of money is merely the obverse of the problem of the money values of all other things. If we were studying the wheat value of money we could assume the sirloin-steak value of money to be held constant. But our present problem is that of the wheat value of money and the sirloin-steak value of money and all other values of money. We can't resort to the strategy of breaking the sticks in our bundle one by one. 66 The Quantity of Money and the Values of Money. — All this does not mean that there is no such thing as a demand for money." Using the word money in its broadest sense, including all" rights to receive money" that are used in making payments, it is clear that every sale of a commodity may be viewed as a purchase of money, and every purchase of a commodity as a sale of money. Going a step farther, and remembering that one wants money only because of the things money will buy, we may say that every sale of one commodity is a purchase of the power of acquiring other things. A seller cares nothing about the quantity of money - the number of dollars he gets in exchange for his goods, except in so far as these dollars have certain exchange relations with other things, including the things he buys as a consumer and the things he pays for under the head of "expenses of production." Similarly, a buyer cares not how much money he parts with in exchange for a definite quantity of goods, except in so far as the money has alternative uses of greater or less importance. The quantity of money the number of dollars in the aggregate supply of the instruments in which payments are made has no significance apart from the values of the dollars. These two things quantity and value are in the case of money bound together in a peculiar way. They are, in a very real sense, not only interdependent but interchangeable. A small amount of money of high purchasing power per unit will meet the needs of both buyer and seller just as well as a larger amount of money of lower purchasing power per unit. What are the conditions under which a general change in the values of dollars is possible? Let us simplify the problem by assuming that the change is absolutely general and uniform; that if, for example, the price of a bushel of wheat is seventy-five cents and the price of a bushel of corn is fifty cents, an increase in the price of wheat to a dollar and a half is accompanied by an increase in the price of corn to a dollar, and by a similar doubling of the money prices of all other commodities and services. Things retain, we shall assume, precisely the same exchange relations as before, except with reference to money. If prices have thus increased, all the values of money have diminished by one half. As an intermediary, then, as a means of obtaining other things, money has only half its former potency. Sellers are demanding and receiving twice as many dollars as before for given quantities of goods; buyers are offering and paying twice as many dollars as before per unit of goods purchased. Remembering now that we are using the word money in its broadest sense, including exchangeable credit instruments, it is evident that twice as much money as before passes from buyer to seller in exchange for every unit of everything else that passes from seller to buyer. But this means that one of two possible conditions must exist. Either (1) fewer exchanges are being made, or (2) exactly twice as much money as before is being exchanged for goods and services. So we reach the very important conclusion that there must be a definite relation between general changes in the values of money and changes in its quantity. We need not as yet concern ourselves with the question of which of these two related things is cause and which is effect. But that these two things are inseparably bound up, the one with the other, should now be clear. We may now state this principle in a somewhat broader form: If the number of units of goods and services of every sort annually exchanged for money remains constant, any increase or decrease in the amount of money used in making payments must be accompanied by an exactly proportionate general increase or decrease in prices. It is not necessary for the truth of this |