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modities to one another remain unaltered by money; the only new relation introduced, is their relation to money itself; how much or how little money they will exchange for; in other words, bow the Exchange Walue of money itself is determined. And this is not a question of any difficulty, when the illusion is dispelled, which caused money to be looked upon as a peculiar thing, not governed by the same laws as other things. Money is a commodity, and its value is determined like that of other commodities, temporarily by demand and supply, permanently and
on the average by cost of production. The illustration of these principles, considered in their application to money, must be given in some detail, on ao
count of the confusion which, in mindr not scientifically instructed on the subject, envelopes the whole matter; partly from a lingering remnant of the old misleading associations, and partly from the mass of vapoury and baseless speculation with which this, more than any other topic of political economy, has in latter times become surrounded. I shall therefore treat of the Value of Money in a chapter apart.
of THE VALUE of MoxEy, As DEPENDENT on DEMAND AND supply.
§ 1. IT is unfortunate that in the very outset of the subject we have to clear from our path a formidable ambiguity of language. The Value of Money is to appearance an expression as precise, as free from possibility of misunderstanding, as any in science. The value of a thing, is what it will exchange for: the value of money, is what money will exchange for; the purchasing power of money. If prices are low, money will buy much of other things, and is of high value; if prices are high, it will buy little of other things, and is of low value. The value of money is inversely as general prices: joins as they rise, and rising as they all.
But unhappily the same phrase is also employed, in the current language of commerce, in a very different sense. Money, which is so commonly understood as the synonyme of wealth, is more especially the term in use to denote it when it is the subject of borrowing. When one person lends to another, as well as when he pays wages or rent to another, what he transfers is not the mere money, but a right to a certain value of the produce of the country, to be selected at pleasure; the lender having first bought this right,
by giving for it a portion of his capital. What he really lends is so much capital; the money is the mere instrument of transfer. But the capital usually passes from the lender to the receiver through the means either of money, or of an order to receive money, and at any rate it is in money that the capital is computed and estimated. Hence, borrowing capital is universally called borrowing money; the loan market is called the money market: those who have their capital disposable for investment on loan are called the monied class: and the equivalent given for the use of capital, or in other words, interest, is not only called the interest of money, but, by a grosser perversion of terms, the value of money. This misapplication of language, assisted by some fallacious appearances which we shall notice and clear up hereafter,” has created a general notion among persons in business, that the Value of Money, meaning the rate of interest, has an intimate connexion with the Value of Money in its proper sense, the value or purchasing power of the circulating medium. We shall return to this subject before long: at present it is enough to say, that by Value i zhall * Infra, ch. xxiii.
§ 2. The value or purchasing power of money depends, in the first instance, on demand and supply. But demand and supply, in relation to money, present themselves in a somewhat different shape from the demand and supply of other things.
The supply of a commodity means the quantity offered for sale. But it is not usual to speak of offering money for sale. People are not usually said to buy or sell money. This, however, is merely an accident of language. In point of fact, money is bought and sold like other things, whenever other things are bought and sold for money. Whoever sells corn, or tallow, or cotton, buys money. , Whoever buys bread, or wine, or clothes, sells money to the dealer in those articles. The money with which people are offering to buy, is money offered for sale. The to, of money, then, is the quantity of it which people are wanting to lay out; that is, . the money they have in their possession, except what they are hoarding, or at least keeping by them as a reserve for future contingencies. The supply of money, in short, is all the money in circulation at the time.
The demand for money, again, consists of all the goods offered for sale. Every seller of goods is a buyer of money, and the goods he brings with him constitute his demand. The demand for money differs from the demand for other things in this, that it is limited only by the means of the pur. chaser. The demand for other things is for so much and no more; but there is always a demand for as much money as can be got. Persons may indeed refuse to sell, and withdraw their goods from the market, if they cannot get for them what they consider a sufficient price. But this is only when they think that the price will rise, and that they shall get more money by waiting. If they thought the low price likely to be permanent, they wo take what they
could get. It is always a sine qu'à non with a dealer to dispose of his goods. As the whole of the goods in the market compose the demand for money, so the whole of the money constitutes the demand for goods. The money and the goods are seeking each other for the purpose of being exchanged. They are reciprocally supply and demand to one another. It is indifferent whether, in characterizing the phenomena, we speak of the demand and supply of goods, or the supply and the ... of money. They are equivalent expressions. We shall proceed to illustrate this proposition more fully. And in doin this, the reader will remark a great dif. ference between the class of questions which now occupy us, and those which we previously had under discussion respecting Values. In considering Value, we were only concerned with causes which acted upon particular commodities apart from the rest. Causes which affect all commodities alike, do not act upon values. But in considering the relation between goods and money, it is with the causes that operate upon all goods whatever, that we are especially concerned. We are comparing goods of all sorts on one side, with money on the other side, as things to be exchanged against each other. Suppose, everything else being the same, that there is an increase in the quantity of money, say by the arrival of a foreigner in a place, with a treasure of gold and silver. When he commences expending it (for this question it matters not whether productively or unproductively), he adds to the supply of money, and by the same act, to the demand for goods. Doubtless he adds, in the first instance, to the demand only for certain kinds of goods, namely, those which he selects for purchase; he will immediately raise the price of those, and so far as he is individually concerned, of those only. If he spends his funds in giving entertainments, he will raise the prices of food and wine. If he expends them in establishing a manufactory, he will raise the prices of labour and materials. But at the higher prices, more money will pass into the hands of the sellers of these different articles; and they, whether labourers or dealers, having more money to lay out, will create an increased demand for all the things which they are accustomed to purchase: these accordingly will rise in price, and so on until the rise has reached everything. I say everything, though it is of course possible that the influx of money might take place through the medium of some new class of consumers, or in such a manner as to alter the proportions of different classes of consumers to one another, so that a greater share of the national income than before would thenceforth be expended in some articles, and a smaller in others; exactly as if a change had taken place in the tastes and wants of the community. If this were the case, then until production had accommodated itself to this change in the comparative demand for different things, there would be a real alteration in values, and some things would rise in price more than others, while some perhaps would not rise at all. These effects, however, would evidently proceed, not from the mere increase of money, but from accessory circumstances attending it. We are now only called upon to consider what would be the effect of an increase of money, considered by itself. Supposing the money in the hands of individuals to be increased, the wants and inclinations of the community collectively in respect to consumption remaining exactly the same; the increase of demand would reach all things equally, and there would be an universal rise of prices. We might suppose with Hume, that some morning, every person in the nation should wake and find a gold coin in his pocket: this example, however, would involve an alteration of the proportions in the demand for different commodities; the luxuries of the poor would, in the first instance, be raised in price, in a much greater degree than other things. Let us rather suppose, therefore, that to every pound, or shilling, or penny, in the possession of any one, another pound, shilling, or penny, were suddenly added. There would be
an increased money domand, and consequently an increased money value, or price, for things of all sorts. This increased value would do no good to any one; would make no difference, except that of having to reckon pounds, shillings, and pence, in higher numbers. It would be an increase of values only as estimated in money, a thing only wanted to buy other things with ; and would not enable any one to buy more of them than before. Prices would have risen in a certain ratio, and the value of money would have fallen in the same ratio. It is to be remarked that this ratio would be precisely that in which the quantity of money had been increased. If the whole money in circulation was doubled, prices would be doubled. If it was only increased one-fourth, prices would rise one-fourth. There would be one-fourth more money, all of which would be used to purchase goods of some description. When there had been time for the increased supply of money to reach all markets, or (according to the conventional metaphor) to permeate all the channels of circulation, all prices would have risen one-fourth. But the general rise of price is independent of this diffusing and equalizing process. Even if some prices were raised more, and others less, the average rise would be one-fourth. This is a necessary consequence of the fact, that a fourth more money would have been given for only the same quantity of goods. General prices, therefore, would in any case be a fourth higher. The very same effect would be produced on prices if we suppose the goods diminished, instead of the money increased: and the contrary effect if the goods were increased, or the money diminished. If there were less money in the hands of the community, and the same amount of goods to be sold, less money altogether would be given for them, and they would be sold at lower prices; lower, too, in the precise ratio in which the money was diminished. So that the value of money, other things being the same, varies inversely as its quantity; every increase of quantity lowering the value, and every diminution raising it, in a ratio exactly equivalent.
This, it must be observed, is a property peculiar to money. We did not find it to be true of commodities generally, that every diminution of supply raised the value exactly in proportion to the deficiency, or that every increase lowered it in the precise ratio of the excess. Some things are usually affected in a greater ratio than that of tho excess or deficiency, others usually in a less: because, in ordinary cases of demand, the desire, being for the thing itself, may be stronger or weaker; and the amount of what people are willing to expend on it, being in any case a limited quantity, may be affected in very unequal degrees by difficulty or facility of attainment. But in the case of money, which is desired as the means of universal purchase, the demand consists of everything which people have to sell; and the only limit to what they are willing to give, is the limit set by their having nothing more to offer. The whole of the goods being in any case exchanged for the whole of the money which comes into the market to be laid out, they will sell for less or more of it, exactly according as less or more is brought.
§ 3. From what precedes, it might for a moment be supposed, that all the goods on sale in a country at any one time, are exchanged for all the money existing and in circulation at that same time: or, in other words, that there is always in circulation in a country, a uantity of money equal in value to the whole of the goods then and there on sale. But this would be a complete misapprehension. The money laid out is equal in value to the goods it purchases; but the quantity of money laid out is not the same thing . the quantity in circulation. As the money passes from hand to hand, the same iece of money is laid out many times,
fore all the things on sale at one time are purchased and finally removed from the market: and each pound or dollar must be counted for as many pounds, or dollars, as the number of times it changes hands in order to
effect this object. The greater of the goods must also be counted .. than once, not only because most things pass through the hands of several sets of manufacturers and dealers before they assume the form in which they are finally consumed, but because in times of speculation (and all times are so, more or less) the same goods are often bought repeatedly, to resold for a profit, before they are bought for the purpose of consumption at all. If we assume the quantity of goods on sale, and the number of times those goods are resold, to be fixed quantities, the value of money will depend upon its quantity, together with the average number of times that each piece changes hands in the process. The whole of the goods sold (counting each resale of the same goods as so much added to the goods) have been exchanged for the whole of the money, multiplied by the number of purchases made on the average by each piece. Consequently, the amount of goods and of transactions being the same, the value of money is inversely as its quantity multiplied by what is called the rapidity of circulation. And the o of money in circulation, is equal to the money value of all the goods sold, divided by the number which expresses the rapidity of circulation. The phrase, rapidity of circulation, requires some comment. It must not be understood to mean, the number of purchases made by each piece of money in a given time. Time is not the thing to be considered. The state of society may be such, that each piece of money hardly performs more than one purchase in a year; but if this arise from the small number of transactions—from the small amount of business done, the want of activity in traffic, or because what traffic there is, mostly takes place by barter—it constitutes no reason why prices should be lower, or the value of money higher. The essential point is, not how often the same money changes hands in a given time, but how often it changes hands in order to perform a given amount of traffic. We must compare the number of purchases made b the money in a given time, not with
the time itself, but with the goods sold in that same time. If each piece of money changes hands on an average ten times while goods are sold to the value of a million sterling, it is evident that the money required to circulate those goods is 100,000l. And conversely, if the money in circulation is 100,000l., and each piece changes hands by the purchase of goods ten times in a month, the sales of goods for money which take place every month must amount on the average to 1,000,000l. Rapidity of circulation being aphrase so ill adapted to express the only thing which it is of any importance to express by it, and having a tendency to confuse the subject by suggesting a meaning extremely different from the one intended, it would be a good thing is the phrase could be got rid of, and another substituted, more directly significant of the idea meant to be conveyed. Some such expression as “the efficiency of money,” though not un2xceptionable, would do better: as it would point attention to the quantity of work done, without suggesting the idea of estimating it by time. Until an appropriate term can be devised, we must be content, when ambiguity is to be apprehended, to express . idea by the circumlocution which alone conveys it adequately, namely, the average number of purchases made by each piece in order to effect a given pecuniary amount of transactions.
§ 4. The proposition which we have laid down respecting the dependence of general prices upon the quantity of money in circulation, must be understood as applying only to a state of things in which money, that is, gold or silver, is the exclusive instrument of exchange, and actually passes from hand to hand at every purchase, credit in any of its shapes being unknown. When credit comes into play as a means of purchasing, distinct from money in hand, we shall hereafter find that the connexion between prices and the amount of the circulating medium is much less direct and intimate, and that such connexion as does exist, no longer
admits of so simple a mode of expression. But on a subject so full of complexity as that of currency and prices, it is necessary to lay the foundation of our theory in a thorough understanding of the most simple cases, which we shall always . lying as a groundwork or substratum under those which arise in practice. That an increase of the quantity of money raises prices, and a diminution lowers them, is the most elementary proposition in the theory of currency, and without it we should have no key to any of the others. In any state of things, however, except the simple and primitive one which we have supposed, the proposition is only true other things being the same: and what those other things are, which must be the same, we are not yet ready to pronounce. We can, however, point out, even now, one or two of the cautions with which the principle must be guarded in attempting to make use of it for the practical explanation of phenomena; cautions the more indispensable, as the doctrine, though a scientific truth, has of late years been the foundation of a greater mass of false theory, and erroneous interpretation of facts, than any other proposition relating to interchange. From the time of the resumption of cash payments by tho Act of 1819, and especially since the commercial crisis of 1825, the favourite explanation of every rise or fall of prices has been “the currency;” and like most popular theories, the doctrine has been applied with little regard to the conditions necessary for making it correct. For example, it is habitually assumed that whenever there is a greater amount of money in the country, or in existence, a rise of prices must necessarily follow. But this is by no means an inevitable consequence. In no commodity is it the quantity in existenoe, but the quantity offered for sale, that determines the value. Whatever may be the quantity of money in the country, only that part of it will affect prices, which goes into the market of commo: dities, and is there actually exchanged against goods. Whatever increases the amount of this portion of the mon