The Purchasing Power of Money

THE purpose of this book is to set forth the principles determining the purchasing power of money and to apply those principles to the study of historical changes in that purchasing power, including in particular the recent change in “the cost of living,” which has aroused world-wide discussion.

If the principles here advocated are correct, the purchasing power of money—or its reciprocal, the level of prices—depends exclusively on five definite factors: (1) the volume of money in circulation; (2) its velocity of circulation; (3) the volume of bank deposits subject to check; (4) its velocity; and (5) the volume of trade. Each of these five magnitudes is extremely definite, and their relation to the purchasing power of money is definitely expressed by an “equation of exchange.” In my opinion, the branch of economics which treats of these five regulators of purchasing power ought to be recognized and ultimately will be recognized as an exact science, capable of precise formulation, demonstration, and statistical verification.

The main contentions of this book are at bottom simply a restatement and amplification of the old “quantity theory” of money. With certain corrections in the usual statements of that theory, it may still be called fundamentally sound. What has long been needed is a candid reëxamination and revision of that venerable theory rather than its repudiation.

In making this attempt at reconstruction, I have the satisfaction of finding myself for once a conservative rather than a radical in economic theory. It has seemed to me a scandal that academic economists have, through outside clamor, been led into disagreements over the fundamental propositions concerning money. This is due to the confusion in which the subject has been thrown by reason of the political controversies with which it has become entangled.

As some one has said, it would seem that even the theorems of Euclid would be challenged and doubted if they should be appealed to by one political party as against another. At any rate, since the “quantity theory” has become the subject of political dispute, it has lost prestige and has even come to be regarded by many as an exploded fallacy. The attempts by promoters of unsound money to make an improper use of the quantity theory—as in the first Bryan campaign—led many sound money men to the utter repudiation of the quantity theory. The consequence has been that, especially in America, the quantity theory needs to be reintroduced into general knowledge.

Besides aiming to set forth the principles affecting the purchasing power of money, this book aims to illustrate and verify those principles by historical facts and statistics. In particular, the recent rise in prices is examined in detail and traced to its several causes.

For a hundred years the world has been suffering from periodic changes in the level of prices, producing alternate crises and depressions of trade. Only by knowledge, both of the principles and of the facts involved, can such fluctuations in future be prevented or mitigated, and only by such knowledge can the losses which they entail be avoided or reduced. It is not too much to say that the evils of a variable monetary standard are among the most serious economic evils with which civilization has to deal; and the practical problem of finding a solution of the difficulty is of international extent and importance. I have proposed, very tentatively, a remedy for the evils of monetary instability. But the time is not yet ripe for the acceptance of any working plan. What is at present most needed is a clear and general public understanding of principles and facts.

Toward such an end this book aims to contribute:—

Most of the statistical results review and confirm the conclusions of Professor Kemmerer in his valuable
Money and Credit Instruments in their Relation to General Prices, which appeared while the present book was in course of construction. I am greatly indebted to Professor Kemmerer for reading the entire manuscript and for much valuable criticism throughout.

My thanks are due to Professor F. Y. Edgeworth of All Souls’ College, Oxford, and to Professor A. W. Flux of Manchester for kindly looking through the manuscript of the Appendix on index numbers and for suggestions and criticisms.

To Dr. A. Piatt Andrew, now Assistant Secretary of the Treasury, my thanks are due for his kindness, as Special Assistant to the National Monetary Commission, in putting the resources of that Commission at my disposal, and in working out, from the records of the office of the Comptroller of the Currency, the volume of deposits subject to check at various dates in the past. For coöperation in carrying out these same calculations, I am likewise indebted to Mr. Lawrence O. Murray, Comptroller of the Currency. These valuable figures are the first of their kind.

To Mr. Gilpin of the New York Clearing House, my thanks are due for his kindness in furnishing various figures asked for and cited specifically in the text.

To Mr. Richard M. Hurd, President of the Lawyers Mortgage Co., I am indebted for reading parts of the manuscript and for valuable criticism.

My thanks are due to the
Economic Journal for permission to use unaltered some parts of my article on “The Mechanics of Bimetallism,” which first appeared in that journal in 1894.

My thanks are due to the
Journal of the Royal Statistical Society for similar permission with reference to my article on “A Practical Method for estimating the Velocity of Circulation of Money,” which appeared in December, 1909.

A number of my students have rendered valuable service in gathering and coördinating statistics. I would especially mention Mr. Seimin Inaoka, Mr. Morgan Porter, Mr. N. S. Fineberg, Mr. W. E. Lagerquist, now instructor at Cornell University, Messrs. G. S. and L. A. Dole, Dr. John Bauer, now assistant professor at Cornell University, Dr. John Kerr Towles, now instructor at the University of Illinois, Dr. A. S. Field, now instructor at Dartmouth College, Mr. A. G. Boesel, Mr. W. F. Hickernell, Mr. Yasuyiro Hayakawa, Mr. Chester A. Phillips, and Mr. R. N. Griswold. Mr. Griswold performed the lengthy calculations involved in ascertaining an index of the volume of trade.

There are two persons to whom I am more indebted than to any others. These are my brother, Mr. Herbert W. Fisher, and my colleague, Dr. Harry G. Brown.

To my brother my thanks are due for a most searching criticism of the whole book from the standpoint of pedagogical exposition, and to Mr. Brown for general criticism and suggestions as well as for detailed work throughout. In recognition of Mr. Brown’s assistance, I have placed his name on the title-page.