The Purchasing Power of Money

Fisher, Irving
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First Pub. Date
New York: The Macmillan Co.
Pub. Date
2nd edition. Harry G. Brown, assistant.
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§ 1 (TO CHAPTER V, § 5)
Effect of Time Credit on Equation of Exchange


It is important to note that, though the system of book credit has a great influence on prices indirectly, it does not enter into the equation of exchange like circulation or bank credit. We may properly include in the discussion with book credit, those cases of credit where the record of the debt is not simply on the books of one of the two parties, but in which an explicit record exists in the form of a promissory note given by the purchaser to the seller. In either case, goods are bought by a promise to pay at a later time; in the one case, the promise is explicit; in the other, implied.


Such an exchange of goods against a later payment may be resolved into two successive exchanges. The first occurs at the start when the credit is given for the goods. The purchaser then buys goods in exchange for a promise to pay. The second exchange occurs at the close of the transaction, when the debt is liquidated. The original purchaser may then be said to buy back his book credit or promissory note with money. Unlike bank credit, then, time credit does not directly save the use of money. Its immediate effect is simply to postpone*4 that use, since, to eventually extinguish the credit, as much money or checks must be expended as though cash were paid in the first instance. Dr. Andrew, now Assistant Secretary of the Treasury, points out that if time credit is being contracted faster than it is being extinguished, prices tend to become higher, but that as soon as the paying of these debts becomes as rapid as the making of them, prices will fall back to their old level.*5 The excess of credit contracted over credit extinguished acts just as does so much money or bank deposits offered for goods.


In order to show how these considerations as to book credit affect the equation of exchange, let us denote the creation of all book credits and other time loans by the letter E'', and their extinguishment by the letter E'''. The left side of our equation of exchange—or the total of money payments, check payments, and book charges and promissory notes for goods bought in the course of the year—will now be MV + M'V' + E''; and the right side, including the value of (1) goods bought and (2) debts maturing and extinguished during the year by payment of money or check, will be represented by SpQ + E'''. Transposing for convenience E''', the equation of exchange may now be written MV + M'V' + E'' - E''' = SpQ. Since E'' will be approximately equal to E''', these equal and opposite terms nearly cancel, i.e. E'' - E''' becomes zero, and the equation virtually becomes again MV + M'V' = SpQ.


Before leaving the subject it may be noted that book credit tends to increase prices by creating offsetting debts and thus diminishing the volume of trade which must be done by money or checks. Thus, the farmer buys on account at the village store, occasionally selling farm produce there, also on account. The account is balanced at long intervals when the difference only is paid in money.*6 And, of course, as pointed out in the text of this chapter, book credit tends also to increase velocity.*7

Notes for this chapter

See A. Piatt Andrew, "Credit and the Value of Money," Proceedings Seventeenth Annual Meeting, American Economic Association, December, 1904.
Andrew, loc. cit.
Ibid, p. 10.
Chapter V, § 4.

Notes for Appendix to Chapter VII

End of Notes

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