The Purchasing Power of Money
By Irving Fisher
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…. [From the Preface to the First Edition]
First Pub. Date
New York: The Macmillan Co.
Assisted by Harry G. Brown (Instructor in Political Economy in Yale U.) 2nd edition. Harry G. Brown, assistant.
The text of this edition is in the public domain.
- Preface to the First Edition
- Preface to the Second Edition
- Suggestions to Readers
- Chapter 1
- Chapter 2
- Chapter 3
- Chapter 4
- Chapter 5
- Chapter 6
- Chapter 7
- Chapter 8
- Chapter 9
- Chapter 10
- Chapter 11
- Chapter 12
- Chapter 13
- Appendix to Chapter II
- Appendix to Chapter III
- Appendix to Chapter V
- Appendix to Chapter VI
- Appendix to Chapter VII
- Appendix to Chapter VIII
- Appendix to Chapter X
- Appendix to Chapter XII
Great Scientiest, Inspiring Friend,
Pioneer in the Study of
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.
The study of the principles and facts concerning the purchasing power of money is of far more than academic interest. Such questions affect the welfare of every in habitant of the civilized world. At each turn of the tide of prices, millions of persons are benefited and other millions are injured.
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:—
2. A discussion of the best form of index number.
3. Some mechanical methods of representing visually the determination of the level of prices.
4. A practical method of estimating the velocity of circulation of money.
5. The ascertainment statistically of the bank deposits in the United States which are
subject to check, as distinct from “individual deposits,” as usually published.
6. An improved statistical evaluation of the volume of trade, as well as of the remaining elements in the equation of exchange.
7. A thorough statistical verification of the (reconstructed) quantity theory of money.
As it is quite impossible to do justice to some of these subjects without the use of mathematics, these have been freely introduced, but have been relegated, so far as
possible, to Appendices. This plan, which is in accordance with that previously adopted in
The Nature of Capital and Income and
The Rate of Interest, leaves the text almost wholly nonmathematical.
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.
To Mr. John O. Perrin, President of the American National Bank of Indianapolis, I am indebted for statistics
of the “activity” of bank accounts in his bank, and for similar figures I am indebted to the officers of the National New Haven Bank and the City Bank of New Haven.
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.
M. On page 432 add (to the bottom of columns 1-8 incl.) in the table the following: 1910, 3.42, 3.42, .32, 1.41, 3.3%, 1.46, 1.64.
M‘. It is not necessary to complete the table on page 435, as the Comptroller’s Report for 1910 (p. 54) gives for the first time deposits subject to check (7.82 billions). To this 7.82, however, three corrections are needed: (1) subtract .29 for “savings accounts” improperly included (estimated for me by the Comptroller’s Office at half of the figure in note
a, lower table, p. 54, Comptr. Rpt.); (2) subtract .54 as “exchanges for clearing house” (= 5/4 times those for national banks); (3) add .25 as the Comptroller’s Office estimate, for me, of unreported deposits subject to check. By applying these corrections we obtain 7.24.
V. I have simply taken 21 as a safe approximate estimate on the basis of the previous statistics of
V (p. 478) and its assumed relation to
V‘. Add to columns 1-7 of table on page 448 the following: 1910, 97.3, 66.4, 429.3, .89 (by extrapolation, an unsafe guide), 382, 52.8.
P. This is obtained (on the principles of the table on page 487) from the index number 131.6 of wholesale prices for 1910 (kindly supplied in advance of publication by the Bureau of Labor) and the average price 96.2 of stocks as given by the
Commercial and Financial Chronicle, both being compared with the respective figures for 1909, viz. 126.5 and 97.5. They are combined by “weighting” the wholesale prices 10 and the stock prices 1 and reducing the results so that the average for 1909 shall be 100.
T. This is obtained: (
a) by continuing columns 1-5 of the table on page 479 by inserting: 1910, 160, 113, 162, 154; (the extension of column 2 for 1910 is made by means of somewhat more complete data than those enumerated on pages 480-482); (
b) by combining the result, 154, obtained for column 5 with the figures for railway cars handled. These were 19.8 millions for 1909 and 22.3 for 1910. Column 5 being weighted 10 and the car figures 1, we get as indices of trade: for 1909, 1718, and for 1910, 1763, showing an increase of 2.6%, which, applied to the (corrected) estimate of the absolute trade of 1909, viz. 387 billions, gives 397 as the absolute trade in 1910.
(The opportunity is here taken to correct an inadvertence on pp. 480 ff. It should have been there stated that, of the 44 categories mentioned, some are
alternative and not independent items, viz. those having the same names and differing only in the number of cities; also that the dates given do not imply that the items opposite are in all cases used for
all the intervening time, but only for such periods as the items were actually available.)
It is noticeable that the changes in business in 1910 as compared with 1909 are somewhat irregular; the sales of stocks have declined; exports and imports (both of them) have declined about 10%.
Notes for Chapter I