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
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.
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
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
E”’. Transposing for convenience
E”’, the equation of exchange may now be written
E” will be approximately equal to
E”’, these equal and opposite terms nearly cancel,
E”’ becomes zero, and the equation virtually becomes again
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.
Proceedings Seventeenth Annual Meeting, American Economic Association, December, 1904.
Notes for Appendix to Chapter VII