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
IN order to make clear the relation which the topic treated in this book bears to the general subject of economics, some primary definitions are necessary.
In the first place,
economics itself may be defined as the science of wealth, and
wealth may be defined as material objects owned by human beings. Of wealth, therefore, there are two essential attributes: materiality and appropriation. For it is not all material things that are included under wealth, but only such as have been appropriated. Wealth does not include the sun, moon, and other heavenly bodies, nor even all parts of the surface of this planet, but only such parts as have been appropriated to the use of mankind. It is, then, appropriated parts of the earth’s surface and the appropriated objects upon it which constitute wealth.
For convenience, wealth may be classified under three heads: real estate, commodities, and human beings.
Real estate includes the surface of the earth and the other wealth attached thereto—improvements such as buildings, fences, drains, railways, street improvements,
and so on.
Commodities include all movable wealth (except man himself), whether raw materials or finished products. There is one particular variety of commodity—a certain finished product—which is of especial importance in the subject of which this book treats; namely, money. Any commodity to be called “money” must be
generally acceptable in exchange, and any commodity generally acceptable in exchange should be called money. The best example of a money commodity is found to-day in gold coins.
Of all wealth, man himself is a species. Like his horses or his cattle, he is himself a material object, and like them, he is owned; for if slave, he is owned by another, and if free, by himself.
But though human beings may be considered as wealth,
human qualities, such as skill, intelligence, and inventiveness, are not wealth. Just as the hardness of steel is not wealth, but merely a quality of one particular kind of wealth,—hard steel,—so the skill of a workman is not wealth, but merely a quality of another particular kind of wealth—skilled workman. Similarly, intelligence is not wealth, but an intelligent man is wealth.
Since materiality is one of the two essential attributes of wealth, any article of wealth may be measured in physical units. Land is measured in acres; coal, in tons; milk, in quarts; and wheat, in bushels. Therefore, for estimating the quantities of different articles of wealth, all the various physical units of measurement
may be employed: linear measure, square measure, cubic measure, and measure by weight.
Whenever any species of wealth is measured in its physical units, a first step is taken toward the measurement of that mysterious magnitude called “value.” Sometimes value is looked upon as a physical and sometimes as a physical phenomenon. But, although the determination of value always involves a psychical process—judgment—yet the terms in which the results are expressed and measured are physical.
It is desirable, for the sake of clearness, to lead up to the concept of value by means of three preliminary concepts; namely, transfer, exchange, and price.
transfer of wealth is a change in its ownership. An
exchange consists of two mutual and voluntary transfers, each in consideration of the other.
When a certain quantity of one kind of wealth is exchanged for a certain quantity of another kind, we may divide one of the two quantities by the other, and obtain the
price of the latter. For instance, if two dollars of gold are exchanged for three bushels of wheat, the price of the wheat in gold is two thirds of a dollar per bushel; and the price of the gold in wheat is one and a half bushels per dollar. It is to be noticed that these are ratios of two physical quantities, the units for measuring which are quite different from each other. One commodity is measured in bushels, or units of volume of wheat, the other in dollars, or units of weight of gold. In general, a price of any species of wealth is merely the ratio of two physical quantities, in whatever way each may originally be measured.
This brings us, at last, to the concept of value. The
value of any item of wealth is its price multiplied by its quantity. Thus, if half a dollar per bushel is the price
of wheat, the value of a hundred bushels of wheat is fifty dollars.
Hitherto we have confined our discussion to some of the consequences of the first prerequisite of wealth—that it must be material. We turn now to the second prerequisite, namely, that it must be owned. To
own wealth is simply to have the right to benefit by it that is, the right to enjoy its services or benefits. Thus the owner of a loaf of bread has the right to benefit by it by eating it, by selling it, or by otherwise disposing of it. The man who owns a house has the right to benefit by enjoying its shelter, by selling it, or by renting it. This right, the right
in the benefits of wealth—or more briefly, the right to or in the wealth itself—is called a “property right” or simply “property.”
If things were always owned in fee simple,
i.e. if there were no division of ownership,—no partnership rights, no shares, and no stock companies,—there would be little practical need to distinguish property from wealth; and as a matter of fact, in the rough popular usage, any article of wealth, and especially real estate, is often inaccurately called a “piece of property.” But the ownership of wealth is frequently divided; and this fact necessitates a careful distinction between the thing owned and the rights of the owners. Thus, a railroad is wealth. Its shares and bonded debt are rights to this wealth. Each owner of shares or bonds has the right to a fractional part of the benefits from the railway. The total of these rights comprises the complete ownership of, or property in, the railway.
Like wealth, property rights also may be measured; but in units of a different character. The units
of property are not physical, but consist of abstract rights to the benefits of wealth. If a man has twenty-five shares in a certain railway company, the measurement of his property is twenty-five units just as truly as though he had twenty-five bushels of wheat. What he has is twenty-five rights of a specific sort.
There exist various units of property for measuring property, as there are various units of wealth for measuring wealth; and to property may be applied precisely the same concepts of transfer, exchange, price, and value which are applied to wealth.
Besides the distinction between wealth and property rights, another distinction should here be noted. This is the distinction between property rights and certificates of those rights. The former are the rights to use wealth, the latter are merely the written evidence of those rights. Thus, the right to receive dividends from a railroad is property, but the written paper evidencing that right is a stock certificate. The right to a railway trip is a property right, the ticket evidencing that right is a certificate of property. The promise of a bank is a property right; the bank note on which that promise is engraved is a certificate of property.
Any property right which is generally acceptable in exchange may be called “money.” Its printed evidence is also called money. Hence there arise three meanings of the term money, viz. its meaning in the sense of wealth; its meaning in the sense of property;
*4 and its meaning in the sense of written evidence. From the standpoint of economic analysis the property sense is the most important.
What we have been speaking of as property is the right to the services, uses, or benefits of wealth. By
benefits of wealth is meant the desirable events which occur by means of wealth. Like wealth and property, benefits also may be measured, but in units of a still different character. Benefits are reckoned either “by time,”—as the services of a gardener or of a dwelling house; or “by the piece,”—as the use of a plow or a telephone. And just as the concepts of transfer, exchange, price, and value apply to wealth and property, so do they apply to benefits.
uses (benefits) of wealth, with which we have been dealing, should be distinguished from the
utility of wealth. The one means desirable events, the other, the desirability of those events. The one is usually outside of the mind, the other always inside.
Whenever we speak of rights to benefits, the benefits referred to are
future benefits. The owner of a house owns the right to use it from the present instant onward. Its past use has perished and is no longer subject to ownership.
The term “goods” will be used in this book simply as a convenient collective term to include
wealth, property, and benefits. The transfer, exchange, price, and value of goods take on innumerable forms. Under price alone, as thus fully applied to goods, fall rent, wages, rates of interest, prices in terms of money, and prices in terms of other goods. But we shall be chiefly concerned in this book with
prices of goods in terms of money.
Little has yet been said as to the relation of wealth, property and benefits to
time. A certain quantity of goods may be either a quantity existing at a particular
instant of time or a quantity produced, consumed, transported, or exchanged during a
period of time. The first quantity is a
fund, of goods; the second is a
stream, of goods. The amount of wheat in a flour mill on any definite date is a stock of wheat, while the monthly or weekly amounts which come in or go out constitute a flow of wheat. The amount of mined coal existing in the United States at any given moment is a stock of mined coal; the weekly amount mined is a flow of coal.
There are many applications of this distinction; for instance, to capital and income. A stock of goods, whether wealth or property, existing at an instant of time is called
capital. A flow of benefits from such capital during a period of time is called “income.” Income, therefore, is one important kind of economic flow. Besides income, economic flows are of three chief classes, representing respectively changes of
condition (such as production or consumption), changes of
position (such as transportation, exportation, and importation), and changes of ownership, which we have already called “transfers.” Trade is a flow of transfers. Whether foreign or domestic, it is simply the exchange of a stream of transferred rights in goods for an equivalent stream of transferred money or money substitutes. The second of these two streams is called the “circulation” of money. The equation between the two is called the “equation of exchange”; and it is this equation that constitutes the subject matter of the present book.
Nature of Capital and Income, New York (Macmillan), 1906.
Handwörterbuch der Staatswissenschaften, Jena (Fischer), Vol. IV, 1900, Article, “Geld,” pp. 69-71.
Notes for Chapter II