THE MONEY PROBLEM

Chapter VII.PURCHASING POWER

THE terms “value” and “purchasing power” have hitherto been used synonymously, much to the confusion of the science, notwithstanding the fact that they embrace wholly different conceptions. Value is the relationship existing between two exchangeable commodities, and is expressed by a simple ratio of two numbers or quantities. Purchasing power is the power of a commodity in exchange, and is expressed by a *single number* or quantity. Value can be expressed only by two numbers ; purchasing power is expressed by one. There cannot be an invariable unit of value ; there can be an invariable unit of purchasing power. Nothing *possesses* value, but all commodities may be said to have purchasing power. A man's credit is his purchasing power ; we do not speak of it as his value.

We may trace an analogy between purchasing power and potential as used in mechanics. A body is said to have potential energy when it is placed above other objects, *i.e*., it has potential power with regard to any object or point below it. A stone thrown upwards gradually loses its initial energy imparted to it by the force that projected it upwards ; but this actual energy is gradually converted into potential energy, the latter increasing with the loss of the former until the initial energy is transformed wholly into potential, at its highest point. Thus potential energy is advantage of position. Now in the commercial world commodities occupy different relations to each other, relations which are constantly changing. Commodities are continually rising and falling in price, changes which are analogous to change of altitude in mechanics. With every fall there is a loss, and with every rise a gain in purchasing power. Purchasing power, unlike value, is capable of expression in units, which may be any number arbitrarily selected. Value, on the other hand, corresponds to distance, which is expressed by the relative positions of the two bodies.

UNIT OF PURCHASING POWER.

Referring to the illustration on page 78, I shewed how the exchange relationship of commodities received definite expression by ratios. These relations are expressed as follows :—

Butter in lbs. | Wheat in bush. | Coats. | Whiskey in gals. | Cows | Silver in oz. | Gold in oz. | Shoes in pairs. |

100 | 60 | 5 | 35 | 1 | 50 | 2½ | 10 |

Now in order to find the purchasing power of each of these commodities, it will be convenient to find their least common multiple, and then range them according to their powers. This multiple is 5250. Dividing this by each number, we obtain the following results :—

Butter in lbs. | Wheat in bush. | Coats. | Whiskey in gals. | Cows | Silver in oz. | Gold in oz. | Shoes in pairs. |

52.5 | 87.5 | 1050 | 150 | 5250 | 105 | 2100 | 525 |

It is only necessary to tabulate commodities as above, *commencing at any given time and place*, and bring the numbers that indicate their exchange relationship to a common multiple.

The following analogy will make this subject clearer. Imagine a number of balloons, A, B, C, and D, at different altitudes, and suppose we wish to trace the variations in their relative positions from time to time. All that we know of their positions is that the distance between A and B is twice that between A and the earth, and that A to C is equal to three times A to B, whilst C to D is twice B to C. How are we to determine their positions ? The problem is a very simple one and is analogous to tracing changes in values. Suppose A to the earth represented by x and is unknown. Then A to B = 2x ; A to C = 6x ; therefore, B to C = 4x, and C to D = 8x. By following the variations in the altitudes of each balloon, in terms of x, we can always determine their relative positions. It is not necessary to know what x is : so long as we can express distance in powers of x, these relations can always be determined. X may be said to correspond to our ideal unit of purchasing power, and it is not necessary to know the dimensions of this unit in absolute terms. All we desire is to be able to trace the fluctuations in the purchasing powers of commodities in terms of x, either as multiples or fractions.

To avoid any possible misunderstanding, it may be well to point out that the above numbers representing the relative purchasing powers of the commodities enumerated, could have no significance and can convey no meaning outside of the exchange circle in which they are employed. For instance, to say that one coat is worth 1050 units, conveys no idea of the expensiveness of the coat, unless we know the relation of the unit to all other commodities. When, however, we know that 5250 of these units represent the purchasing power of one cow, 105 units one ounce of silver, 2100 units one ounce of gold, and so on, the price of the coat, expressed in these units, becomes intelligible. We have therefore only to apply to these units some distinguishing term, such as dollar, franc, pound, yen or rouble, in order to make the system generally intelligible.