THE MONEY PROBLEM

Chapter XII.

CAUSE OF GENERAL RISE AND
FALL IN PRICES AND ITS
REMEDY.—DEVELOPMENT OF
VALUE AND PRICE FROM
BARTER



THE statement made in the previous chapter that “ with money as an invariable denominator of values there can be no such thing as a general rise or general fall in prices,” appears so startling that a complete elucidation of the matter is desirable.  As this demonstration will be made by a consideration of the price form of commodities, I shall first shew how this form is developed from simple barter.

Barter is the direct exchange of commodities with each other ;  thus, if two pounds of cheese are exchanged directly for one bushel of wheat, we have simple barter.  If, however, money be introduced and two pounds of cheese be sold for a certain sum of money, and this money be used to purchase the bushel of wheat, this is said to be selling cheese and buying wheat.  The two transactions are identical in results, providing they both take place at the same place and at the same time.  An interval between selling the cheese and buying the wheat may, however, cause the results to be widely different.  Referring to the illustration given on page 102 of the chapter on Money, we saw how the relations of commodities were expressed.  Take the following commodities as equivalents in exchange :

Barter or Exchange Form.


Sugar
in lbs.
400
Butter
in lbs.
50
Coffee
in lbs
40
Potatoes
in bush.
20
Cloth
in yds.
25
Gold
in ox.
1

Now since values are inversely proportional to the quantities in which goods exchange, we can arrive immediately at the value form by dividing their least common multiple by each quantity.  Thus :


400
400
Sugar
50
Butter
40
Coffee
20
Potatoes
25
Cloth
1
Gold

which becomes :

Value Form :


Sugar :
as 1:
Butter :
8 :
Coffee :
10 :
Potatoes :
20 :
Cloth :
16 :
Gold :
400

We have seen that price is the money form of commodities.  It follows, therefore, that the price form is evolved directly from the value form by merely applying a common denominator to the latter.

This common denominator can be any number arbitrarily selected.  All whole numbers being simple multiples of unity we will select one as our common denominator.  In the above example it will be seen that I happens to be the equivalent, or the expression of the purchasing power of I pound of sugar at this particular time.  But it is likewise the expression of the purchasing powers of 1-8th pound of butter, 1-10th pound of coffee, 1-400th ounce of gold, etc., and represents one just as much as another.  Hence this unit being in nowise based or dependent upon any one commodity, it is absolutely invariable.  All we need do is to apply the decimal system and we at once arrive at a method by which the purchasing powers of all commodities may be expressed and their daily fluctuations registered with mathematical fidelity and precision.

Taking 1 as the denominator and applying it to the value form we obtain the following :

Price Form :


Sugar
1
Butter
8
Coffee
10
Potatoes
20
Cloth
16
Gold
400
1.00

which means, that if sugar be 1 unit per pound, butter is worth 8 units, coffee 10 units, and so on.  Here we have traced the development of price from the exchange relations of commodities.  We are now in a position to ascertain the cause of a general rise or fall in prices, and having discovered the cause the remedy will become apparent.  Taking the price form, let us write down the values of several commodities.

Suppose tea to be selling for 60 cents per pound ;  wheat 75 cents per bushel ;  iron $25 per ton ;  silver 90 cents per ounce ;  whiskey $2.50 per gallon ;  gold $20 per ounce.  Remembering that the common denominator of values is $1, the price form of the above commodities becomes :


Tea
60
Wheat
75
Iron
2500
Whiskey
250
Gold
2000
1.00

Now, it is quite evident that any variation in the denominator affects all the numerators proportionately.  Thus, if the denominator be doubled, the effect is the same as if all the numerators were halved.  Similarly, halving the denominator is the same thing as doubling the numerators.  Since these fractions constitute the prices of the Various commodities (i.e. tea being 60-100 dollar per pound ;  wheat 75-100 dollar per bushel), it follows that variations in the denominator of values causes variations in the prices of commodities ;  and since all commodities have for their denominator some commodity monetary unit—the dollar, or sovereign, or franc—it is evident that any change in money causes a corresponding change in the prices of commodities.  An increase in the denominator results in a decrease in prices, and a decrease in the denominator causes an increase in prices.

The cause, therefore, of a general rise or a general fall in commodities, is the use of a variable denominator of values.