The Natural Economic Order/Part III/Chapter 10

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(The Demand for Wares or, simply, Demand)

The characteristic of the products of the division of labour and property is that they must be sold. Wares are produced to sell, and no product is more characteristically a ware than money. This we have already shown.

All other wares sooner or later leave the market as goods for consumption, but money is bought only to be sold again.

Wares can be sold only for money, and in the same way money can be sold only for wares. Just as wares represent the embodied demand for money, so money represents the demand for wares. An increase in the stock of money means an increase in the demand for wares. He who has no money can create no demand for wares. The money in the cellars of a bank could at any moment be poured upon the market and would create a powerful demand for wares, whereas a thousand starving unemployed casting longing glances at the riches of the market can create no demand for them.

The demand for wares depends therefore chiefly upon the stock of money. The demand for wares will not always coincide with the stock of money (we shall very soon come to this crucial point), but money is a ware and therefore sooner or later compels its possessor to offer it in exchange.

A person can offer less money than he possesses, but he cannot offer more than he possesses. Our stock of money is the upper limit of our offer of money. Again, since money is a ware, more money will be offered in exchange, on the average, over a period of years, where the stock of money is larger than where it is smaller.

The 180 millions stored for 40 years in the German war chest at Spandau prove, no doubt, that money and the sup o money are not, like potatoes and the supply of potatoes, almost identical. Nevertheless the function of money is, to be offered, under certain circumstances, in exchange.

As a vehicle becomes useful to its owner only through a change of place, so money becomes useful only when it changes possession, when it serves as a medium of exchange and circulates. Inherent in money is the characteristic which sets it in circulation. To a certain degree the present form of money is under a material compulsion to circulate. (With Free-Money this compulsion becomes absolute).

We said that the stock of wares is in inverse proportion to the speed with which commerce dispatches wares from the market to the consumer. But since money is used and not consumed, since it preserves its characteristic of being a ware, since it is bought only to be sold (the use of gold in the arts can here be disregarded) an acceleration, by improved commercial organisation, of the rate at which money changes possession has the opposite effect to an acceleration of the sale of wares. The more rapidly money passes from hand to hand, the sooner it appears at its point of departure, the market, to begin its circuit again. With each change of possession of money, a ware is brought a stage further in its progress towards the cellar of the consumer. Just as the number of ton-miles completed by a railway wagon in a given time is proportionate to the rapidity at which the wheels rotate, so the quantity of wares that a piece of money clears from its path is proportionate to the rapidity with which it completes its circuit. A brand-new, obviously genuine thaler perhaps changes possession only ten times in the week, since some persons into whose possession it comes will think twice before parting with it. With a worn thaler this obstacle to circulation is smaller, and with a doubtful one it is non-existent. So to complete the same circuit a new thaler may require a month, a worn thaler a fortnight, and a doubtful thaler a week. Four new thalers, two worn thalers or one doubtful thaler perform the same amount of work. The power of money to effect exchanges, its technical quality from the mercantile standpoint, is in inverse proportion to its technical quality from the banking standpoint. From the mercantile standpoint a doubtful thaler may be four times as efficient as one fresh from the mint. This little detail should be carefully noted.

Supply is a stream which rises in the division of labour and flows into the houses of the consumers. Demand is not a stream but an object which moves in a circle and when rotating quickly resembles a solid ring. Supply is always composed of fresh wares which make one journey and disappear for ever. Demand is composed of a mass of coins which have completed the same journey a thousand times and are destined to complete it as many times again.

This comparison is used to show that demand is subject to laws other than those of supply. The mere fact that a ware on its journey to the consumer becomes larger, heavier, that is, dearer, whereas the price of money may remain the same, after it has changed hands a thousand times, shows clearly that we cannot always compare money with wares. (But nothing in this sentence should be taken to mean that at present money performs the exchange of wares free of cost).

None of the conditions determining the amount of the supply of wares, noted in the last chapter, apply in fact to demand (supply of money). Indeed one condition, the improvement of commercial technique, has an effect upon money opposite to that upon wares. Improved commercial technique accelerates the progress of wares to the consumer, and this reduces the stock and supply of wares. A technical improvement in money, on the contrary, a reduction of its period of circulation, causes the same coin to reappear sooner at its starting point to begin its work again. Every improvement in money therefore increases the supply of money. For this reason, after the introduction of Free-Money about one-third of the stock of money will probably suffice to create the same amount of demand.

1. Because the stock of money increases through the discovery of new gold mines or the issue of paper-money 10% 100 2. Because the velocity of circulation of money increases through improvements in commercial organisation, 20% 200 3. Because the savings banks bring the money of small savers more rapidly into circulation. 10% 100 ____

	1400

But this demand is not constant, it does not appear regularly in the market, as we shall see in the following chapters.


The amount of the supply of wares is in the first place determined by the conditions of production - the fruitfulness of nature, the skill of the workers and the efficiency of their tools. For demand all this is immaterial. Gold is not produced but found; and the stock of gold which affects the present generation has been inherited from its forbears. Similarly the stock of paper-money has been arbitrarily "issued". The wares produced a year ago have almost ceased to influence supply, but the gold which Solomon brought from Ophir doubtless forms part of the currency of today and influences demand. Supply is each year created afresh; demand is an inheritance which includes the treasures of Solomon, the Spanish plunder from Mexico and Peru and, in recent times, the abundant gold discoveries from Klondyke and the Transvaal. The magnitude of demand is determined by men whose bones are long since dust. A thousand million human beings are engaged in feeding supply; demand, on the other hand, is kept up by a handful of adventurers in the gold-mines of Alaska and South Africa.

But demand is also affected by the velocity of the monetary circulation, and many may find it difficult to set any limit to this velocity. They will therefore be inclined to think that demand is something quite indeterminate. Yet demand, in conjunction with supply, has the supremely important function of determining price.

It is a fact that we can hardly imagine a velocity of circulation which could not be increased by some improvement in commercial organisation.

Suppose, for instance, that we have worked out carefully the highest imaginable Emit for the velocity of paper-money. Someone then proposes to impregnate the notes with some nauseous chemical such as sulphuretted hydrogen. Everyone would try to get rid of such money still more quickly, so the limit set to the velocity was obviously too low.

But in practice it is immaterial to the demand of today whether the velocity of circulation of money can be increased tomorrow. "Today" is what matters in the market; "tomorrow" is important only if it can be clearly foreseen. We cannot imagine a limit to the speed of a railway train which could not be exceeded by some technical improvement; but for the present the limit is prescribed by the existing locomotives, bridges, curves and embankments. It is a matter of course for all of us that we cannot travel at any speed we please. After a little consideration we should be able to familiarise ourselves with the thought that the existing commercial organisation prescribes a maximum velocity for money which, for the present, cannot be exceeded.

But this does not mean that commercial organisation cannot be improved. As a matter of fact it is being improved almost daily. The reform of the German currency, for example, which replaced the former medley of coins by a unified coinage passing from hand to hand without examination, certainly made a faster circulation possible.

(*Arguments could be found for the opposite conclusion. The greater security against a fall in the rate of exchange and the greater security from false coinage must make the coins more attractive to savers than the worn groschen, thalers and gulden. But to save the actual currency means to interrupt the circulation of money. We have here without doubt, to some extent, a restraining influence.)

Exchanges, clearing-houses, cheques and bills of exchange increase the velocity of circulation of money.

(*Merchants formerly, like cattle-dealers today, carried, when travelling, ready money for their purchases. The ocean bed on the sea route to India is said to be covered with a layer of silver lost through shipwreck.)

Above all, the change in the form of saving has influenced the velocity of circulation. Savings were formerly hidden in a mattress, a buried jar, etc.; in modem times they are brought into circulation again through the medium of the savings banks. In this manner large sums go to increase demand.

The circulation of money is even accelerated by modem department stores, since a purchaser can spend in such a store in one day a sum which would have required two days to spend in separate shops scattered through the town. In short, the possibility of a continual acceleration of the velocity of circulation of money cannot be denied, but this possibility does not obscure in any way the picture of demand which we have drawn in the preceding pages.

Demand, then, is determined by the amount of the stock of money and the velocity of circulation of money. Demand increases in exact proportion to the increase of the stock of money and of the velocity of its circulation.

That is what we must first know of demand, to form a general picture of the determination of price through demand and supply. It must be admitted that what we have learnt is as yet very little. But at least a content has been given to these words. We can weigh and handle demand and supply; they are no longer abstractions. When we speak of supply we no longer think of business transactions, speculation and so forth. We see passing before us a goods train loaded with timber, straw, lime, vegetables, wool, minerals. With our eyes and other senses we have become aware of the nature of supply.

And if we speak of demand we do not see beggars, deficits, interest on loans. We see money, paper-money or metallic money, which we can handle and count. We know that money is brought into motion in a circuit by a force inherent in it, and that this motion can be accelerated by improvements in commercial organisation. We observe that each time money completes its circuit it seizes a certain quantity of wares and throws them from the market into the consumers' houses. We can follow with our own eyes how demand depends in part upon the rate at which money, after each ejection, returns to the market to seize another ware. We speak no longer as parrots, but with the consciousness that we are uttering the fundamental truth of economic science when we say: Prices are determined by demand and supply.

A numerical representation of the elements of price discussed so far would be somewhat as follows:

Supply Tons Demand Tons When commercial organisation is working smoothly, the division of l a b o u r and property throws on the market daily a quantity of wares equal to 1000 The metal or paper-money of the State creates, with its present velocity of circulation and yesterday's prices, a d e m a n d which also equals 1000

This supply increases: Demand increases: 1. Because production increases through a 10% increase of population 150 2. Because division of labour replaces primitive production, expanding 5 % 50 3. Because the means of production i m p r o v e 20% 200 4. Because workmen, becoming more efficient, produce wares of superior quality. 30 % 300 ____ 1650 On the other hand supply decreases: 1. Because better commercial organisation and the elimination of middlemen cause wares to flow more rapidly from the market to the places of consumption 100 2. Because simplification of the law relating to bills of exchange and o t h e r circumstances cause wares to be exchanged by way of credit instead of for money 300 400 ____ ____

 	1250

1. Because the stock of money increases through the discovery of new gold mines or the issue of paper-money 10% 100 2. Because the velocity of circulation of money increases through improvements in commercial organisation, 20% 200 3. Because the savings banks bring the money of small savers more rapidly into circulation. 10% 100 ____

	1400

But this demand is not constant, it does not appear regularly in the market, as we shall see in the following chapters.

Explanation: A ton can of course be a ton of any kind of ware, for example peat. We then calculate the quantity of potatoes, milk, cranberries, buckwheat, etc. that can be exchanged, at present prices, for a ton of peat. 100 Ibs. of potatoes, first quality, or 20 gallons of unskimmed milk, or two bushels of buckwheat are then equal to one ton of supply.

In the case of demand we calculate from the actual stock of money and its actual velocity of circulation how much money can to-day be offered for wares, and how many tons of wares can be bought at present prices by this amount. The answer is 1000 tons. Since demand and supply determine the prices upon which these 1000 tons are based, demand expressed in tons by means of the money offered, must necessarily correspond to supply expressed in tons. If this is not the case, as for instance in the above example, where a supply of 1250 tons is confronted with a demand of 1400 tons, the discrepancy is sooner or later removed by a change of prices. In our example equilibrium would be established by a rise of prices of 12 per cent.