The Natural Economic Order/Part III/Chapter 7
|Part III, Chapter 6|| The Natural Economic Order
Part III. Chapter 7. How the Price of Money Can Be Measured with Precision
written by Silvio Gesell, translated by Philip Pye
|Part III, Chapter 8|
(* By "Price of money" is meant the amount of commodities that must be given -in exchange for a certain amount of money.)
If the price of money is to remain constant, proof must be given that it actually has remained constant. If this proof is not forthcoming, either debtors or creditors will be dissatisfied and demand the lowering or raising of the price of money. The only way of silencing the complaints of creditors and debtors is to prove in black and white that the price of money has remained unchanged.
The conflict between the advocates of the gold standard and the bimetallists turned upon the question whether the price of money had changed. The question was debated on both sides under the influence of an illusion, that of so-called "value" ("intrinsic value", "store of value" etc.), and therefore could not be settled. The finest scientific proofs of the bimetallists were again and again reduced to absurdity by this fiction. If the bimetallists, by the help of laboriously compiled statistics, showed that prices had fallen 10, 20 or 50% since the introduction of the gold standard, the champions of the gold standard replied that this objection was meaningless, since the question was not the price of money but ist "value" ! - as indeed the bimetallists admitted. The general fall in the price of commodities was ascribed to the decrease of costs of production and transport, caused by technical progress. Only a few convinced opponents of the theory of value could succeed in proving that the introduction of the gold standard was a blunder through which debtors (among them the State) were plundered to the profit of their creditors. The bimetallists would have won, and won with ease, if they had confined the issue to the price of money, but they disarmed themselves by their docile acceptance of the illusion of "value".
The price of money can be expressed only in commodities. If barter is excluded, the price of commodities can be expressed only in one way, namely by a sum of money, but the price of money can be expressed in as many ways as there are kinds and qualities of commodities, terms for the delivery of commodities, markets for commodities. If we read every current market report, price-list and catalogue in a country, we know what, at that moment, its money is worth.
But if we need to find out whether the price of money has changed, it is not sufficient simply to compare the prices of commodities to-day with their prices of yesterday. For it is probable that a large number has increased, and that another large number has decreased in price.
At the same time a change in the price of steam-coal, wheat and iron is, of course vastly more important than a change in the price of needles, canaries or buttons.
An example will show what we mean: - 1906 1907 A person paid for 1 tobacco-pipe $1.00 $1.10+
1 tin of boot-polish 0.50 0.60+ 1 doz. steel pens 0.50 0.80+ 1 hat 3.00 2.50- 1 pair of boots 4.00 3.00- 1 pair of trousers 11.00 10.00- ____ ____ $20.00 $18.00-
Thus although one half of these six articles increased in price and the other half diminished, yet the "average price" fell $2 or 10%. Judging by the above commodities the buyer will observe an increase in the price of money of approximately 11 %. The buyer receives 11 % more commodities for his money than formerly.
To establish equilibrium with the time of the first measurement it is not necessary that the former exchange-relation of the commodities to one another should be re-established. It is sufficient if the price of money is lowered. All commodities must simply rise 11% in price. Money has no influence upon the exchange-relation of the commodities among themselves. If, simultaneously, boot-polish rises in price, and a pair of trousers falls in price, that is the result of changed conditions in the production and sale of these commodities. Only when, "on the average", more or less commodities of the same quality are received for the same amount of money, can we say that the ratio of exchange of commodities and money has altered. And so, to re-establish the former equilibrium, an increase of 11 % (11.1 %) must be made upon each of the above six articles, no matter what their former prices were. We should then have: - 1 tobacco-pipe $1.10 +11.1% $1.22 1 tin of boot-polish 0.60 0.67 1 doz. steel pens 0.80 0.89 1 hat 2.50 2.78 1 pair of boots 3.00 3.33 1 pair of trousers 10.00 11.11
____ ____ $18.00 $20.00
The total is now $20, as before.
This uniform proportionate increase can only come from a cause acting uniformly upon all commodities, not from changes in the Various costs of production, and money alone (* General changes of price affect the relation between debtor and creditor, between the earning class and the stockholding class. This affects the demand for, and consequently the price of, the (very different) commodities bought by these two classes. This reaction is not treated here, as it is immaterial to the understanding of this part of the subject.) can act uniformly Upon the prices of all commodities. To re-establish equilibrium we need only bring more money into circulation until prices have risen 11 %.
To measure variations in the price of money we must therefore determine the average price of commodities and compare it with the average price of some former time.
Thousands of millions are here at stake, since the price of money
determines the prosperity or ruin of creditors and debtors. Careful work is therefore necessary; the method employed must be proof against interested outside manipulation and give an exact scientific result; otherwise there will be no end to the complaints of debtors and creditors.
Unfortunately this exact, unimpeachable result is not attained by the methods hitherto proposed. Dismayed by the difficulty of determining officially the prices of millions of commodities of different qualities, at different places, and of classifying them according to their relative importance, statisticians have proposed to choose a limited number of commodities from among the staple articles bought and sold at the exchanges, and to estimate the relative importance of these commodities by the amount of capital sunk in their production and marketing.
In this manner the "Index numbers" of Jevons, Sauerbeck, Soetbeer and others have been compiled.
To facilitate the understanding of a matter of vital importance to economic life, I shall here print such a table - with the prefatory remark that all the figures in it are drawn from imagination and are used simply as illustrations.
Table for the Calculation of the Average Price of Staple Commodities
1860 1880 1900
a Price b Quant. c Total a Price b Quant. c Total a Price b Quant. c Total 1. Wool 1.00 100 100 0.80 90 72 0.70 40 28 2. Sugar 1.00 20 20 0.90 90 81 0.80 110 88 1. Flax 1.00 70 70 1.10 40 44 1.20 10 12 2. Cotton 1.00 20 20 0.90 40 36 0.80 60 48 1. Wood 1.00 150 150 1.20 100 120 1.30 80 104 2. Iron 1.00 50 50 0.80 100 80 0.70 130 91 1. Wheat 1.00 400 400 0.80 300 240 0.75 260 195 2. Meat 1.00 150 150 1.20 200 240 1.40 260 364 1. Indigo 1.00 30 30 0.80 5 4 0.75 1 (1) 2. Petroleum 1.00 10 10 1.10 35 38 1.20 49 58
1000 1000 1000 955 1000 989
Explanation: According to this table the average price of these ten commodities changed from 1000 in the year 1860 to 955 in the year 1880 and 989 in the year 1900.
The quantities in the three columns (b) must of course always be brought to the same total amount (here 1000) if the result is to hold good. The figure chosen is unimportant, it is only necessary that the ratios of the separate quantities among themselves in each column (b) should be correct. If for instance, we reduced the sum of these quantities in our table to 500 or 100, the final result would be the same; the relation of the numbers 1000 - 955 - 955 would remain unchanged.
Each price in the first column (a) is for the quantity of the commodity obtainable in the year 1860 for one dollar, for example, 7.5 ounces of wool, 51 ounces of sugar, 6 ounces of flax, etc. For this reason all the prices appear as one dollar in the first column. The prices in the second and third columns (a), for 1880 and 1900, are for the same amounts, the amounts of the commodities which were obtainable for one dollar in 1860; that is, again 71 ounces of wool, 51 ounces of sugar, etc.
To illustrate the chief difficulties to be overcome with this method of determining the general level of prices, I have chosen the commodities in such a way that a commodity of decreasing importance in the economic life of the country is followed by a commodity of increasing importance. Wool and sugar are an example. German sheep-breeding has steadily declined during the last decades and wool has by no means the same importance in German economic life as it had 40 years ago. At that time the price of wool reacted upon the price of an enormous flock of sheep and upon the rent of a large tract of country which was used for sheep-grazing. Today German agriculture is hardly concerned in the price of wool. If the price of wool fell from 100 to 50, scarcely one German farmer in a hundred would be aware of the fact; wool-merchants, weavers and cloth-merchants alone would suffer.
Only by "weighting" the price of wool with its quantity can we reduce the price in the above table to its real importance. For this quantity, therefore, we have chosen the numbers 100 - 90 - 40.
Of sugar the reverse is true. The German beet-sugar industry has expanded greatly since 1860, not alone absolutely, but also in comparison with other industries. Many sheep-pastures have been converted into beet-fields; large numbers of German farmers and considerable amounts of capital in land, factories and stores are
affected by the price of sugar. Sugar is therefore given a place of increasing importance in our table.
It is the same with the other pairs of commodities, flax and cotton, wood and iron, wheat and meat, indigo and petroleum.
If we can make sure: -
1. that the data are complete, 2. that the separate prices are correctly ascertained, 3. that the estimates of the comparative importance of the separate commodities are correct,
the result, doubtlessly, will be unobjectionable.
But this is a large assumption. There are millions of separate commodities, and each commodity has numerous differences of quality, as one can observe by turning over the pages of the catalogues of the separate factories. Take, for example, a catalogue of photographic articles, of drugs or hardware. A thousand different articles strike the eye. And how are the prices to be officially ascertained ? Factories have for their different customers blue, red, green and white quotation-lists with different rates of discount. Is the official price-collector to be given a white or a green discount quotation ?
But if there were no other, simpler, method of reaching a sufficient degree of accuracy, we might be content with an approximate result, a determination, not of the average price of all commodities but of 100, 200 or 500 of the most important staple articles.
If the work of collecting the prices were left to the Chambers of Commerce, and the average were taken of the prices collected by them, no great objection could be made from the standpoint of impartiality towards debtors and creditors.
Absolute precision could not be obtained since: -
1. The prices of commodities cannot be exactly ascertained by third persons, especially if these persons are government officials. 2. The estimation of the relative importance of the different commodities is exceedingly intricate.
But is this any reason why we should make no attempt to measure the price of money ? The tailor measuring cloth does not use the standard metre of Paris; his customers are satisfied with the use of the wooden yard-stick. The rough result obtained by the above method of ascertaining the price of money would be preferable to the wordy assertions of the President of the Reichsbank. What do we know today of the price of money in Germany ? Nothing but our own observation tells us, or what interested persons, without proofs or facts, choose to assert.
Compared with this blind ignorance an approximate measurement of the movements of the price of money would be practically, and theoretically an immense advantage. Such a measurement would perhaps bring surprises and embarrass the worshippers of the gold standard, but is this any reason for renouncing it ? Does the judge when framing his questions for the jury take into consideration the embarrassment of the thief ? Is not a tallow-candle better than inky darkness, the doubt that science suggests preferable to blind superstition ?
For 40 years we have been put off with the assertion that the German monetary standard is an excellent standard, and for 40 years we have waited in vain for the proof.
Statistics of prices collected by the above method would give us a basis for examining the correctness of this assertion. The reason why such statistics have not been compiled up to the present is fear of the unwelcome light they would throw upon our present currency administration. Routine hates science.
It is curious to observe how the same persons who are blind to the acrobatics of the gold standard suddenly become meticulous pedants and raise the claims of accuracy beyond all practical requirements when considering a paper-money standard and the possibility of its measurement. The complaint that within short periods of time, prices, under the gold standard, rise or fall 10 - 20 - 30% is met with the counter-complaint that the proposed method of measurement is not absolutely reliable, that it is not free from errors, though possibly the existence of these errors cannot be proved. (*To prove the errors complained of in this method of measurement critics would have to provide a method of measurement of their own. But this they refuse to do, as the method would be applied to the gold standard, which could not stand the test. They prefer therefore to speak of "unprovable" errors and to arouse the suspicion in lay minds that a which is "unprovable" is, for that reason, particularly dangerous.)
But even such malevolent pedantry can be silenced, provided that we are prepared to take a certain amount of trouble. For what is the problem at bottom ? It is merely to discover whether the interests of creditors and debtors have been affected by changes of prices; whether and to what extent the budget of the business classes has been influenced by a rise or fall of prices; whether wage-earners, officials, stock-holders and pensioners can buy more or less commodities with their money income.
To ascertain this beyond the possibility of error it would only be necessary to pass the following law: That all producers (farmers. manufacturers) be required to furnish the amount of the commodities produced by them, and the prices obtained, to authorities designated for this purpose, perhaps the Chambers of Commerce. The separate figures would be collected by these authorities and the result communicated to the central bureau of statistics. The communication would be somewhat as follows: -
5,000 tons wheat, per ton $140 $700,000 1,000 tons potatoes, per ton 30 30,000 5,000 gallons milk, per gallon 0.60 3,000 600 cubic yards boards, per cubic yard 9 5,400 5 million bricks, per thousand 8 40,000 200 sheep 20 4,000 500 doz. straw hats, per doz. 10 5,000
Annual production of the District X. $787,400
At the central bureau of statistics the amounts returned by all the districts would be added together. The total would give the point of comparison for the determination, from time to time, of later variations. For these new measurements new prices, ascertained by the local collecting agencies, would be incorporated in a calculation similar to the one sketched above. The new total would give the average change of prices for the whole production of the country. The prices would therefore have to be collected as often as measurements were desired, but the amounts produced would only be taken annually. For foreign commodities statistics of imports would be used.
Since the volume of production varies as much as prices, the new statistics of production would not be immediately available for the new measurement. To obtain comparable quantities the new amounts of production must be used first with the old prices, and then with the new prices. The comparison of these two figures gives the index numbers of the movement of the price of money.
Merchants' stocks are left out of this calculation. They are included in production, and we may assume that changes revealed by statistics of the prices of production would apply in the same proportion to the wares held by merchants. It would therefore be a useless complication to include the merchants' stocks in the statistics of prices. The same is true of wages, which are already included in the price of wares. It may also be assumed that if factory prices in general are constant, the cost of living must also be constant; that workmen, officials, stockholders and pensioners will be able to buy the same quantity of goods for their money. (The workmen's house-rent, which consists chiefly of interest, cannot be taken into consideration in this connection).
Means of production (land, houses, machinery, etc.) must not be included in these statistics. The means of production are no longer wares for exchange, but goods useful to their owners through the employment to which they put them. And the price of things which are not for sale is a matter of indifference.
That part of the instruments of production which is consumed by "wear and tear", and written off, is transformed into wares and reappears regularly in the market. It is thus sufficiently represented in the prices of wares.
The State, by this plan, neither ascertains the prices nor estimates importance of the separate commodities. The whole work is carried out by the people themselves. The price of money is thus ascertained impartially, outside the sphere of politics. The nation is directly responsible for its monetary standard.
The duty of supplying the figures to be placed at the disposal of the State would hardly be a noticeable burden upon the business world, and the records required would be extremely useful to the producer, showing him to what extent his balance was affected by the management of the monetary standard. He would learn how much depended upon his activity and how much upon the activity of the Bank of Issue.
The most important objection to this method is that individuals interested in the rise or fall of prices (debtors or creditors) would falsify their reports; that farmers with debts, for example, would endeavour to prove that prices had fallen, in order to cause the State to raise prices by the issue of money - a rise of prices being equivalent to a general relief of debtors. But this danger is not great, since everyone would know how infinitely little his declaration would affect the total result. If an indebted farmer wrongly declared a loss of 1000 marks on a turnover of 10,000 marks, this would be a negligible quantity in comparison with fifty billion marks, the turnover of Germany as a whole. False declarations could be made punishable, and individuals would ask themselves whether the risk was not out of all proportion to the expected gain.
Each declaration would also be checked by the others. If the majority of farmers reported a rise of prices, an exception would be noticeable, and the falsifier would have to be prepared to face an inquiry.
Obviously this procedure takes no account of the illusion of "value".
Wares are paid for with wares, and money can be measured only by wares, by the material characteristics of wares. There is no other measure of money. I have given wares for money and I shall receive wares for it. Not work, not sweat. Someone in exchange for my money gives me an article. How he came into possession of it, how long he worked upon it, is his concern, not mine. I am interested solely in the product. Labour must be sharply distinguished from the product of labour, and wages must therefore be rejected as a measure of the price of money. Wages do indeed depend upon the product of labour and not, as Marx asserts, upon the factory clock. But wages are not identical with the product of labour, inasmuch as a deduction must be made from the latter in the shape of rent and interest. But wages, plus rent, plus interest, are equivalent to the product of labour which, in the form of wares, is, as we have seen, the measure of the price of money.
(* I use the word "measure" reluctantly. A measure is always a part or multiple of the object to be measured; the length of a bale of cloth is measured by the length of the yardstick. But what part of a horse can be found in the dollars for which it is sold ? For 100 years economists have called money "a measure of value" and none of them has as yet felt the necessity of finding a substitute for this manifestly erroneous expression.
That money and commodities are exchanged does not prove that they have something in common; on the contrary, it is because money and commodities have little or nothing in common, it is because they are incommensurable, that they are exchanged to the advantage of both parties. but how can we "measure" two things that lack a common property ?
This criticism also applies to the expression "purchasing power of money which causes the same illusions and must be rejected. For price is the result of bargaining and in influenced by thousands of factors.
A real measure, again, the standard platinum metre at Paris, is kept in a special compartment constructed deep in the earth in order to remove it from the influence of variations of temperature. Apply such a measure to the action (bargaining) on which price is based and you will at once recognise the illusory character of the expressions "value", "purchasing power", "measure of value", as applied to money.
And perhaps, if you are a bad mathematician but a good philosopher, you will then discover the term that economists can henceforward without reluctance employ.)