DOES CREDIT ACT ON THE GENERAL LEVEL OF PRICES?
BY A. J. UTLEY.
It is conceded by all standard writers on political economy that the value of money—that is, its purchasing power—is fixed and regulated by the amount of money available for use.
John Stuart Mill says:
If the whole money in circulation was doubled prices would be doubled. If it was only increased one-fourth, prices would rise one-fourth. There would be one-fourth more money, all of which would be used to purchase goods of some description. When there had been time for the increased supply of money to reach all markets, or (according to conventional metaphor) to permeate all the channels of circulation, all prices would have risen one-fourth. But the general rise of price is independent of this diffusing process. Even if some prices were raised more, and others less, the average rise would be one-fourth. This is a necessary consequence of the fact that a fourth more money would have to be given for only the same quantity of goods. General price, therefore, in any such case would be one-fourth higher. The very same effect would be produced on prices if we suppose the goods diminished, instead of the money increased: and the contrary effect if the goods were increased, or the money diminished. If there were less money in the hands of the community, and the same amount of goods to be sold, less money altogether would be given for them, and they would be sold at lower prices; lower, too, in the precise ratio in which the money was diminished. So that the value of money, other things being the same, varies inversely as its quantity; every increase in quantity lowering the value, and every diminution raising it, in a ratio exactly equivalent.
This is known as the quantitative theory of money, and is recognized by Ricardo, Jevons, Macleod, John Locke, James Mill, John Stuart Mill, Senator John P. Jones, David Hume, William Huskisson, Sir James Graham, Prof. Torrens, Prof. Sidgwick, J. R. McCulloch, Mr. Gallatin, Prof. Fawcett, Prof. Perry, N. A. Nicholson, Earl Grey, Prof. Shield Nicholson, Lord Overstone, and, in fact, by all writers on political economy of any prominence since Adam Smith. Formerly it was supposed that the value of money depended upon the cost of production; that the reason why a dollar in gold or silver was worth 100 cents was because it took 100 cents’ worth of labor to produce metal enough to make a dollar. This theory, however, has been abandoned by the best writers and speakers; in fact, by all economists of any standing, and it is now conceded that the cost of producing the metal has no influence on its money value, only as it may tend to increase or reduce the amount of money, and that it is the quantity of money, the number of units, available for use that determines and regulates its value; that is, if the quantity is increased its value will fall, and if the quantity is diminished its value will rise, and that it will fall or rise in value in a ratio exactly equivalent to the increase or diminution of the volume of money; and that if sufficiently reduced in volume, a dollar, whether stamped on gold, silver, or paper, would buy a plantation or pay a man for the labor of a lifetime. There can be no doubt as to the correctness of the quantitative theory of money.
John Stuart Mill says: