Irving Fisher

“ Emphasis is laid instead on the fact that in the last analysis the trade is of goods for goods, not of money for goods, and that a tariff on imports reduces, not only imports, but exports also,—that it merely interrupts temporarily the virtual barter between nations. ”

“ If it costs nothing to have bullion coined into money, and nothing to melt money into bullion, there will be an automatic flux and reflux from money to bullion and from bullion to money that will prevent the price of bullion from varying greatly. On the one hand, if the price of gold bullion is greater than the money which could be minted from it, no matter how slight the difference may be, the users of gold who require bullion—notably jewelers—will save this difference by melting gold coin into bullion. ”

“ When a single small country is under consideration, it is therefore preferable to say that the quantity of money in that country is determined by the universal price level, rather than to say that its level of prices is determined by the quantity of money within its borders. ”

“ The effect of a tax on imports is likened to that of a tax on exports. But in respect to effects on price levels a tax on imports and a tax on exports are diametrically opposed. If we place our tax on exports, we first interfere with exports. The imports are not checked until money has flowed out and has reduced the general price level enough to destroy the "unfavorable" balance of trade first created. We conclude that the general purchasing power of money is reduced by a tariff and that it would be increased by a tax on exports. ”

“ VI.8 But, although international and interlocal trade will never bring about exact uniformity of price levels, it will, to the extent that it exists, produce an adjustment of these levels toward uniformity by regulating in the manner already described the distribution of money. If one commodity enters into international trade, it alone will suffice, though slowly, to act as a regulator of money distribution; for in return for that commodity, money may flow and, as the price level rises or falls, the quantity of that commodity sold may be correspondingly adjusted. ”

“ As the surface rises, therefore, more outlets will be brought into use, but fewer inlets. That is to say, the less the purchasing power of gold as bullion, the more it will be used in the arts, but the less profitable it will be for the mines to produce it, and the smaller will be the output of the mines. As the surface falls, more inlets will come into use and fewer outlets. ”

“ The cost at this point is called the marginal cost of production. At the richest mines, the cost of production is extremely small. From this low standard the cost gradually rises at other mines, until the marginal mine is reached, at which the cost will normally be equal to the value of the product. In fact, there exists a marginal point of production, not only as among different mines, but for each mine individually. The fact that cost tends in general to increase with increased product is due to the fact that gold is an extractive industry. ”

“ If all countries had their irredeemable paper money, and had no money acceptable elsewhere, there could be no international adjustment of monetary matters. Price levels in different countries would have no intimate connection. Indeed, to some extent the connection is actually broken between existing countries which have different metallic standards,—for example, between a gold-basis and a silver-basis country,—although through their nonmonetary uses the two metals are still somewhat bound together. ”

“ VI.15 Except for transitional effects, then, international differences of price levels produce changes only in one of the elements in the equation of exchange,—the volume of money. Practically, of course, transition periods may be incessant or chronic. It seldom happens that a nation has no balance of trade. For decades Oriental nations took silver from Occidental nations even when silver was, under the bimetallic régime, at a stable ratio with gold. ”

“ But if outsiders buy of Connecticut, they will have to bring money to buy with. There will, therefore, be a tendency for money to flow to Connecticut until the level of prices there rises to a level which will arrest the influx. If, on the other hand, prices in Connecticut are higher than in surrounding states, it becomes a good place to sell to and a poor place to buy from. But if outsiders sell to Connecticut, they will receive money in exchange. There is then a tendency for money to flow out of Connecticut until the level of prices in Connecticut is lower. ”

“ Each inlet distance represents the cost of production for each mine, measured in goods; each outlet distance represents the value of gold in some particular use, likewise measured in goods. The surface distance, as we have already explained, represents the value of bullion, likewise measured in goods,—in other words, its purchasing power. ”

“ But whatever may be the source of the difference in price levels, equilibrium will eventually be restored through an international or interlocal redistribution of money and goods brought about by international and interlocal trade. Other elements in the equation of exchange than money and commodities cannot be transported from one place to another. ”

“ Wherever the estimated cost of producing a dollar of gold is less than the existing value of a dollar in gold, it will normally be produced. Wherever the cost of production exceeds the existing value of a dollar, gold will normally not be produced. ”

“ But where two or more nations trading with each other use the same standard, there is a tendency for the price levels of each to influence profoundly the price levels of the other.
VI.4 The price level in a small country like Switzerland depends largely upon the price level in other countries. Gold, which is the primary or full weight money in most civilized nations, is constantly travelling from one country or community to another. ”

“ If objects made of gold are cheap—that is, if the prices of other objects are relatively high—then the relative cheapness of the gold objects will lead to an increase in their use and consumption. Expressing the matter in terms of money prices, when prices of everything else are higher and people's incomes are likewise higher, while gold watches and gold ornaments generally remain at their old prices, people will use and consume more gold watches and ornaments. ”

“ This means nothing more than the fact that gold in one form and measured in one way will always bear a constant ratio to gold in another form and measured in another way. An ounce of gold bullion is worth a fixed number of gold dollars, for the same reason that a pound sterling of gold is worth a fixed number of gold dollars, or that a gold eagle is worth a fixed number of gold dollars. ”

“ In ordinary intercourse between nations, even when a deliberate attempt is made to interfere with it by protective tariffs, there will always be a large number of commodities thus acting as outlets and inlets. ”

“ A tariff obviously raises the prices of the "protected" goods. But it does more than that,—it tends also to raise the prices of goods in general. Thus, the tariff first causes a decrease in imports. Though in the long run this decrease in imports will lead to a corresponding decrease in exports, yet at first there will be no such adjustment. The foreigner will, for a time, continue to buy from the protected country almost as much as before. ”

“ Distance, ignorance as to where the best markets are to be found, tariffs, and costs of transportation help to maintain price differences. The native products of each region tend to be cheaper in that region. ”