Irving Fisher

“ In no other way can the price level of the United States be prevented from rising above that of other nations in which we have assumed this level and the other magnitudes in the equation of exchange to be quiescent. While the ultimate effect then is to increase the volume of circulating media, this increase is spread over the whole world. Although the extension of banking is purely local, its effects are international. In fact, not only will there be a redistribution of gold money over all gold countries, but there will be a tendency to melt coin into bullion for use in the arts. ”

“ As we have seen, a doubling of all prices and incomes would not affect anybody's rate of turnover of money. Each person would need to make exactly twice the expenditure for the same actual result and to keep on hand exactly twice the money in order to meet the same contingencies in the same way. The determinant of velocity is real expenditure, not nominal. But a person's real expenditure is only another name for his volume of trade. We conclude, therefore, that a change in the volume of trade, when it affects the per capita trade, affects velocity of circulation as well. ”

“ But as somebody else must be found to take the money off his hands, its mere transfer will not diminish the amount in the community. It will simply increase somebody else's surplus. Everybody has money on his hands beyond what experience and convenience have shown to be necessary. Everybody will want to exchange this relatively useless extra money for goods, and the desire so to do must surely drive up the price of goods. No one can deny that the effect of every one's desiring to spend more money will be to raise prices. ”

“ In considering the influence affecting individual prices we say that an increase in supply lowers prices, but an increase in demand raises them. But in considering the influences affecting price levels we enter upon an entirely different set of concepts, and must not confuse the proposition that an increase in the trade (the Q's) tends to lower the price level, with the proposition that an increase in supply tends to lower an individual price. Trade (the Q's) is not supply—in fact is no more to be associated with supply than with demand. ”

“ Much of their reasoning goes no farther than to explain one price in terms of other prices. If we attempt to explain the money price of a finished product in terms of the money prices of its raw materials and other money costs of prices of production, it is clear that we merely shift the problem. We have still to explain these antecedent prices. ”

“ To throw away contemptuously the equation of exchange because it is so obviously true is to neglect the chance to formulate for economic science some of the most important and exact laws of which it is capable. ”

“ A change in the amount of what dollars will buy is as important as a change in the amount of sugar. The price of sugar in dollars depends partly on sugar and partly on dollars,—that is, on what dollars will buy—that is, on the price level. Therefore, beneath the price of sugar in particular there lies, as one of the bases of that particular price, the general level of prices. We have more need to study the price level preparatory to a study of the price of sugar than to study the price of sugar preparatory to a study of the price level. ”

“ Taking the world as a whole, the ultimate effect is, as we have seen, to raise world prices slightly and to melt some coin. The only appreciable ultimate effect of increasing the ratio of M' to M in one country is to expel money from that country into others. All of these effects are exactly the same as those of increasing the issue of bank notes, so long as they continue redeemable in gold or other exportable money. ”

“ VIII.68 The legitimacy of separating the study of price levels from that of prices will be clearly recognized, when it is seen that individual prices cannot be fully determined by supply and demand, money cost of production, etc., without surreptitiously introducing the price level itself. We can scarcely overemphasize the fact that the "supply and demand" or the "cost of production" of goods in terms of money do not and cannot completely determine prices. Each phrase, fully expressed, already implies money. There is always hidden somewhere the assumption of a general price level. ”

“ Thus currency expands when prices are low and contracts when prices are high, and such expansion and contraction tend to lower the high prices and raise the low prices, thus working toward mutual equality. We see then that, so far from its being true that high prices cause increased supply of money, it is true that money avoids the place and time of high prices and seeks the place and time of low prices, thereby mitigating the inequality of price levels. ”

“ If barter needs to be seriously considered as a relief from money stringency, we shall be doing it full justice if we picture it as a safety-valve, working against a resistance so great as almost never to come into operation and then only for brief transition intervals. For all practical purposes and all normal cases, we may assume that money and checks are necessities for modern trade. ”

“ Those who place such implicit reliance on the competency of supply and demand to fix prices, irrespective of the quantity of money, deposits, velocity, and trade, will have their confidence rudely shaken if they will follow the reasoning as to price causation of separate articles. They will find that there are always just one too few equations to determine the unknown quantities involved.*7 The equation of exchange is needed in each case to supplement the equations of supply and demand. ”

“ Any rational study of the influence of improvements in methods of production upon the level of prices should, therefore, fix attention, first, on the resulting volume of trade, and should aim to discover whether this, in turn, carries prices upwards or downwards. ”

“ Not only is the demand for sugar at ten cents a pound greater than the demand at twenty cents a pound (at a given level of prices of other things) , but the demand at twenty cents at a high level of prices is greater than the demand at twenty cents at a low level of prices. In fact if the price level is doubled, the demand at twenty cents a pound will be as great as the demand was before at ten cents a pound, assuming that the doubling applies likewise to wages and incomes generally. The significance of a dollar lies in what it will buy ”

“ If the magnitudes in the equations of exchange in other countries with which the United States is connected by trade are constant, the ultimate effect on M is to make it less than what it would otherwise have been, by increasing the exports of gold from the United States or reducing the imports. ”

“ As soon as local prices have risen enough to make it profitable to sell at the high prices in that place and buy at the low prices elsewhere, money will be exported. The production of gold in Colorado and Alaska first results in higher prices in Colorado and Alaska, then in sending gold to other sections of the United States, then in higher prices throughout the United States, then in export abroad, and finally in higher prices throughout the gold-using world. ”

“ If all property were equally acceptable, all property would be equally money; or if there were many kinds of property nearly as exchangeable as money, resort to barter would be so easy that some of the goods sold for money could be almost equally well bartered for something else. But as long as there were any preference at all for the use of money, resort to barter would be reluctantly made and as a temporary expedient only. We have seen this when studying transition periods. ”

“ VIII.54 It is clear that the equality between the money side and the goods side must be maintained somehow, and that if the prices are raised the quantity of money or the quantity of deposits or their velocities must be raised, or else the volume of business must be reduced. ”

“ But if all prices including the prices of services are doubled, there is no reason why trade should be reduced. Since the average person will not only pay, but also receive high prices, it is evident that the high prices he gets will exactly make him able to stand the high prices he pays without having to reduce his purchases. ”

“ VIII.18 So much pains has been taken to establish these premises and to emphasize the results of the reasoning based on them because it seems nothing less than a scandal in Economic Science that there should be any ground for dispute on so fundamental a proposition. ”

“ The greatest generalizations of physical science, such as that forces are proportional to mass and acceleration, are truisms, but, when duly supplemented by specific data, these truisms are the most fruitful sources of useful mechanical knowledge. ”

“ Probably no one will deny this, but some objectors might claim that, though technique of production and trade determine most of these things, nevertheless the Q's—the actual quantities of goods exchanged for money and deposit currency—might conceivably vary according as barter is or is not resorted to. If barter were as convenient as sale-and-purchase, this contention would have force. There would then be little need of distinguishing between money as the generally acceptable medium of exchange and other property as not generally acceptable. ”

“ They spend money faster, not only absolutely but relatively to the money they keep on hand. Statistics collected at Yale University of a number of cases of individual turnover show this clearly.*4 In other words, the man who spends much, though he needs to carry more money than the man who spends little, does not need to carry as much in proportion to his expenditure. ”

“ Sometimes the rise in an individual price raises and at other times lowers the general price level.*10 To draw a physical parallel let us suppose that a thousand piles have been driven in a quicksand and that the owner wishes to raise their level a foot. ”