Those determinants of the objective exchange value of money that have already been considered exhibit no sort of special peculiarity. So far as they are concerned, the exchange value of money is determined no differently from the exchange value of other economic goods. But there are other determinants of variations in the objective exchange value of money which obey a special law.

No complaint is more widespread than that against “dearness of living.” There has been no generation that has not grumbled about the “expensive times” that it lives in. But the fact that “everything” is becoming dearer simply means that the objective exchange value of money is falling. It is extraordinarily difficult, if not impossible, to subject such assertions as this to historical and statistical tests. The limits of our knowledge in this direction will have to be referred to in the chapter dealing with the problem of the measurability of variations in the value of money. Here we must be content to anticipate the conclusions of this chapter and state that we can expect no support from investigations into the history of prices or from the methods employed in such investigations. The statements of the average man, even though it may very easily happen that these are founded on self-deception and even though they are so much at the mercy of variations in the subjective valuations of the individual, would almost form a better substantiation of the fact of a progressive fall in the objective exchange value of money than can be provided by all the contents of voluminous statistical publications. Certainty can be afforded only by demonstration that chains of causes exist, which are capable of evoking this sort of movement in the objective exchange value of money and would evoke it unless they were cancelled by some counteracting force. This path, which alone can lead to the desired goal, has already been trodden by many investigators-with what success, we shall see.

With many others, and in agreement with general popular opinion, Wagner assumes the predominance of a tendency toward the diminution of the objective exchange value of money. He holds that this phenomenon can be explained by the fact that the supply side is almost invariably the stronger and the most capable of pursuing its own acquisitive interest. Even apart from actual cartels, rings, and combinations, and in spite of all the competition of individual sellers among themselves, he claims that the supply side has more solidarity than the opposing demand side. He argues further that the tradesmen engaged in retail trade are more interested in an increase of prices than their customers are in the continuance of the old prices or in price reductions; for the amount of the tradesmen’s earnings, and consequently their whole economic and social position, depends largely on the prices they obtain, while as a rule only special, and therefore relatively unimportant, interests of the customers are involved. Hence the growth on the supply side of a tendency toward the maintenance and raising of prices, which acts as a kind of permanent pressure in the direction of higher prices, more energetically and more universally than the opposing tendency on the demand side. Prices certainly are kept down and reduced in retail trade with the object of maintaining and expanding sales and increasing total profits, and competition may, and often does, make this necessary. But neither influence, according to Wagner, is in the long run so generally and markedly effective as the interest in and striving for higher prices, which is in fact able to compete with and overcome their resistance. In this permanent predominance of the supply side over the demand side, Wagner sees one of the causes of the general increases in prices.51

Wagner, that is to say, attributes the progressive fall in the objective exchange value of money to a series of factors which have no effect on the determination of wholesale prices but only in the determination of retail prices. Now it is a well-known phenomenon that the retail prices of consumption goods are affected by numerous influences which prevent them from responding rapidly and completely to movements of wholesale prices. And, among the peculiar determinants of retail prices, those predominate which tend to keep them above the level corresponding to wholesale prices. It is, for instance, well known that retail prices adapt themselves more slowly to decreases in wholesale prices than to increases. But it must not be overlooked that the adjustment must eventually take place, all the same, and that the retail prices of consumption goods always participate in the movements of the prices of production goods, even if they lag behind them; and that it is only small, transient movements in wholesale trade that have no effect on retail trade.

Even if we were willing to admit the existence of a permanent predominance of the supply side over the demand side, it would still be decidedly questionable whether we could deduce a tendency toward a general increase of dearness from it. If no further cause could be shown to account for an increase of wholesale prices—and Wagner does not attempt this at all—then we can argue a progressive increase of retail prices only if we are prepared to assume that the time lag between the movements of retail and of wholesale prices is continually increasing. But Wagner makes no such assumption; and it would be very difficult to support it, if he did. It may be said, in fact, that modern commercial development has brought about a tendency toward a more rapid adjustment of retail prices to wholesale and manufacturers’ prices. Multiple and chain stores and cooperative societies follow the movements of wholesale prices much more closely than peddlers and small shopkeepers.

It is entirely incomprehensible why Wagner should connect this tendency to a general rise of prices, arising from the predominance of the supply side over the demand side, with the individualistic system of free competition or freedom of trade, and declare that it is under such a system that the tendency is clearest and operates with the greatest force and facility. No proof is given of this assertion, which is probably a consequence of Wagner’s antipathy to economic liberalism; neither could one easily be devised. The more developed the freedom of trade, the more easily and quickly are movements in wholesale prices reflected in retail prices, especially downward movements. Where legislative and other limitations on freedom of trade place small producers and retailers in a favored position, the adjustment is slower and sometimes complete adjustment may even be prevented altogether.

A striking example of this is afforded by the Austrian attempts during the last generation to favor craftsmen and small shopkeepers in their competition against factories and large stores, together with the subsequent considerable rise in prices between 1890 and 1914. It is not under free competition that the conditions which Wagner calls the permanent predominance of the supply side over the demand side are most strongly in evidence, but in those circumstances where the development of free competition is opposed by the greatest obstacles.

• 51See Wagner, Theoretische Sozialökonomik (Leipzig, 1909), vol. 2, p, 245.

Wieser’s attempt52  to explain an increase in the money prices of goods unaccompanied by any considerable change in their value in terms of other goods, is not entirely satisfactory either. He holds the opinion that most of the changes in the value of money that have actually occurred are to be attributed to changes in the relations between the “natural economy” (Naturalwirtschaft) and the “money economy” (Geldwirtschaft). When the money economy flourishes, the value of money is reduced; when it decays, the value of money rises again. In the early stages of a money economy most wants are still satisfied by the methods of the natural economy. The family is self-supporting; it lives in its own house, and itself produces the greater part of what it needs; the sale of its products constitutes only a supplementary source of income. Consequently, the cost of living of the producer, or, what comes to the same thing, the value of his labor, is not fully allowed for or not allowed for at all in the cost of the products that are sold; all that is included is the cost of the raw materials used and the wear and tear of those tools or other instruments that have had to be specially constructed, which in any case do not amount to much under conditions of extensive production. So it is with the buyer also; the wants that he satisfies by purchase are not among his more important wants and the use-values that he has to estimate are not very great.

Then gradually all this changes. The extension of the sphere of the money economy introduces into cost calculations factors that were not included before but were dealt with on “natural economic” principles. The list of the costs that are reckoned in monetary terms grows longer, and each new element in the cost calculation is estimated by comparison with the factors already expressed in money, and added to them, with the effect of raising prices. Thus a general rise of prices occurs, but this is not interpreted as a consequence of changes in supply conditions, but as a fall in the value of money.

According to Wieser, if it is not possible to explain the increasing rise in the prices of commodities as originating in monetary factors alone (that is, in variations in the relations between the supply of money and the demand for it), then we must seek another reason for these changes in the general level of prices. Now it is impossible to find the reason by reference to such fluctuations in the values of commodities as are caused by factors belonging to the commodity side of the price ratio; for nowadays we are not worse supplied with goods than our forefathers were. But, to Wieser, no other explana tion seems more natural than that which attributes the diminution of the purchasing power of money to the extension of the money economy which was its historical accompaniment. For Wieser, in fact, it is this very inertia of prices which has helped to bring about the change in the value of money during each period of fresh progress; it must have been this that caused the older prices to be raised by the amount of the additional values involved whenever new factors were co-opted into that part of the process of production that was regulated by the money economy. But the higher the money prices of commodities rise, the lower must the value of money fall in comparison. Increasing dearness thus appears as an inevitable symptom of the development of a growing money economy.

It cannot be denied that this argument of Wieser’s reveals important points in connection with the market and the determination of prices, which, if followed up, have important bearings on the determination of the exchange ratios between the various economic goods other than money. Nevertheless, so far as Wieser’s conclusions relate to the determination of money prices, they exhibit serious shortcomings. In any case, before his argument could be accepted as correct, it would have to be proved that, not forces emanating from the money side, but only forces emanating from the commodity side, are here involved. Not the valuation of money, but only that of the commodities, could have experienced the transformation supposed to be manifested in the alteration of the exchange ratio.

But the chain of reasoning as a whole must be rejected. The development of facilities for exchanging means that the new recruits to the economy increase their subjective valuations of those goods which they wish to dispose of. Goods which they previously valued solely as objects of personal use are now valued additionally on account of their exchangeability for other goods. This necessarily involves a rise in their subjective value in the eyes of those who possess them and are offering them for exchange. Goods which are to be disposed of in exchange are now no longer valued in terms of the use-value that they would have had for their owners if consumed by them, but in terms of the use-value of the goods that may be obtained in exchange for them. The latter value is always higher than the former, for exchanges only occur when they are profitable to both of the parties concerned.

But on the other hand—and Wieser does not seem to have thought of this—the subjective value of the goods acquired in exchange sinks. The individuals acquiring them no longer ascribe to them the significance corresponding to their position in a subjective scale of values (Wertskala) or utilities (Nutzenskala), they ascribe to them only the smaller significance that belongs to the other goods that have to be surrendered in order to get them.

Let us suppose that the scale of values of the possessor of an apple, a pear, and a glass of lemonade, is as follows:

1. An apple
2. A piece of cake
3. A glass of lemonade
4. A pear

If now this man is given the opportunity of exchanging his pear for a piece of cake, this opportunity will increase the significance that he attaches to the pear. He will now value the pear more highly than the lemonade. If he is given the choice between relinquishing either the pear or the lemonade, he will regard the loss of the lemonade as the lesser evil. But this is balanced by his reduced valuation of the cake. Let us assume that our man possesses a piece of cake, as well as the pear, the apple, and the lemonade. Now if he is asked whether he could better put up with the loss of the cake or of the lemonade, he will in any case prefer to lose the cake, because he can make good this loss by surrendering the pear, which ranks below the lemonade in his scale of values. The possibility of exchange introduces considerations of the objective exchange value of goods into the economic decisions of every individual; the original primary scale of use-values is replaced by the derived secondary scale of exchange values and use-values, in which economic goods are ranked not only with regard to their use-values, but also according to the value of the goods that can be obtained for them in exchange. There has been a transposition of the goods; the order of their significance has been altered. But if one good is placed higher, then—there can be no question of it—some other must be placed lower. This arises simply from the very nature of the scale of values, which constitutes nothing but an arrangement of the subjective valuations in order of the significance of the objects valued.

The extension of the sphere of exchange has the same effects on objective exchange values as on subjective values. Here also every increase of value on the one side must be opposed by a decrease of value on the other side. In fact the alteration of an exchange ratio between two goods in such a way that both become dearer is inconceivable. And this cannot be avoided by the interposition of money. When it is asserted that the objective exchange value of money has experienced an alteration, some special cause for this must be demonstrated, apart from the bare fact of the extension of the sphere of exchange. But nobody has ever provided this demonstration.

Wieser commences by contrasting, after the fashion of economic historians, the natural economy and the money economy. These terms fail to provide that scientific abstraction of concepts that is the indispensable basis of all theoretical investigation. It remains uncertain whether the contrast of an exchangeless state with an order of society based upon exchange is intended, or a contrast between conditions of direct exchange and of indirect exchange based upon the use of money. It seems most likely that Wieser intends to contrast an exchangeless state with one of exchange through money. This is certainly the sense in which the expressions natural economy and money economy are used by economic historians; and this definition corresponds to the actual course of economic history after the full development of the institution of money. Nowadays, when new geographical areas or new spheres of consumption are brought within the scope of exchange, there is a direct transition from the exchangeless state to that of the money economy; but this has not always been so. And in any case the economist must make a clear distinction.

Wieser speaks of the townsman who is in the habit of spending his summer holiday in the country and of always finding cheap prices there. One year, when this townsman goes on holiday he finds that prices have suddenly become higher all round; the village has meanwhile been brought within the scope of the money economy. The farmers now sell their milk and eggs and poultry in the town and demand from their summer visitors the prices that they can hope to get at market. But what Wieser describes here is only half the process. The other half is worked out in the town, where the milk, eggs, and poultry coming on the market from the newly tapped sources of supply in the village exhibit a tendency toward a reduction of price. The inclusion of what has hitherto been a natural economy within the scope of an exchange system involves no one-sided rise of prices, but a leveling of prices. The contrary effect would be evoked by any contraction of the scope of the exchange system; it would have an inherent tendency to increase the differences between prices. Thus we should not use this phenomenon, as Wieser does, to substantiate propositions about variations in the objective exchange value of money.

• 52See Wieser, “Der Geldwert und seine geschichtlichen Veränderungen,” pp. 57 ff.; “Der Geldwert und seine Veränderungen,” pp. 527 ff.; “Theorie der gesellschaftlichen Wirtschaft,” in Grundriss der Sozialökonomik (Tübingen, 1914), Part I pp. 327 ff.

Nevertheless, the progressive rise of prices and its complement, the fall in the value of money, may quite well be explained from the monetary side, by reference to the nature of money and monetary transactions.

The modern theory of prices has stated all its propositions with a view to the case of direct exchange. Even where it does include indirect exchange within the scope of its considerations, it does not take sufficient account of the peculiarity of that kind of exchange which is dependent upon the help of the common medium of exchange, or money. This, of course, does not constitute an objection to the modern theory of prices. The laws of price determination which it has established for the case of direct exchange are also valid for the case of indirect exchange, and the nature of an exchange is not altered by the use of money. Nevertheless, the monetary theorist has to contribute an important addition to the general theory of prices.

If a would-be buyer thinks that the price demanded by a would be seller is too high, because it does not correspond to his subjective valuations of the goods in question, a direct exchange will not be feasible unless the would-be seller reduces his demands. But by indirect exchange, with money entering into the case, even without such a reduction there is still a possibility that the transaction may take place. In certain circumstances the would-be buyer may decide to pay the high price demanded, if he can hope similarly to obtain a better price than he had reckoned upon for those goods and services that he himself has to dispose of. In fact, this would very often be the best way for the would-be buyer to obtain the greatest possible advantage from the transaction. Of course, this will not be true, as in the case of transactions like those of the stock exchange, or in individual bargaining, when both parties cooperate immediately in the determination of prices and consequently are able to give direct expression to their subjective estimates of commodity and medium of exchange. But there are cases in which prices appear to be determined one-sidedly by the seller, and the buyer is obliged to abstain from purchase when the price demanded is too high. In such a case, when the abstention of the purchaser indicates to the seller that he has overreached his demand, the seller may reduce his price again (and, of course, in so doing, may possibly go too far, or not far enough). But under certain conditions a different procedure may be substituted for this roundabout process. The buyer may agree to the price demanded and attempt to recoup himself elsewhere by screwing up the prices of the goods that he himself has for sale. Thus a rise in the price of food may cause the laborers to demand higher wages. If the entrepreneurs agree to the laborers’ demands, then they in turn will raise the prices of their products, and then the food producers may perhaps regard this rise in the price of manufactured goods as a reason for a new rise in the price of food. Thus increases in prices are linked together in an endless chain, and nobody can indicate where the beginning is and where the end, or which is cause and which effect.

In modern selling policies “fixed prices” play a large part. It is customary for cartels and trusts and in fact all monopolists, including the state, to fix the prices of their products independently, without consulting the buyers; they appear to prescribe prices to the buyer. The same is often true in retail trade. Now this phenomenon is not accidental. It is an inevitable phenomenon of the unorganized market. In the unorganized market, the seller does not come into contact with all of the buyers, but only with single individuals or groups. Bargaining with these few persons would be useless, for it is not their valuations alone but those of all the would-be purchasers of the good in question that are decisive for price determination. Consequently the seller fixes a price that in his opinion corresponds approximately to what the price ought to be (in which it is understandable that he is more likely to aim too high than too low), and waits to see what the buyers will do. In all of those cases in which he alone appears to fix prices, he lacks exact knowledge of the buyers’ valuations. He can make more or less correct assumptions about them, and there are merchants who by close observation of the market and of the psychology of buyers have become quite remarkably expert at this; but there can be no certainty. In fact, estimates often have to be made of the effects of uncertain and future processes. The sole way by which sellers can arrive at reliable knowledge about the valuations of consumers is the way of trial and error Therefore they raise prices until the abstention of the buyers shows them that they have gone too far. But even though the price may seem too high, given the current value of money the buyer may still pay it if he can hope in the same way to raise the price which he “fixes” and believes that this will lead more quickly to his goal than abstention from purchasing, which might not have its full effect for a long time and might also involve a variety of inconveniences to him. In such circumstances the seller is deprived of his sole reliable check upon the reasonableness of the prices he demands. He sees that these prices are paid, thinks that the profits of his business are increasing proportionately, and only gradually discovers that the fall in the purchasing power of money deprives him of part of the advantage he has gained. Those who have carefully traced the history of prices must agree that this phenomenon repeats itself a countless number of times. It cannot be denied that much of this passing on of price increases has indeed reduced the value of money, but has by no means altered the exchange ratios between other economic goods in the intended degree.

In order to guard against any possible misunderstanding, it should be explicitly stated that there is no justification for drawing the conclusion from this that all increases of prices can be passed on in this way, and so perhaps for assuming that there is a fixed exchange ratio between the different economic goods and human efforts. To be consistent, we should then have to ascribe the rise in the money prices of goods to the vain efforts of human greed. A rise in the money price of a commodity does as a rule modify its exchange ratio to the other commodities, although not always in the same degree as that in which its exchange ratio to money has been altered.

The champions of the mechanical version of the quantity theory may perhaps admit the fundamental correctness of this line of argument, but still object that every variation in the objective exchange value of money that does not start from changes in the relations between the supply of money and the demand for it must be automatically self-correcting. If the objective exchange value of money falls, then the demand for money must necessarily increase, since in order to cope with the volume of transactions a larger sum of money is necessary. If it were permissible to regard a community’s demand for money as the quotient obtained by dividing the volume of transactions by the velocity of circulation, this objection would be justified. But the error in it has already been exposed. The dependence of the demand for money on objective conditions, such as the number and size of the payments that have to be coped with, is only an indirect dependence through the medium of the subjective valuations of individuals. If the money prices of commodities have risen and each separate purchase now demands more money than before, this need not necessarily cause individuals to increase their stocks of money. It is quite possible, despite the rise of prices, that individuals will form no intention of increasing their reserves, that they will not increase their demand for money. They will probably endeavor to increase their money incomes; in fact this is one way in which the general rise of prices expresses itself. But increase of money incomes is by no means identical with increase of money reserves. It is of course possible that individuals’ demands for money may rise with prices; but there is not the least ground for assuming that this will occur, and in particular for assuming that such an increase will occur in such a degree that the effect of the decrease in the purchasing power of money is completely canceled. Quite as justifiably, the contrary assumption might also be hazarded, namely that the avoidance of unnecessary expenditure forced upon the individual by the rise of prices would lead to a revision of views concerning the necessary level of cash reserves and that the resultant decision would certainly be not for an increase, but rather for even a decrease, in the amount of money to be held.

But here again it must be observed that this is a matter of a variation brought about through dynamic agencies. The static state, for which the contention attributed to the adherents of the mechanical version of the quantity theory would be valid, is disturbed by the fact that the exchange ratios between individual commodities are necessarily modified. Under certain conditions, the technique of the market may have the effect of extending this modification to the exchange ratio between money and other economic goods also.53

• 53See also my article “Die allgemeine Teuerung im Lichte der theoretischen Nationalalökonomie,” Archiv für Sozialwissenschaft 37: 563 ff.