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11. Money and Its Purchasing Power > 9. Interlocal Exchange

A. Uniformity of the Geographic Purchasing Power of Money

The price of any commodity tends to be the same throughout the entire area using it. We have seen that this rule is not violated by the fact that cotton in Georgia, for example, is priced lower than cotton in New York. When cotton in New York is a consumers’ good, cotton in Georgia is a capital good in relation to the former. Cotton in Georgia is not the same commodity as cotton in New York because goods must first be processed in one location and then transported to the places where they are consumed.

Money is no exception to the rule that the price of every commodity will tend to be uniform throughout the entire area in which it is used. In fact, the scope for the money commodity is broader. Other commodities are produced in certain centers and must then be transported to other centers where they are consumed. They are therefore not the same “good” in different geographical locations; in the producing centers they are capital goods. Money, it is true, must first be mined and then shipped to places of use. But, once mined, the money commodity is used only for exchange. For these purposes, it is from then on shipped back and forth throughout the world market. Therefore, there is no really important capital-good location for money separate from a consumers’-good location. Whereas all other goods are first produced and then moved to the place where they are used and consumed, money is used interchangeably throughout the entire market area, moving back and forth. Therefore, the tendency toward geographical uniformity in the purchasing power of money holds true for the physical commodity gold or silver, and there is no need for that commodity to be treated as a different good in one place or another.

The purchasing power of money will therefore be identical over the entire area. Should the PPM be lower in New York than in Detroit, the supply of money for the exchange of goods will diminish in New York and increase in Detroit. Prices of goods being higher in New York than in Detroit, people will spend less in New York and more in Detroit than heretofore, this shift being reflected in the movement of money. This action will tend to raise the purchasing power of money in New York and lower it in Detroit, until its purchasing power in the two places is equal. The purchasing power of money will, in this way, tend to remain equal in all places where the money is used, whether or not national boundaries happen to intervene.

Some people contend that, on the contrary, there do exist permanent differences in the purchasing power of money from place to place. For example, they point to the fact that prices for food in restaurants are higher in New York City than in Peoria. For most people, however, New York has certain definite advantages over Peoria. It has a vastly wider range of goods and services available to the consumer, including theaters, concerts, colleges, high-quality jewelry and clothing, and stockbrokerage houses. There is a great difference between the commodity “restaurant service in New York” and the commodity “restaurant service in Peoria.” The former allows the purchaser to remain in New York and to enjoy its various advantages. Thus, the two are distinct goods, and the fact that the price of restaurant service is greater in New York signifies that the preponderance of individuals on the market value the former more highly and consider it a commodity of higher quality.40

Costs of transport, however, do introduce a qualification into this analysis. Suppose that the PPM in Detroit is slightly higher than in Rochester. We would expect gold to flow from Rochester to Detroit, spending relatively more on goods in the latter place, until the PPM's are equalized. If, however, the PPM in Detroit is higher by an amount smaller than the transport cost of shipping the gold from Rochester, then relative PPM's have a leeway to differ within the zone of shipping costs of gold. It would then be too expensive to ship gold to Detroit to take advantage of the higher PPM. The interspatial PPM's may vary in either direction within this cost-of-transport margin.41

Many critics allege that the PPM cannot be uniform throughout the world because some goods are not transferable from one locale to another. Times Square or Niagara Falls, for example, cannot be transferred from one region to another; they are specific to their locale. Therefore, it is alleged, the equalization process can take place only for those goods which “enter into interregional trade”; it does not apply to the general PPM.

Plausible as it seems, this objection is completely fallacious. In the first place, disparate goods like Times Square and other main streets are different goods, so that there is no reason to expect them to have the same price. Secondly, so long as one commodity can be traded, the PPM can be equalized. The composition of the PPM may well be changed, but this does not refute the fact of equalization. The process of equalization can be deduced from the fact of human action, even though, as we shall see, the PPM cannot be measured, since its composition does not remain the same.

Finally, since any good can be traded, what is there to prevent, for example, Oshkosh capital from buying a building on Times Square? The Oshkosh capitalists need not literally transport a good back to Oshkosh in order to buy it and make money from their investment. Every good, then, “enters into interregional trade”; no distinction between “domestic” and “interregional” (or “international”) goods can be made.

Thus, suppose the PPM is higher in Oshkosh than in New York. New Yorkers tend to buy more in Oshkosh, and Oshkoshians will buy less in New York. This does not only mean that New York will buy more Oshkosh wheat, or that Oshkosh will buy less New York clothing. It also means that New Yorkers will invest in real estate or theaters in Oshkosh, while Oshkoshians will sell some of their New York holdings.

  • 40. For an appreciation of Mises’ achievement in clarifying this problem, see Wu, An Outline of International Price Theories, pp. 127, 232–34.
  • 41. As we shall see below, however, interlocal clearing can greatly narrow these limits.