The existence of an exchange ratio between two sorts of money is dependent upon both being used side by side, at the same time, by the same economic agents, as common media of exchange. We could perhaps conceive of two economic areas, not connected in any other way, being linked together only by the fact that each exchanged the commodity it used for money against that used for money by the other, in order then to use the acquired monetary commodity otherwise than as money.

For the exchange ratio between two or more kinds of money, whether they are employed side by side in the same country (the parallel standard) or constitute what is popularly called foreign money and domestic money, it is the exchange ratio between individual economic goods and the individual kinds of money that is decisive. The different kinds of money are exchanged in a ratio corresponding to the exchange ratios existing between each of them and the other economic goods. If 1 kg. of gold is exchanged for m kg. of a particular sort of commodity, and 1 kg.

Let us at first ignore the possibility of various kinds of money being employed side by side, and assume that in a given district one kind of money serves exclusively as the common medium of exchange. The problem of the reciprocal exchange ratios of different kinds of money will then form the subject matter of the next chapter In this chapter, however, let us imagine an isolated geographical area of any size whose inhabitants engage in mutual trade and use a single good as common medium of exchange.

In contrast to the law of interlocal price relations that has just been explained is the popular belief in local variations in the purchasing power of money. The assertion is made again and again that the purchasing power of money may be different in different markets at the same time, and statistical data are continually being brought forward to support this assertion. Few economic opinions are so firmly rooted in the lay mind as this. Travelers are in the habit of bringing it home with them, usually as a piece of knowledge gained by personal observation.

There is a certain connection between the assertion of local differences in the purchasing power of money and the widespread belief in local differences in the cost of living. It is supposed to be possible “to live” more cheaply in some places than in others. It might be supposed that both statements come to the same thing, and that it makes no difference whether we say that the Austrian crown was “worth” less in 1913 than the eighty-five pfennigs which corresponded to its gold value, or that “living” was dearer in Austria than in Germany.

The assertion is often encountered that the size of the monetary unit exerts a certain influence on the determination of the exchange ratio between money and the other economic goods. In this connection the opinion is expressed that a large monetary unit tends to raise the money prices of commodities while a small monetary unit is likely to increase the purchasing power of money.

In a review devoted to the first edition of this book,56  Professor Walter Lotz deals with the criticism that I have brought forward against Laughlin’s explanation of the value of the Austrian silver gulden in the years 1879-92.

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.

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.