We are now in a position to draw together all the strands determining the prices of goods. In chapters 4 through 9 we analyzed all the determinants of the prices of particular goods. In this chapter we have analyzed the determination of the purchasing power of money. Now we can see how both sets of determinants blend together.

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.

Clearing is particularly appropriate for interlocal transactions, since costs of transporting money from one locale to another are likely to be heavy. Bills of exchange on each town (i.e., I.O.U.’s owed by each town) can be reciprocally canceled. Suppose that there are two traders, A and B, in Detroit, and two in Rochester, C and D. A sells C a refrigerator for 200 gold grams, and D sells B a TV set for 200 grams. The two debts can be cleared, and no money need be shipped from one place to the other. On the other hand, D’s sale of a TV set may total 120 grams.

The total stock of money in a society is the total number of ounces of the money commodity available. Throughout this volume we have deliberately used “gold ounces” instead of “dollars” or any other name for money, precisely because on the free market the latter would only be a confusing term for units of weight of gold or silver.

Chapter 2 described the difference between “claims to present goods” and “claims to future goods.” The same analysis applies to money as to barter. A claim to future money is a bill of exchange—an evidence of a credit transaction. The holder of the bill—the creditor—redeems it at the date of redemption in exchange for money paid by the debtor. A claim to present money, however, is a completely different good.

Since money-substitutes exchange as money on the market, we must consider them as part of the supply of money. It then becomes necessary to distinguish between money (in the broader sense)—the common medium of exchange—and money proper. Money proper is the ultimate medium of exchange or standard money—here the money commodity—while the supply of money (in a broader sense) includes all the standard money plus the money-substitutes that are held in individuals’ cash balances.

One popular criticism of 100-percent bank reserves charges that the bank could not then earn any income or cover costs of storage, printing, etc. On the contrary, a bank is perfectly capable of operating like any goods warehouse, i.e., by charging its customers for its services to them and reaping the usual interest return on its operations.

It is true, as we have said, that the only use for money is in exchange. From this, however, it must not be inferred, as some writers have done, that this exchange must be immediate. Indeed, the reason that a reservation demand for money exists and cash balances are kept is that the individual is keeping his money in reserve for future exchanges. That is the function of a cash balance—to wait for a propitious time to make an exchange.

One of the most obvious influences on the demand for money is expectation of future changes in the exchange-value of money. Thus, suppose that, at a certain point in the future, the PPM of money is expected to drop rapidly. How the demand-for-money schedule now reacts depends on the number of people who hold this expectation and the strength with which they hold it. It also depends on the distance in the future at which the change is expected to take place. The further away in time any economic event, the more its impact will be discounted in the present by the interest rate.