Study Guide to the Theory of Money and Credit
9. The Problem of the Existence of Local Differences in the Objective Exchange Value of Money
Chapter Outline
1. Interlocal Price Relations
Money can perform its services from virtually any location. Gold stored in the cellars of the Bank of England can be used as a common medium of exchange anywhere in the world, through the use of banknotes, checks, and clearing systems. In contrast, physical location is a crucial feature of other economic goods. “Coffee in Brazil” is not the same good as “coffee in England,” from the perspective of English consumers.
If we completely disregard the possible (but small) influence of the position of money on its valuation, then we can derive the law that every economic good that is ready for consumption, has a subjective use-value qua consumption good at the place where it is, and qua production good at those places to which it may be transported for consumption. Therefore, the money-price of any commodity in any place must be the same as the money-price at any other place, once we adjust for the money-cost of transportation, unless there are institutional limits restricting exchange. (In the real world, there are possible costs of the transport of money, the need to re-coin it, and so on, that would affect the foreign-exchange rate such as the cable rate. These complications do not arise if we assume the money itself stays put.)
2. Alleged Local Differences in the Purchasing Power of Money
Despite the arguments put forward in the previous section, many people still cling to the belief that one’s money “goes further” in some regions compared to others. However, this erroneous view neglects the fact that the same physical item is a different good, economically speaking, depending on its location. A cocktail in a bar in Manhattan is a different good from the “same drink” in a bar in Boise, so their different money-prices cannot lead us to conclude that the “value of money” is higher in Boise than in Manhattan. On the contrary, the purchasing power of money will tend to be equalized in all regions where it is used, and any apparent discrepancies are due to differences on the commodity side.
3. Alleged Local Differences in the Cost of Living
Closely related to the fallacy that the purchasing power of money can vary from region to region, is the claim that the “cost of living” is higher in one area versus another. Here too we need to consider the subjective valuations of individuals, rather than the physical attributes of goods and services. An apartment carries a higher rental price in a resort town near a popular beach, versus a rural area with no special attractions, precisely because people value the proximity to the beach, the local night life, etc. It is simply not true that the same lifestyle can be obtained more cheaply in the rural town than in the resort town. If the “cost of living” really were higher in one location, people would move out of the area until its prices had fallen enough to eliminate the discrepancy.
Technical Notes
• Mises says on page 171 that the money-price of a commodity must be the same in all places, due account being made for the money-cost of transport, and disregarding “the time taken in transit.” This caveat is necessary because the time dimension affects the subjective valuation of goods. For an extreme example, if it takes one year to ship a new computer to a colony on Mars, the manufacturer would insist on a higher retail price (obtainable in one year) than the current spot price on Earth, even after adding in explicit shipping expenses. This is because the computer manufacturer could receive revenues from Earth-based customers immediately, which is more valuable than having to wait a year to receive the same amount of money from Martian consumers.
• Mises concedes on pages 176–77 that there is a limited sense in which a region’s higher “cost of living” is both valid theoretically and important in practice. Namely, for those workers who move to a region and do not subjectively value its amenities, the high money-prices for rent, parking, food, and so on must be compensated by an appropriate increase in their money-wages or salaries. For example, a hospital located in a resort beach town may need to offer a higher salary to attract (say) a qualified brain surgeon, if there happen to be no brain surgeons eager to live near the beach and who are therefore willing to accept the “normal” salary in the face of above-average prices for housing in the resort town.
New Terminology
Clearing systems: Arrangements that cancel out or “clear” reciprocal financial claims, so that only net claims need be settled through the actual transfer of money.
Foreign-exchange rate: The exchange ratio between a domestic and foreign currency.
Cable rate: Slang used by foreign-exchange traders to denote the exchange rate between the U.S. dollar and British pound sterling.
Study Questions
1. What complementary good is necessary to turn the production good “coffee in Brazil” into the consumption good “coffee in Europe”? (p. 171)
2. Explain: “To what absurd conclusions should we not come if we regarded goods lying in bond in a customs or excise warehouse and goods of the same technological species on which the duty or tax had already been paid as belonging to the same species of goods in the economic sense?” (pp.172–73)
3. Explain: “It is hardly possible to agree with these arguments [put forward by Wieser], which smack a little too much of the cost-of-production theory of value and are certainly not to be reconciled with the principles of the subjective theory.” (p. 174)
4. Can government restrictions on the movement of commodities and workers explain differences in retail prices? (p. 175)
5. What does Mises intend with his example of a hotel on the peaks and valleys of the Alps? (p. 176)
