Variations in the objective exchange value of money evoke displacements in the distribution of income and property, on the one hand because individuals are apt to overlook the variability of the value of money, and on the other hand because variations in the value of money do not affect all economic goods and services uniformly and simultaneously.

For hundreds, even thousands, of years, people completely failed to see that variations in the objective exchange value of money could be induced by monetary factors. They tried to explain all variations of prices exclusively from the commodity side. It was Bodin’s great achievement to make the first attack upon this assumption, which then quickly disappeared from scientific literature. It long continued to dominate lay opinion, but nowadays it appears to be badly shaken even here. Nevertheless, when individuals are exchanging present goods against future goods they do not take account in their valuations of variations in the objective exchange value of money. Lenders and borrowers are not in the habit of allowing for possible future fluctuations in the objective exchange value of money.

Transactions in which present goods are exchanged for future goods also occur when a future obligation has to be fulfilled, not in money, but in other goods. Still more frequent are transactions in which the contracts do not have to be fulfilled by either party until a later point of time. All such transactions involve a risk, and this fact is well known to all contractors. When anybody buys (or sells) corn, cotton, or sugar futures, or when anybody enters into a long-term contract for the supply of coal, iron, or timber, he is well aware of the risks that are involved in the transaction. He will carefully weigh the chances of future variations in prices, and often take steps, by means of insurance or hedging transactions such as the technique of the modern exchange has developed, to reduce the aleatory factor in his dealings.

In making long-term contracts involving money, the contracting parties are generally unconscious that they are taking part in a speculative transaction. Individuals are guided in their dealings by the belief that money is stable in value, that its objective exchange value is not liable to fluctuations, at least so far as its monetary determinants are concerned. This is shown most clearly in the attitude assumed by legal systems with regard to the problem of the objective exchange value of money.

In law, the objective exchange value of money is stable. It is sometimes asserted that legal systems adopt the fiction of the stability of the exchange value of money; but this is not true. In setting up a fiction, the law requires us to take an actual situation and imagine it to be different from what it really is, either by thinking of nonexistent elements as added to it or by thinking of existing elements as removed from it, so as to permit the application of legal maxims which refer only to the situation as thus transformed. Its purpose in doing this is to make it possible to decide cases according to analogy when a direct ruling does not apply. The whole nature of legal fictions is determined by this purpose, and they are sustained only so far as it requires. The legislator and the judge always remain aware that the fictitious situation does not correspond to reality. So it is also with the so-called dogmatic fiction that is employed in jurisprudence to permit legal facts to be systematically classified and related to each other. Here again, the situation is thought of as existing, but it is not assumed to exist.1

The attitude of the law to money is quite a different matter. The jurist is totally unacquainted with the problem of the value of money; he knows nothing of fluctuations in its exchange value. The naive popular belief in the stability of the value of money has been admitted, with all its obscurity, into the law, and no great historical cause of large and sudden variations in the value of money has ever provided a motive for critical examination of the legal attitude toward the subject. The system of civil law had already been completed when Bodin set the example of attempting to trace back variations in the purchasing power of money to causes exerting their influence from the monetary side. In this matter, the discoveries of more modern economists have left no trace on the law. For the law, the invariability of the value of money is not a fiction, but a fact.

All the same, the law does devote its attention to certain incidental questions of the value of money. It deals thoroughly with the question of how existing legal obligations and indebtednesses should be reckoned as affected by a transition from one currency to another. In earlier times, jurisprudence devoted the same attention to the royal debasement of the coinage as it was later to devote to the problems raised by the changing policies of states in choosing first between credit money and metallic money and then between gold and silver. Nevertheless, the treatment that these questions have received at the hands of the jurists has not resulted in recognition of the fact that the value of money is subject to continual fluctuation. In fact, the nature of the problem, and the way in which it was dealt with, made this impossible from the very beginning. It was treated, not as a question of the attitude of the law toward variations in the value of money, but as a question of the power of the prince or state arbitrarily to modify existing obligations and thus to destroy existing rights. At one time, this gave rise to the question whether the legal validity of the money was determined by the stamp of the ruler of the country or by the metal content of the coin; later, to the question whether the command of the law or the free usage of business was to settle if the money was legal tender or not. The answer of public opinion, grounded on the principles of private property and the protection of acquired rights, ran the same in both cases: “Prout quidque contractum est, ita et solvi debet; ut cum re contraximus, re solvi debet, veluti cum mutuum dedimus, ut retro pecuniae tantundem solvi debeat.”2  The proviso in this connection, that nothing was to be regarded as money except what passed for such at the time when the transaction was entered into and that the debt must be repaid not merely in the metal but in the currency that was specified in the contract, followed from the popular view, regarded as the only correct one by all classes of the community but especially by the tradesmen, that what was essential about a coin was its metallic content, and that the stamp had no other significance than as an authoritative certificate of weight and fineness. It occurred to nobody to treat coins in business transactions any differently from other pieces of metal of the same weight and fineness. In fact, it is now removed beyond doubt that the standard was a metallic one.

The view that in the fulfillment of obligations contracted in terms of money the metallic content alone of the money was to be taken into account prevailed against the nominalistic doctrine expounded by the minting authorities. It is manifested in the legal measures taken for stabilizing the metal content of the coinage, and since the end of the seventeenth century when currencies developed into systematic monetary standards it has provided the criterion for determining the ratio between different coins of the same metal (when current simultaneously or successively), and for the attempts, admittedly unsuccessful, to combine the two precious metals in a uniform monetary system.

Even the coming of credit money, and the problems that it raised, could not direct the attention of jurisprudence to the question of the value of money. A system of paper money was thought of as according with the spirit of the law only if the paper money remained constantly equivalent to the metallic money to which it was originally equivalent and which it had replaced or if the metal content or metal value of the claims remained decisive in contracts of indebtedness. But the fact that the exchange value of even metallic money is liable to variation has continued to escape explicit legal recognition and public opinion, at least as far as gold is concerned (and no other metal need nowadays be taken into consideration); there is not a single legal maxim that takes account of it, although it has been well known to economists for more than three centuries.

In its naive belief in the stability of the value of money the law is in complete harmony with public opinion. When any sort of difference arises between law and opinion, a reaction must necessarily follow; a movement sets in against that part of the law that is felt to be unjust. Such conflicts always tend to end in a victory of opinion over the law; ultimately the views of the ruling class become embodied in the law. The fact that it is nowhere possible to discover a trace of opposition to the attitude of the law on this question of the value of money shows clearly that its provisions relating to this matter cannot possibly be opposed to general opinion. That is to say, not only the law but public opinion also has never been troubled with the slightest doubt whatever concerning the stability of the value of money; in fact, so free has it been from doubts on this score that for an extremely long period money was regarded as the measure of value. And so when anybody enters into a credit transaction that s to be fulfilled in money it never occurs to him to take account of future fluctuations in the purchasing power of money.

Every variation in the exchange ratio between money and other economic goods shifts the position initially assumed by the parties to credit transactions in terms of money. An increase in the purchasing power of money is disadvantageous to the debtor and advantageous to the creditor; a decrease in its purchasing power has the contrary significance. If the parties to the contract took account of expected variations in the value of money when they exchanged present goods against future goods, these consequences would not occur. (But it is true that neither the extent nor the direction of these variations can be foreseen.)

The variability of the purchasing power of money is only taken into account when attention is drawn to the problem by the co-existence of two or more sorts of money whose exchange ratio is liable to big fluctuations. It is generally known that possible future variations in foreign-exchange rates are fully allowed for in the terms of credit transactions of all kinds. The part played by considerations of this sort, both in trade within countries where more than one sort of money is in use and in trade between countries with different currencies, is well known. But the allowance for the variability of the value of money in such cases is made in a fashion that is still not incompatible with the supposition that the value of money is stable. The fluctuations in value of one kind of money are measured by the equivalent of one of its units in terms of units of another kind of money, but the value of this other kind of money is for its part assumed to be stable. The fluctuations of the currency whose stability is in question are measured in terms of gold; but the fact that gold currencies are also liable to fluctuation is not taken into account. In their dealings individuals allow for the variability of the objective exchange value of money, so far as they are conscious of it; but they are conscious of it only with regard to certain kinds of money, not with regard to all. Gold, the principal common medium of exchange nowadays, is thought of as stable in value.3

So far as variations in the objective exchange value of money are foreseen, they influence the terms of credit transactions. If a future fall in the purchasing power of the monetary unit has to be reckoned with, lenders must be prepared for the fact that the sum of money which a debtor repays at the conclusion of the transaction will have a smaller purchasing power than the sum originally lent. Lenders, in fact, would do better not to lend at all, but to buy other goods with their money. The contrary is true for debtors. If they buy commodities with the money they have borrowed and sell them again after a time, they will retain a surplus over and above the sum that they have to pay back. The credit transaction results in a gain for them. Consequently it is not difficult to understand that, so long as continued depreciation is to be reckoned with, those who lend money demand higher rates of interest and those who borrow money are willing to pay the higher rates. If, on the other hand, it is expected that the value of money will increase, then the rate of interest will be lower than it would otherwise have been.4

Thus if the direction and extent of variations in the exchange value of money could be foreseen, they would not be able to affect the relations between debtor and creditor; the coming alterations in purchasing power could be sufficiently allowed for in the original terms of the credit transaction.5  But since this assumption, even so far as fluctuations in credit money or fiat money relatively to gold money are concerned, never holds good except in a most imperfect manner, the allowance made in debt contracts for future variations in the value of money is necessarily inadequate; while even nowadays, after the big and rapid fluctuations in the value of gold that have occurred since the outbreak of the world war, the great majority of those concerned in economic life (one might, in fact, say all of them, apart from the few who are acquainted with theoretical economics) are completely ignorant of the fact that the value of gold is variable. The value of gold currencies is still regarded as stable.

Those economists who have recognized that the value of even the best money is variable have recommended that in settling the terms of credit transactions, that is to say, the terms on which present goods are exchanged for future goods, the medium of exchange should not be one good alone, as is usual nowadays, but a “bundle” of goods; it is possible in theory if not in practice to include all economic goods in such a “bundle”. If this proposal were adopted, money would still be used as a medium for the exchange of present goods; but in credit transactions the outstanding obligation would be discharged, not by payment of the nominal sum of money specified in the contract, but by payment of a sum of money with the purchasing power that the original sum had at the time when the contract was made. Thus, if the objective exchange value of money rises during the period of the contract, a correspondingly smaller sum of money will be payable; if it falls, a correspondingly larger sum.

The arguments devoted above to the problem of measuring variations in the value of money show the fundamental inadequacy of these recommendations. If the prices of the various economic goods are given equal weight in the determination of the parity coefficients without consideration of their relative quantities, then the evils for which a remedy is sought may merely be aggravated. If variations in the prices of such commodities as wheat, rye, cotton, coal, and iron are given the same significance as variations in the prices of such commodities as pepper, opium, diamonds, or nickel, then the establishment of the tabular standard would have the effect of making the content of long-term contracts even more uncertain than at present. If what is called a weighted average is used, in which individual commodities have an effect proportioned to their significance,6  then the same consequences will still follow as soon as the conditions of production and consumption alter. For the subjective values attached by human beings to different economic goods are just as liable to constant fluctuation as are the conditions of production; but it is impossible to take account of this fact in determining the parity coefficients, because these must be invariable in order to permit connection with the past.

It is probable that the immediate associations of any mention nowadays of the effects of variations in the value of money on existing debt relations will be in terms of the results of the monstrous experiments in inflation that have characterized the recent history of Europe. In all countries, during the latter part of this period, the jurists have thoroughly discussed the question of whether it would have been possible or even whether it was still possible, by means of the existing law, or by creating new laws, to offset the injury done to creditors. In these discussions it was usually overlooked that the variations in the content of debt contracts that were consequent upon the depreciation of money were due to the attitude toward the problem taken by the law itself. It is not as if the legal system were being invoked to remedy an inconvenience for which it was not responsible. It was just its own attitude that was felt to be an inconvenience—the circumstance that the government had brought about depreciation. For the legal maxim by which an inconvertible banknote is legal tender equally with the gold money that was in circulation before the outbreak of the war, with which it has nothing in common but the name mark, is a part of the whole system of legal rules which allow the state to exploit its power to create new money as a source of income. It can no more be dissociated from this system than can the laws canceling the obligation of the banks to convert their notes and obliging them to make loans to the government by the issue of new notes.

When jurists and businessmen assert that the depredation of money has a very great influence on all kinds of debt relations, that it makes all kinds of business more difficult, or even impossible, that it invariably leads to consequences that nobody desires and that everybody feels to be unjust, we naturally agree with them. In a social order that is entirely founded on the use of money and in which all accounting is done in terms of money, the destruction of the monetary system means nothing less than the destruction of the basis of all exchange. Nevertheless, this evil cannot be counteracted by ad hoc laws designed to remove the burden of the depreciation from single persons, or groups of persons, or classes of the community, and consequently to impose it all the more heavily on others. If we do not desire the pernicious consequences of depreciation, then we must make up our minds to oppose the inflationary policy by which the depreciation is created.

It has been proposed that monetary liabilities should be settled in terms of gold and not according to their nominal amount. If this proposal were adopted, for each mark that had been borrowed that sum would have to be repaid that could at the time of repayment buy the same weight of gold as one mark could at the time when the debt contract was entered into.7  The fact that such proposals are now put forward and meet with approval shows that etatism has already lost its hold on the monetary system and that inflationary policies are inevitably approaching their end.8  Even only a few years ago, such a proposal would either have been ridiculed or else branded as high treason. (It is, by the way, characteristic that the first step toward enforcing the idea that the legal tender of paper money should be restricted to its market value was taken without exception in directions that were favorable to the national exchequer.)

To do away with the consequences of unlimited inflationary policy one thing only is necessary—the renunciation of all inflationary measures. The problem which the proponents of the tabular standard seek to solve by means of a “commodity currency” supplementing the metallic currency, and which Irving Fisher seeks to solve by his proposals for stabilizing the purchasing power of money, is a different one—that of dealing with variations in the value of gold.

• 1See Dernburg, Pandekten, 6th ed. (Berlin, 1900), vol. 1, p. 84. On the fact that one of the chief characteristics of a fiction is the explicit consciousness of its fictitiousness, see also Vaihinger, Die Philosophie des Als ob, 6th ed. (Leipzig, 1920), p. 173; English trans., The Philosophy of “As If” (London: Kegan Paul, 1924).
• 2L. 80, Dig. de solutionibus et liberationibus 46, 3. Pomponius libro quarto ad Quintum Mucium. See further Seidler, “Die Schwankungen des Geldwertes und die juristische Lehre von dem Inhalt der Geldschulden,” Jahrbücher für Nationalökonomie und Statistik (1894), 3d series, vol. 7, pp. 685 ff.; Endemann, Studien in der romanische-kanonistischen Wirtschafts-und Rechtslehre bis gegen Ende des 17 Jahrhunderts (Berlin, 1874), vol. 2, p. 173.
• 3In a review of the first edition (Die Neue Zeit, 30th year, vol. 2, p. 1024-1027), Hilferding criticized the above arguments as “merely funny.” Perhaps it is demanding too much to expect this detached sense of humor to be shared by those classes of the German nation who have suffered in consequence of the depreciation of the mark. Yet only a year or two ago even these do not appear to have understood the problem any better. Fisher (Hearings Before the Committee on Banking and Currency of the House of Representatives, 67th Cong., 4th sess., on H.R. 1788 [Washington, D.C., 1923], pp. 5 ff., 25 ff.) gives typical illustrations. It was certainly an evil fate for Germany that its monetary and economic policy in recent years should have been in the hands of men like Hilferding and Havenstein, who were not qualified even for dealing with the depreciation of the mark in relation to gold.
• 4See Knies, Geld und Kredit, (Berlin, 1876), vol. 2, Part I, pp. 105 ff.; Fisher, The Rate of Interest (New York, 1907), pp. 77 ff., 257 ff., 327 ff., 356 ff.
• 5See Clark, Essentials of Economic Theory (New York, 1907), pp. 541 ff.
• 6See Walsh, The Measurement of General Exchange Value (New York, 1901), pp. 80 ff.; Zizek, Die statistischen Mittelwerte (Leipzig, 1908), pp. 183 ff.
• 7See Mügel, Geldentwertung und Gesetzgebung (Berlin, 1923), p. 24.
• 8[It should be remembered that all this was written in 1924. H.E.B.]

The naive conception of money as stable in value or as a measure of value is also responsible for economic calculation being carried out in terms of money.

Even in other respects, accountancy is not perfect. The precision of its statements is only illusory. The valuations of goods and rights with which it deals are always based on estimates depending on more or less uncertain and unknown factors. So far as this uncertainty arises from the commodity side of the valuations, commercial practice, sanctioned by the law, attempts to get over the difficulty by the exercise of the greatest possible caution. With this purpose it demands conservative estimates of assets and liberal estimates of liabilities, so that the merchant may be preserved from self-deceit about the success of his enterprises and his creditors protected.

But there are also shortcomings in accountancy that are due to the uncertainty in its valuations that results from the liability to variation of the value of money itself. Of this, the merchant, the accountant, and the commercial court are alike unsuspicious. They hold money to be a measure of price and value, and they reckon as freely in monetary units as in units of length, area, capacity, and weight. And if an economist happens to draw their attention to the dubious nature of this procedure, they do not even understand the point of his remarks.9

This disregard of variations in the value of money in economic calculation falsities accounts of profit and loss. If the value of money falls, ordinary bookkeeping, which does not take account of monetary depreciation, shows apparent profits, because it balances against the sums of money received for sales a cost of production calculated in money of a higher value, and because it writes off from book values originally estimated in money of a higher value items of money of a smaller value. What is thus improperly regarded as profit, instead of as part of capital, is consumed by the entrepreneur or passed on either to the consumer in the form of price reductions that would not otherwise have been made or to the laborer in the form of higher wages, and the government proceeds to tax it as income or profits. In any case, consumption of capital results from the fact that monetary depreciation falsities capital accounting. Under certain conditions the consequent destruction of capital and increase of consumption may be partly counteracted by the fact that the depreciation also gives rise to genuine profits, those of debtors, for example, which are not consumed but put into reserves. But this can never more than partly balance the destruction of capital induced by the depreciation.10

The consumers of the commodities that are sold too cheaply as a result of the false reckoning induced by the depreciation need not be inhabitants of the territory in which the depreciating money is used as the national currency. The price reductions brought about by currency depreciation encourage export to countries the value of whose money is either not falling at all or at least falling less rapidly. The entrepreneur who is reckoning in terms of a currency with a stable value is unable to compete with the entrepreneur who is prepared to make a quasi-gift of part of his capital to his customers. In 1920 and 1921, Dutch traders who had sold commodities to Austria could buy them back again after a while much more cheaply than they had originally sold them, because the Austrian traders completely failed to see that they were selling them for less than they had cost.

So long as the true state of the case is not recognized, it is customary to rejoice in a naive Mercantilistic fashion over the increase of exports and to see in the depreciation of money a welcome “export premium.” But once it is discovered that the source whence this premium flows is the capital of the community, then the “selling off” procedure is usually regarded less favorably. Again, in importing countries the public attitude wavers between indignation against “dumping” and satisfaction with the favorable conditions of purchase.

Where the currency depreciation is a result of government inflation carried out by the issue of notes, it is possible to avert its disastrous effect on economic calculation by conducting all bookkeeping in a stable money instead. But so far as the depreciation is a depreciation of gold, the world money, there is no such easy way out.11

• 9At Vienna in March 1892 at the sessions of the Currency Inquiry Commission, which was appointed in preparation for the regulation of the Austrian currency, Carl Menger remarked: “I should like to add that not only legislators, but all of us in our everyday life, are in the habit of disregarding the fluctuations in the purchasing power of money. Even such distinguished bankers as yourselves, gentlemen, draw up your balance sheet at the end of the year without inquiring whether by any chance the sum of money representing the share capital has gained or lost in purchasing power.” These remarks of Menger’s were not understood by the director of the Bodenkreditanstalt, Theodor von Taussig, the most outstanding of all Austrian bankers. He replied: “A balance sheet is a balancing of the property or assets of a company or individual against its liabilities, both expressed in terms of the accepted measure of value or monetary standard, that is, for Austria in gulden. Now I cannot see how, when we are thus expressing property and indebtedness in terms of the standard (which we have assumed to be homogeneous), we are to take account of variations in the standard of measurement instead of taking account of variations in the object to be measured, as is customary.” Taussig completely failed to see that the point at issue concerned the estimation of the value of goods and the amount of depreciation to be written off, and not the balancing of monetary claims and monetary obligations, or that a profit and loss account, if it is not to be hopelessly inexact, must take account of variations in the value of money. Menger had no occasion to raise this point in his reply, since he was rather concerned to show that his remarks were not to be interpreted, as Taussig was inclined to interpret them, as an accusation of dishonest practice on the part of the bank directors. Menger added: “What I said was merely that all of us, not only the directors of the banks (I said even such men as are at the head of the banks), make the mistake of not taking account in everyday life of changes in the value of money” (Stenographische Protokolle über die vom 8. bis 17. März 1892 abgehaltenen Sitzungen der nach Wien einberufenen Währungs-Enquete- Kommission [Vienna, 2892], pp. 221, 257, 270).
• 10See my book, Nation, Staat und Wirtschaft (Vienna, 1919), pp. 129 ff. A whole series of writings dealing with these questions has since appeared in Germany and Austria.
• 11Cf. further pp. 401 ff. below.

If we disregard the exchange of present goods for future goods, and restrict our considerations for the time being to those cases in which the only exchanges are those between present goods and present money, we shall at once observe a fundamental difference between the effects of an isolated variation in a single commodity price, emanating solely from the commodity side, and the effects of a variation in the exchange ratio between money and other economic goods in general, emanating from the monetary side. Variations in the price of a single commodity influence the distribution of goods among individuals primarily because the commodity in question, if it plays a part in exchange transactions at all, is ex definitione not distributed among individuals in proportion to their demands for it. There are economic agents who produce it (in the broadest sense of the word, so as to include dealers) and sell it, and there are economic agents who merely buy it and consume it. And it is obvious what effects would result from a displacement of the exchange ratio between this particular good and the other economic goods (including money); it is clear who would be likely to benefit by them and who to be injured.

The effects in the case of money are different. As far as money is concerned, all economic agents are to a certain extent dealers.12  Every separate economic agent maintains a stock of money that corresponds to the extent and intensity with which he is able to express his demand for it in the market. If the objective exchange value of all the stocks of money in the world could be instantaneously and in equal proportion increased or decreased, if all at once the money prices of all goods and services could rise or fall uniformly, the relative wealth of individual economic agents would not be affected. Subsequent monetary calculation would be in larger or smaller figures; that is all. The variation in the value of money would have no other significance than that of a variation of the calendar or of weights and measures.

The social displacements that occur as consequences of variations in the value of money result solely from the circumstance that this assumption never holds good. In the chapter dealing with the determinants of the objective exchange value of money it was shown that variations in the value of money always start from a given point and gradually spread out from this point through the whole community. And this alone is why such variations have an effect on the social distribution of income.

It is true that the variations in market exchange ratios that emanate from the commodity side are also not as a rule completed all at once; they also start at some particular point and then spread with greater or less rapidity. And because of this, price variations of this sort too are followed by consequences that are due to the fact that the variations in prices do not occur all at once but only gradually. But these are consequences that are encountered in a marked degree by a limited number of economic agents only namely, those who, as dealers or producers, are sellers of the commodity in question. And further, this is not the sum of the consequences of variations in the objective exchange value of a commodity. When the price of coal falls because production has increased while demand has remained unaltered, then, for example, those retailers are involved who have taken supplies from the wholesale dealers at the old higher price but are now able to dispose of them only at the new and lower price. But this alone will not account for all the social changes brought about by the increase of production of coal. The increase in the supply of coal will have improved the economic position of the community. The fall in the price of coal does not merely amount to a rearrangement of income and property between producer and consumer; it also expresses an increase in the national dividend and national wealth. Many have gained what none have lost. The case of money is different.

The most important of the causes of a diminution in the value of money of which we have to take account is an increase in the stock of money while the demand for it remains the same, or tails off, or, if it increases, at least increases less than the stock. This increase in the stock of money, as we have seen, starts with the original owners of the additional quantity of money and then transfers itself to those that deal with these persons, and so forth. A lower subjective valuation of money is then passed on from person to person because those who come into possession of an additional quantity of money are inclined to consent to pay higher prices than before. High prices lead to increased production and rising wages, and, because all of this is generally regarded as a sign of economic prosperity, a fall in the value of money is, and always has been, considered an extraordinarily effective means of increasing economic welfare.13  This is a mistaken view, for an increase in the quantity of money results in no increase of the stock of consumption goods at people’s disposal. Its effect may well consist in an alteration of the distribution of economic goods among human beings but in no case, apart from the incidental circumstance referred to on page 138 above, can it directly increase the total amount of goods possessed by human beings, or their welfare. It is true that this result may be brought about indirectly, in the way in which any change in distribution may affect production as well; that is, by those classes in whose favor the redistribution occurs using their additional command of money to accumulate more capital than would have been accumulated by those people from whom the money was withdrawn. But this does not concern us here. What we are concerned with is whether the variation in the value of money has any other economic significance than its effect on distribution. If it. has no other economic significance, then the increase of prosperity can only be apparent; for it can only benefit a part of the community at the cost of a corresponding loss by the other part. And thus in fact the matter is. The cost must be borne by those classes or countries that are the last to be reached by the fall in the value of money.

Let us, for instance, suppose that a new gold mine is opened in an isolated state. The supplementary quantity of gold that streams from it into commerce goes at first to the owners of the mine and then by turns to those who have dealings with them. If we schematically divide the whole community into four groups, the mine owners, the producers of luxury goods, the remaining producers, and the agriculturalists, the first two groups will be able to enjoy the benefits resulting from the reduction in the value of money the former of them to a greater extent than the latter. But even as soon as we reach the third group, the situation is altered. The profit obtained by this group as a result of the increased demands of the first two will already be offset to some extent by the rise in the prices of luxury goods which will have experienced the full effect of the depreciation by the time it begins to affect other goods. Finally for the fourth group, the whole process will result in nothing but loss. The farmers will have to pay dearer for all industrial products before they are compensated by the increased prices of agricultural products. It is true that when at last the prices of agricultural products do rise, the period of economic hardship for the farmers is over; but it will no longer be possible for them to secure profits that will compensate them for the losses they have suffered. That is to say, they will not be able to use their increased receipts to purchase commodities at prices corresponding to the old level of the value of money; for the increase of prices will already have gone through the whole community. Thus the losses suffered by the farmers at the time when they still sold their products at the old low prices but had to pay for the products of others at the new and higher prices remain uncompensated. It is these losses of the groups that are the last to be reached by the variation in the value of money which ultimately constitute the source of the profits made by the mine owners and the groups most closely connected with them.

There is no difference between the effects on the distribution of income and wealth that are evoked by the fact that variations in the objective exchange value of money do not affect different goods and services at the same time and in the same degree, whether the case is that of metallic money or that of fiat or credit money. When the increase of money proceeds by way of issue of currency notes or inconvertible banknotes, at first only certain economic agents benefit and the additional quantity of money only spreads gradually through the whole community. If, for example, there is an issue of paper money in time of war, the new notes will first go into the pockets of the war contractors. “As a result, these persons’ demands for certain articles will increase and so also the price and the sale of these articles, but especially in so far as they are luxury articles. Thus the position of the producers of these articles will be improved, their demand for other commodities will also increase, and thus the increase of prices and sales will go on, distributing itself over a constantly augmented number of articles, until at last it has reached them all.”14  In this case, as before, there are those who gain by inflation and those who lose by it. The sooner anybody is in a position to adjust his money income to its new value, the more favorable will the process be for him. Which persons, groups, and classes fare better in this, and which worse, depends upon the actual data of each individual case, without knowledge of which we are not in a position to form a judgment.

Let us now leave the example of the isolated state and turn our attention to the international movements that arise from a fall in the value of money due to an increase in its amount. Here, again, the process is the same. There is no increase in the available stock of goods; only its distribution is altered. The country in which the new mines are situated and the countries that deal directly with it have their position bettered by the fact that they are still able to buy commodities from other countries at the old lower prices at a time when depreciation at home has already occurred. Those countries that are the last to be reached by the new stream of money are those which must ultimately bear the cost of the increased welfare of the other countries. Thus Europe made a bad bargain when the newly discovered gold fields of America, Australia, and South Africa evoked a tremendous boom in these countries. Palaces rose over night where there was nothing a few years before but virgin forest and wilderness; the prairies were intersected with railways; and anything and everything in the way of luxury goods that could be produced by the Old World found markets in territories which a little earlier had been populated by naked nomads and among people who in many cases had previously been without even the barest necessaries of existence. All of this wealth was imported from the old industrial countries by the new colonists, the fortunate diggers, and paid for in gold that was spent as freely as it had been received. It is true that the prices paid for these commodities were higher than would have corresponded to the earlier purchasing power of money; nevertheless, they were not so high as to make full allowance for the changed circumstances. Europe had exported ships and rails, metal goods and textiles, furniture and machines, for gold which it little needed or did not need at all, for what it had already was enough for all its monetary transactions.

A diminution of the value of money brought about by any other kind of cause has an entirely similar effect. For the economic consequences of variations in the value of money are determined, not by their causes, but by the nature of their slow progress, from person to person, from class to class, and from country to country. If we consider in particular those variations in the value of money which arise from the action of sellers in increasing prices, as described in the second chapter of this part, we shall find that the resultant gradual diminution of the value of money constitutes one of the motives of the groups which apparently dictate the rise of prices. The groups which begin the rise have it turned to their own disadvantage when the other groups eventually raise their prices too; but the former groups receive their higher prices at a time when the prices of the things they buy are still at the lower level. This constitutes a permanent gain for them. It is balanced by the losses of those groups who are the last to raise the prices of their goods or services; for these already have to pay the higher prices at a time when they are still receiving only the lower prices for what they sell. And when they eventually raise their prices also, being the last to do this they can no longer offset their earlier losses at the expense of other classes of the community. Wage laborers used to be in this situation, because as a rule the price of labor did not share in the earlier stages of upward price movements. Here the entrepreneurs gained what the laborers lost. For a long time, civil servants were in the same situation. Their multitudinous complaints were partly based on the fact that, since their money incomes could not easily be increased, they had largely to bear the cost of the continual rise in prices. But recently this state of affairs has been changed through the organization of the civil servants on trade-union lines, which has enabled them to secure a quicker response to demands for increases of salaries.

The converse of what is true of a depreciation in the value of money holds for an increase in its value. Monetary appreciation, like monetary depreciation, does not occur suddenly and uniformly throughout a whole community, but as a rule starts from single classes and spreads gradually. If this were not the case, and if the increase in the value of money took place almost simultaneously in the whole community, then it would not be accompanied by the special kind of economic consequences that interest us here. Let us assume, for instance, that bankruptcy of the credit-issuing institutions of a country leads to a panic and that everybody is ready to sell commodities at any price whatever in order to put himself in possession of cash, while on the other hand buyers cannot be found except at greatly reduced prices. It is conceivable that the increase in the value of money that would arise in consequence of such a panic would reach all persons and commodities uniformly and simultaneously. As a rule, however, an increase in the value of money spreads only gradually. The first of those who have to con tent themselves with lower prices than before for the commodities they sell, while they still have to pay the old higher prices for the commodities they buy, are those who are injured by the increase in the value of money. Those, however, who are the last to have to reduce the prices of the commodities they sell, and have meanwhile been able to take advantage of the fall in the prices of other things, are those who profit by the change.

• 12See Ricardo, Letters to Malthus, ed. Bonar (Oxford, 1887), p. 10.
• 13See Hume, Essays, ed. Frowde (London), p. 294 ff.
• 14Auspitz and Lieben, Untersuchungen über die Theorie des Preises (Leipzig, 1889), p. 65.

Among the consequences of variations in the value of money it is those of variations in the exchange ratio between two different kinds of money in which economic science has been chiefly interested. This interest has been aroused by the events of monetary history. In the course of the nineteenth century international trade developed in a hitherto undreamed-of manner, and the economic connections between countries became extraordinarily close. Now just at this time when commercial relations were beginning to grow more active, the monetary standards of the individual states were becoming more diverse. A number of countries went over for a shorter or longer period to credit money and the others, which were partly on gold and partly on silver, were soon in difficulties, because the ratio between the values of these two precious metals, which had changed but slowly during centuries, suddenly began to exhibit sharp variations. And in recent years this problem has been given a much greater practical significance still by monetary happenings in the war and postwar periods.

Let us suppose that one kilogram of silver had been exchangeable for ten quintals of wheat, and that upon the objective exchange value of silver being halved, owing, say, to the discovery of new and prolific mines, one kilogram of it was no longer able to purchase more than five bushels of wheat. From what has been said on the natural exchange ratio of different kinds of money, it follows that the objective exchange value of silver in terms of other kinds of money would now also be halved. If it had previously been possible to purchase one kilogram of gold with fifteen kilograms of silver, thirty kilograms would now be needed to make the same purchase; for the objective exchange value of gold in relation to commodities would have remained unchanged, while that of silver had been halved. Now this change in the purchasing power of silver over commodities will not occur all at once, but gradually. A full account has been given of the way in which it will start from a certain point and gradually spread outward, and of the consequences of this process. Until now we have investigated these consequences only so far as they occur within an area with a uniform monetary standard; but now we must trace up the further consequences involved in commercial relations with areas in which other sorts of money are employed. One thing that was found to be true of the former case can be predicated of this also: if the variations in the objective exchange value of the money occurred uniformly and simultaneously throughout the whole community then such social consequences could not appear at all. The fact that these variations always occur one after another is the sole reason for their remarkable economic effects.

Variations in the objective exchange value of a given kind of money do not affect the determination of the exchange ratio between this and other kinds of money until they begin to affect commodities that either are already objects of commercial relations between the two areas or at least are able to become such upon a moderate change in prices. The point of time at which this situation arises determines the effects upon the commercial relations of the two areas that will result from variations in the objective exchange value of money. These vary according as the prices of the commodities concerned in international trade are adjusted to the new value of money before or after those of other commodities. Under the modern organization of the monetary system this adjustment is usually first made on the stock exchanges. Speculation on the foreign-exchange and security markets anticipates coming variations in the exchange ratios between the different kinds of money at a time when the variations in the value of money have by no means completed their course through the community, perhaps when they have only just begun it, but in any case before they have reached the commodities that play a decisive part in foreign trade. He would be a poor speculator who did not grasp the course of events in time and act accordingly. But as soon as the variation in the foreign-exchange rate has been brought about, it reacts upon foreign trade in a peculiar manner until the prices of all goods and services have been adjusted to the new objective exchange value of money. During this interval the margins between the different prices and wages constitute a fund that somebody must receive and somebody surrender. In a word, we are here again confronted with a redistribution, which is noteworthy in that its influence extends beyond the are where the good whose objective exchange value is changing is employed as domestic money. It is clear that this is the only sort of consequence that can follow from variations in the value of money. The social stock of goods has in no way been increased; the total quantity that can be distributed has remained the same.

As soon as an uncompleted change in the objective exchange value of any particular kind if money becomes expressed in the foreign-exchange rates, a new opportunity of making a profit is opened up, either for exporters or for importers according as the purchasing power of money is decreasing or increasing. Let us take the former case, that of the diminution in the value of money. Since, according to our assumptions, the changes in domestic prices are not yet finished, exporters derive an advantage from the circumstance that the commodities that they market already fetch the new higher prices whereas the commodities and services that they want themselves and, what is of particular importance, the material and personal factors of production that they employ, are still obtainable at the old lower prices. Who the “exporter” is who pockets this gain, whether it is the producer or the dealer, is impertinent to our present inquiry; all that we need to know is that in the given circumstances transactions will result in profit for some and loss for others.

In any case the exporter shares his profit with the foreign importer and foreign consumer And it is even possible—this depends upon the organization of the export trade—that the profits which the exporter retains are only apparent, not real.

Thus the result is always that the gains of foreign buyers, which in certain cases are shared with home exporters, are counterbalanced by losses that are borne entirely at home. It is clear that what was said of the promotion of exportation by the falsification of monetary accounting applies also to the “export premium” arising from a diminution of the value of money.