The Theory of Money and Credit

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. He argues further that the tradesmen engaged in retail trade are more interested in an increase of prices than their customers are in the continuance of the old prices or in price reductions; for the amount of the tradesmen’s earnings, and consequently their whole economic and social position, depends largely on the prices they obtain, while as a rule only special, and therefore relatively unimportant, interests of the customers are involved. Hence the growth on the supply side of a tendency toward the maintenance and raising of prices, which acts as a kind of permanent pressure in the direction of higher prices, more energetically and more universally than the opposing tendency on the demand side. Prices certainly are kept down and reduced in retail trade with the object of maintaining and expanding sales and increasing total profits, and competition may, and often does, make this necessary. But neither influence, according to Wagner, is in the long run so generally and markedly effective as the interest in and striving for higher prices, which is in fact able to compete with and overcome their resistance. In this permanent predominance of the supply side over the demand side, Wagner sees one of the causes of the general increases in prices.51

Wagner, that is to say, attributes the progressive fall in the objective exchange value of money to a series of factors which have no effect on the determination of wholesale prices but only in the determination of retail prices. Now it is a well-known phenomenon that the retail prices of consumption goods are affected by numerous influences which prevent them from responding rapidly and completely to movements of wholesale prices. And, among the peculiar determinants of retail prices, those predominate which tend to keep them above the level corresponding to wholesale prices. It is, for instance, well known that retail prices adapt themselves more slowly to decreases in wholesale prices than to increases. But it must not be overlooked that the adjustment must eventually take place, all the same, and that the retail prices of consumption goods always participate in the movements of the prices of production goods, even if they lag behind them; and that it is only small, transient movements in wholesale trade that have no effect on retail trade.

Even if we were willing to admit the existence of a permanent predominance of the supply side over the demand side, it would still be decidedly questionable whether we could deduce a tendency toward a general increase of dearness from it. If no further cause could be shown to account for an increase of wholesale prices—and Wagner does not attempt this at all—then we can argue a progressive increase of retail prices only if we are prepared to assume that the time lag between the movements of retail and of wholesale prices is continually increasing. But Wagner makes no such assumption; and it would be very difficult to support it, if he did. It may be said, in fact, that modern commercial development has brought about a tendency toward a more rapid adjustment of retail prices to wholesale and manufacturers’ prices. Multiple and chain stores and cooperative societies follow the movements of wholesale prices much more closely than peddlers and small shopkeepers.

It is entirely incomprehensible why Wagner should connect this tendency to a general rise of prices, arising from the predominance of the supply side over the demand side, with the individualistic system of free competition or freedom of trade, and declare that it is under such a system that the tendency is clearest and operates with the greatest force and facility. No proof is given of this assertion, which is probably a consequence of Wagner’s antipathy to economic liberalism; neither could one easily be devised. The more developed the freedom of trade, the more easily and quickly are movements in wholesale prices reflected in retail prices, especially downward movements. Where legislative and other limitations on freedom of trade place small producers and retailers in a favored position, the adjustment is slower and sometimes complete adjustment may even be prevented altogether.

A striking example of this is afforded by the Austrian attempts during the last generation to favor craftsmen and small shopkeepers in their competition against factories and large stores, together with the subsequent considerable rise in prices between 1890 and 1914. It is not under free competition that the conditions which Wagner calls the permanent predominance of the supply side over the demand side are most strongly in evidence, but in those circumstances where the development of free competition is opposed by the greatest obstacles.

• 51See Wagner, Theoretische Sozialökonomik (Leipzig, 1909), vol. 2, p, 245.