 A great many attempts have been made to define money in few words. They have failed like similar attempts to define other economic terms commonly used in ordinary language. They fail because money, like most of the other great economic terms, and like nearly all words in common use, means different things in different contexts. In the context in which it appears in the title of the present chapter and in which it will generally appear in the body of the chapter, it means the unit of account commonly used in purchases and sales and other commercial transactions. In the United Kingdom, Australia and South Africa, people buy goods with and sell them for pounds, shillings and pence, and "prices" are always expressed in quantities of these units: in the United States and Canada dollars and cents are used for the purpose: in France, francs and centimes: in India rupees, annas and pice. But as the cent and centime are merely decimal fractions of the dollar and franc, and the shilling and penny merely vulgar fractions of the pound, and annas and pice the same of the rupee, we can say for short and without any risk of being misunderstood, that the unit of account in these countries is the pound, the dollar, the franc, and the rupee. 
When, then, it is said in England that the value of money has fallen, what is meant is that a pound sterling, £1, will buy less than before: when the same words are used in the United States what is meant is that a dollar, $1, will buy less; when in France, that a euro, 1E., and in India, that a rupee, R1, will buy less. Thus an alteration in the general level of prices is the same thing as an alteration in the value of money, except of course that it is upsidedown, a fall in the value of money being a rise in the general level of prices, and a rise in its value being a fall in that level. As prices are expressed in quantities of the unit of account, this is a matter which could not possibly be otherwise. The price of things is the money got for them; the value of money is the things got for it.
Till recently there have been many persons, and perhaps there still are some, who manifest an extraordinary reluctance to admit the occurrence of any change in the general level of prices in their own time. They appear to have at the back of their minds an impression that money has become invariable in value, so that prices taken as a whole are no longer subject to change, however much variation there may be in the prices of particular commodities. Why such changes should have been possible in the past, as they admit, and not in the present, they are never able to explain, and their reluctance to admit the possibility of changes in the present is only the consequence of their being so habitually accustomed to measure values by money that they feel towards any suggestion that the value of money itself wants measuring just as the aged villager feels towards the suggestion that the distance between two milestones from which he has throughout life taken his idea of a mile is fifty yards short; and the suggestion that the value of money has changed appears as incredible to them as the suggestion that the whole of the West Riding of Yorkshire had risen a foot between two Ordnance Surveys would appear to the average inhabitant of Huddersfield.
Being unable to bring forward any reasons why changes in the value of money and general level of prices should have become impossible, those who dislike the idea are obliged to confine themselves to questioning the existence of each particular change which happens to take place in their time. It is therefore necessary for us to begin by making clear how such changes may be recognized and roughly measured. We cannot expect to find in actual life a general rise of prices manifesting itself as a uniform rise, say of 10 per cent. in the price of each single commodity and service. If we did expect such a thing, it would imply that we also thought that if the general level of prices remained stationary, say between to-day and next year, the price of each single commodity would be precisely the same next year as to-day. Of course we expect nothing of the kind: we know that particular prices are affected by various diverse influences and are constantly changing. In the event of a general rise or fall of prices there is no reason for supposing that these such change was proceeding. When there is a general rise, some things will rise much and others little, and some are likely even to fall. How then can we judge whether there has been a change in the general level, and if we are satisfied that such a change has occurred, how can we judge whether it is great or small?
The process is analogous to that which would be employed in ascertaining whether and if so by how much the existing level of an acre of ground which has been very much disturbed by operations upon it is lower than it was before. Let us say that Jones and Smith have been comrades in the War, and on the conclusion of peace they return home to find that a field belonging to Smith has been used for training recruits in trench warfare. Formerly it was flat and level with the surrounding fields, now the digging and mining have made it into something like a model of Switzerland. Smith is informed by a friend (who does not want his name mentioned) and believes, that Jones' father, the only haulier in the village, has taken advantage of its disturbed condition to carry away many loads of gravel from it. He tells this to Jones, who replies indignantly "Father would never do a thing like that," and points out that if so much gravel had been removed, the general level of the ground would have been perceptibly reduced. Smith and Jones go together to look at the ground, and to Smith's eye the field seems on the whole very decidedly lower--"about two feet," he guesses. Jones is led by bias in favour of Jones senior to think there is no difference, and draws Smith's attention to the particularly high parts of the ground: Smith in return points to the biggest depressions. To settle the question, they agree to run a level line of rods across the field sufficiently high to clear the hills and measure down from it at frequent fixed intervals, say every two yards, to the present surface. This done, they find that the average of all the measurements indicates a level of 10 inches below the old level. This is a blow to Jones, but not so much as Smith expected, so the two agree that this result "is not sufficient to go by," and take another line across the field; this shows an average fall of 8 inches, and averaged with the first line, 9 inches. Both being still dissatisfied, they take four more lines which give as their results falls of 11, 9, 12 and 8 inches. The average for the whole of the measurements is now 9 ?, and both Smith and Jones see that more measurements will make very little difference. Smith is willing to admit that the fall need not be more than about 10 inches, and Jones finds it expedient to abandon the argument that nothing has been removed, and to find some other defence for his parent.
Commodities and services are so numerous in kind and the kinds shade into each other so gradually, that to take into account the price of all of them is much like taking into account the level of every part of a rough field, when smoothing it is not to be thought of. We cannot do it literally, and must be content with taking a sufficient number of measurements at points selected without bias. The ordinary person's impression about a general change of prices is much like Smith's measurement of the level of his field "by the eye"; it is likely that he will be able to recognize a large change of prices--probably anything over 25 per cent., just as Smith is likely to be able to detect a fall of 10 feet in the general level of his field. When the change is not great, he is just as likely as Jones to be misled by bias into denying its existence, and in all cases bias is likely to mislead him, as it led Smith, into very faulty estimates. To arrive at agreement it is necessary, as in the case of the disturbed field, to introduce statistical methods, and this is done by the construction of what are called "index numbers" of prices. The prices of a large number of commodities at some particular date, called for this purpose the "base year" or the "standard year," are collected, and the prices of the same commodities at subsequent (or earlier) dates are represented as percentages of the prices of the base year. If beef cost 10d. per lb. in the base year and 13d. at some later date, it is put down at 100 for the first and 130 for the second period, since if it takes 13d. to buy what formerly could be got for 10d., it takes 130d. to buy what could formerly be got for 100. The prices of a number of other commodities are treated in the same way, so that each stands at 100 for the base year and some other number, larger or smaller than 100 according as its price has risen or fallen for the period to be compared with the base-year. Then, as each of the commodities stands at 100 for the base-year, the average or "index-number" for that year will be 100, while the index number for the other date will be the average of a number of figures each of which may be above or below 100. When this indexnumber is above 100, the excess will indicate a rise of that much per cent. in the general level of prices, and when it is below the deficit will indicate a fall of that much. There are many difficulties in the construction of an index number, the chief being that of finding commodities which do not vary much in kind or quality, and have prices about which dispute is impossible, but none of the difficulties are sufficient to prevent the method from making it possible to prove any substantial change in the general level of prices and to measure approximately its magnitude.
Granting that changes in the general level of prices or value of money can and do occur, and that we can appreciate their existence and approximately measure their magnitude, we can proceed to consider their causes. In other words we can ask why is it that a unit of account such as the pound sterling or the rupee is of greater value--will buy more--at one time than at another? The subject, or so much of it as is of immediate modern interest, may be divided according as the unit of account is a mere quantity of bullion, a coin kept by limitation at a value above that of its bullion contents, or, finally, a note.
|
