The Value of MoneyAnderson, Benjamin M. (Benjamin McAlester)
General
The Value of Money
Anderson, Benjamin M. (Benjamin McAlester)
Money
I shall show a similar conflict between the quantity theory and the law
of costs. In general, the quantity theorist thinks that he has
reconciled his theory with cost theory by pointing out that reduced
costs manifest themselves in increasing production, which means
increasing trade, which should, on the quantity theory, mean lower
prices.[343] I need not, for my purposes, analyze this doctrine in
detail, though I am disposed to consider it an accident that the two
theories converge at this point. For the present, I shall analyze a case
where reducing costs actually come as a consequence of the _reduction_
in the volume of trade, and inquire whether such a case will lead, as
the cost theory would assert, to lowered general prices, or, as the
quantity theory would assert, to _higher_ general prices. The case is
that where by improved methods of handling goods, it is possible to
dispense with middlemen. Concretely, assume that retailers of milk get
in direct touch with dairymen, so that middlemen are eliminated, and
that as a consequence the price of milk is reduced two cents a quart.
What of the general price-level? T (trade) is reduced. There are less
exchanges. Volume of trade does not mean volume of goods _produced_, but
volume of _exchanges_. With a reduced trade, the quantity theory must
assert that prices of commodities other than milk must, on the average,
rise, not merely enough to compensate for the fall in milk, but more
than that, enough to compensate for the reduced trade as well. But how
can the other prices rise? Well, a point comes up obviously: the buyers
of milk save two cents a quart. They can spend it for something else.
This will raise the prices of other things. But, on the other hand, the
middlemen now have less to spend. They have _exactly as much less_ as
the others have _more_, the extra money that milk buyers have being, in
fact, the money that the middlemen would otherwise have had. The one
offsets the other. There is, then, no reason for the average of other
prices to rise. Suppose we carry the process one step further. After a
while, the middleman will find other work to do. Then they will have
incomes again to spend. But in going to work again, they will be engaged
in production, and so will, in general, be increasing the volume of
trade. The quantity theorist could not expect a rise in prices from
this!
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