8. WHAT DETERMINES THE PRICE OF PAPER-MONEY?

The theory that the ratio in which commodities are exchanged is Undetermined by the amount of work necessary for their production cannot be applied to paper-money. Paper-money has indeed a price but it has no "value", since it has cost no work. Paper-money has no "intrinsic" or "extrinsic" value, no "value as a substance"; it cannot serve as a "store of value", a "conserver of value" or a "means of transport of value"; it is never "undervalued" or "fully-valued". The price of paper-money cannot "oscillate about its value as centre of gravity". (Terminology of the theory of value).

(* We might here ask why price must "oscillate" about "value", why the forces that are strong enough to separate price from value are not also strong enough to make the separation lasting.)

Paper-money must therefore go its own way; it is completely subject to the forces which determine price, and serves but one master.

The forces that determine price are summed up by the words demand and supply. To answer the question at the head of the chapter we must therefore understand clearly what these words mean.

If we ask today: What is demand for money ? Who creates a demand for money ? Where do we find a demand for money ? We receive contradictory answers. Probably the answer most frequently given would be: "In the banks, where employers and merchants discount bills. If the demand for money increases, the rate of interest rises, so the rate of interest can be used as a measure of the demand for money. States that, unable to balance their budgets, float loans create a demand for money; so do beggars".

But this is not a demand compatible with the conception of a medium of exchange; and money is above all things a medium of exchange. We must learn to regard money simply as a medium of exchange. That the above answers are nonsense becomes apparent if we substitute for the word "money" the expression "medium of exchange".

The merchant who asks the bank for money exchanges nothing; he gives nothing but his promise to repay the money; he borrows, he does not exchange. He gives money for money; there is no question of commerce and prices, but one of interest. Nor does the State create with its loans a demand for the medium of exchange; it offers nothing in exchange either. A sum of money in the present is changed for a sum of money in the future.

This is not demand for the medium of exchange; it is not a demand for money compatible with the purpose of money. To demand money as a medium of exchange, something different from money must be offered for it.

Where, then, is the demand for money ?

Evidently wherever there is need of a medium of exchange; wherever the division of labour throws upon the market wares which, for their exchange, require a medium of exchange, that is, money.

And who demands money ? Evidently the farmer bringing his produce to market, the merchant selling his wares across the counter, the workman offering his services and asking money for the product of his labour. Where the supply of wares is largest, the demand for the medium of exchange is largest; where the supply of wares increases, the demand for money, for the medium of exchange, increases. If there are no wares to be exchanged, the demand for money disappears. Primitive production and barter mean absence of demand for money.

We must therefore distinguish sharply between the merchant offering a farmer calico in his shop and the same merchant an hour later visiting the bank to discount a bill. With his calico in his shop the merchant creates demand for the medium of exchange; with the bill of exchange at his bank he creates no demand for money, since a bill of exchange is not a ware. We speak here of rate of interest. This is simply desire for money, not demand.

Demand for money has nothing in common with desire for money. The beggar, the farmer in the grasp of the usurer, the State, the employer, or merchant discounting a bill desire money; but demand for money is only created by those who have wares for sale. Desire for money is complicated, demand for money is simple. Desire for money comes from a person, demand for money comes from a thing, from a commodity awaiting sale. The beggar desires alms; the merchant desires to enlarge his business; the speculator desires to keep loan-money out of reach of his competitors, so as to monopolise the market; the farmer has fallen into the trap laid by the usurer. All of them have an intense desire for money and none of them is able to create a demand for money, since demand depends, not upon the cares of men, but upon the stock of wares awaiting exchange. In this sense it would be false to say that desire for a thing and the supply of it determine price. There is the greatest possible difference between the desire for money, measured by the rate of interest, and the demand for money, measured by prices. The two things have nothing in common.

Persons who hear the word "demand for money" and do not at once think of wares, or the words "a great demand for money" and do not at once think of a pile of wares, a market, a goods train, an overladen ship or perhaps of "over-production" and unemployment, have not grasped the meaning of the expressions: "Demand for the medium of exchange", "Demand for money." They have failed to understand that the division of labour produces wares for the exchange of which money is as necessary as railway wagons for the sale of coal.

If we hear someone speaking of an increasing demand for money because the rate of interest has risen, we may be sure that this person is unable to give clear expression to his ideas. And if we find a professional economist confusing demand and desire, it is our duty to remark that scientific questions should not be handled in loose language.

We thus separate the demand for money from human desires. from the state of the market, from business projects, dealings, speculations and so forth; we rescue it from the enveloping fog of "value" and enthrone it upon the mountain of wares which the division of labour throws upon the market - visible to all, palpable, measurable.

We distinguish this demand for money from desire for money. Upon another mountain, not of wares but of bills of exchange, deeds of mortgage, bonds, government securities, insurance-policies and so forth we place the inscription: "Desire for money". Upon the first mountain we write "Prices" and upon the second "Rates of interest". Anyone who, in the course of the following inquiry, thinks of desire for money when I write demand for money had better lay aside this book. It was not written for him.

Demand and supply determine price, the ratio in which money and wares are exchanged. What demand for money is, we now know. It is material; it is the stream of wares continuously flowing from the division of labour.

But what is the supply of money ? We must give this conception a form and content; we must remove it also from its enveloping fog.

The farmer who harvests potatoes, the tailor who sews a coat, must offer the product of his labour for money-but what does he do with the money ? What have the 100,000 farmers and artisans done with the thaler which for 100 years has passed from hand to hand ? Each of them offered the thaler for wares which, once in their possession, became goods for use and disappeared from the market. But the thaler returned again and again to the market, it remained on the market for one year, 10 years, 100 years; and perhaps, supposing it to be re-coined, for 1000, 2000, 3000 years. To all through whose hands it passed the thaler was useful only as a ware; of all those 100,000 persons there was not one who could use it otherwise. The uselessness of the thaler for consumption compelled everyone to get rid of it again, to sell it, that is, to offer it in exchange for commodities.

Those who had much money were forced to offer much money in exchange, those who had little money were forced to offer the little they had. The offer of money was, and is, quite correctly called the demand for commodities. Where the stock of commodities is large, the demand for money is large. Similarly it can be said that where the quantity of money is large there is necessarily more demand for commodities than where the quantity of money is small. (The limitations of this statement will soon appear).

Is there any demand for commodities other than that which the supply of money represents ?

Here again, as with money, we must distinguish between the desire for, the need of, commodities, and the demand for commodities. The "needy" need or desire commodities, but only those persons demand commodities who offer money for them. The need or desire for wares is expressed by requests or begging letters, the demand for wares by the ring of hard cash upon the counter. Merchants shun desire for their wares, but demand for their wares attracts them like a magnet. In short, the demand for wares consists of the offer of money, those who have money must create a demand (We shall see later when they must do so.)

Demand for commodities, usually known simply as demand, is therefore always represented by money. A mountain of money means a great demand for commodities, though not indeed always, as is proved clearly by the 180 millions in the war-chest at Spandau. During 40 years this mountain of money has not bought a pfennig's worth of commodities. Such exceptions will be treated later. The discovery of a new gold mine means an increasing demand for commodities, and if a country with a paper-money standard sets in motion additional printing-presses for paper-money, everyone knows that demand, and consequently prices, will increase. If everyone were given the right to cut banknotes, treasury notes and coins in two, and to use each half as a whole, demand, and prices would be doubled.

But can we now go further; can we do with the supply of money what we did with the supply of wares, can we say: "To measure the stock of money is to measure the demand for wares" ? In other words, is the supply of money to such a degree identical with the stock of money that it is completely independent of the wishes of the possessor of money ? Or is the offer of money, partly at least, subject to the whims of the market, to the greed of speculators ? In short, is the supply of money something material, namely money itself, or does it include an action ?

The answer to this question is obviously of extreme importance for the solution of our problem.

The division of labour causes a never-ending stream of wares called "supply". The stock of money causes the offer of money called "demand". The stock of money is a definite quantity. If, therefore, the offer of money were continuous, price, the ratio of exchange between money and wares, would be independent of human action. Money would be the embodiment, sharply defined, of demand, just as the wares are the calculable, measurable embodiment of supply. We should then only need to ascertain the ratio of the stock of money to the stock of wares in order to know whether prices were about to rise or fall. This would actually be true of Free-Money as described in the next section of this book. Free-Money embodies demand, it eliminates from demand the wishes of the possessor of money in respect to the time, place and amount of demand. Free-Money dictates to its possessor orders for commodities and makes these orders an imperative necessity. With Free-Money the amount of demand can be measured directly by the amount of Free-Money issued by the State, just as the supply of potatoes or of a morning newspaper can be measured by the size of the harvest or of the edition printed.

But this is not true of the present form of money, as we shall see later, and we cannot therefore at once answer the question at the head of this chapter. We must undertake further investigation before we can say what determines the price of the present form of paper-money.