# The Purchasing Power of Money

##### By Irving Fisher

THE purpose of this book is to set forth the principles determining the purchasing power of money and to apply those principles to the study of historical changes in that purchasing power, including in particular the recent change in “the cost of living,” which has aroused world-wide discussion.If the principles here advocated are correct, the purchasing power of money–or its reciprocal, the level of prices–depends exclusively on five definite factors: (1) the volume of money in circulation; (2) its velocity of circulation; (3) the volume of bank deposits subject to check; (4) its velocity; and (5) the volume of trade. Each of these five magnitudes is extremely definite, and their relation to the purchasing power of money is definitely expressed by an “equation of exchange.” In my opinion, the branch of economics which treats of these five regulators of purchasing power ought to be recognized and ultimately will be recognized as an exact science, capable of precise formulation, demonstration, and statistical verification…. [From the Preface to the First Edition]

###### First Pub. Date

1911

###### Publisher

New York: The Macmillan Co.

###### Pub. Date

1922

###### Comments

Assisted by Harry G. Brown (Instructor in Political Economy in Yale U.) 2nd edition. Harry G. Brown, assistant.

###### Copyright

The text of this edition is in the public domain.

- Preface to the First Edition
- Preface to the Second Edition
- Suggestions to Readers
- Addendum
- Chapter 1
- Chapter 2
- Chapter 3
- Chapter 4
- Chapter 5
- Chapter 6
- Chapter 7
- Chapter 8
- Chapter 9
- Chapter 10
- Chapter 11
- Chapter 12
- Chapter 13
- Appendix to Chapter II
- Appendix to Chapter III
- Appendix to Chapter V
- Appendix to Chapter VI
- Appendix to Chapter VII
- Appendix to Chapter VIII
- Appendix to Chapter X
- Appendix to Chapter XII

### SUGGESTIONS TO READERS

1. The

*general reader* will be chiefly interested in Chapters I-VIII.

2. The

*cursory reader* will find the gist of the book in Chapter II.

3.

*Objectors to the quantity theory* will find their theoretical and statistical objections discussed in Chapters VIII and XII respectively.

4.

*Students of financial history* should read Chapter XII.

5.

*Currency reformers* should read Chapter XIII.

6. The appendices are addressed mainly (though not exclusively) to

*mathematical economists,* for whom the chief interest will probably lie with the Appendix to Chapter X, on Index Numbers, (which should be read as a whole,) and ยง 6 of the Appendix to Chapter XII, on the Method of Determining Velocity of Circulation.

7. The remainder of the Appendix to Chapter XII is supplied chiefly in order that

*statistical critics* may be enabled to verify the processes described in the text.

8. Chapter X and its Appendix are of chief interest to

*students of index numbers,* a subject as fascinating to some as it is dry to others.

9. The analytical table of contents, the index, and the running page headings have been constructed with especial reference to the varying needs of different classes of readers.

The book is, however, designed to constitute a complete whole, and it is hoped that as many as possible of those who approach it from special view points may, in the end, read it all.

*M.* On page 432 add (to the bottom of columns 1-8 incl.) in the table the following: 1910, 3.42, 3.42, .32, 1.41, 3.3%, 1.46, 1.64.

*M*‘. It is not necessary to complete the table on page 435, as the Comptroller’s Report for 1910 (p. 54) gives for the first time deposits subject to check (7.82 billions). To this 7.82, however, three corrections are needed: (1) subtract .29 for “savings accounts” improperly included (estimated for me by the Comptroller’s Office at half of the figure in note

*a,* lower table, p. 54, Comptr. Rpt.); (2) subtract .54 as “exchanges for clearing house” (= 5/4 times those for national banks); (3) add .25 as the Comptroller’s Office estimate, for me, of unreported deposits subject to check. By applying these corrections we obtain 7.24.

*V.* I have simply taken 21 as a safe approximate estimate on the basis of the previous statistics of

*V* (p. 478) and its assumed relation to

*V*‘.

*M*‘

*V*‘. Add to columns 1-7 of table on page 448 the following: 1910, 97.3, 66.4, 429.3, .89 (by extrapolation, an unsafe guide), 382, 52.8.

*P.* This is obtained (on the principles of the table on page 487) from the index number 131.6 of wholesale prices for 1910 (kindly supplied in advance of publication by the Bureau of Labor) and the average price 96.2 of stocks as given by the

*Commercial and Financial Chronicle,* both being compared with the respective figures for 1909, viz. 126.5 and 97.5. They are combined by “weighting” the wholesale prices 10 and the stock prices 1 and reducing the results so that the average for 1909 shall be 100.

*T.* This is obtained: (

*a*) by continuing columns 1-5 of the table on page 479 by inserting: 1910, 160, 113, 162, 154; (the extension of column 2 for 1910 is made by means of somewhat more complete data than those enumerated on pages 480-482); (

*b*) by combining the result, 154, obtained for column 5 with the figures for railway cars handled. These were 19.8 millions for 1909 and 22.3 for 1910. Column 5 being weighted 10 and the car figures 1, we get as indices of trade: for 1909, 1718, and for 1910, 1763, showing an increase of 2.6%, which, applied to the (corrected) estimate of the absolute trade of 1909, viz. 387 billions, gives 397 as the absolute trade in 1910.

(The opportunity is here taken to correct an inadvertence on pp. 480 ff. It should have been there stated that, of the 44 categories mentioned, some are

*alternative* and not independent items, viz. those having the same names and differing only in the number of cities; also that the dates given do not imply that the items opposite are in all cases used for

*all* the intervening time, but only for such periods as the items were actually available.)

It is noticeable that the changes in business in 1910 as compared with 1909 are somewhat irregular; the sales of stocks have declined; exports and imports (both of them) have declined about 10%.

Notes for Chapter I