III Purchasing power

Let us be quite clear about the meaning of the expression “purchasing power.” It is customary to use this expression in reference to the quantity of money that is available for buying. For our purpose, however, this use of the expression is inconvenient. The different forms of money, and the laws which govern the quantities of each, will be dealt with separately and fully in later chapters. Meantime it is necessary to make some general observations regarding the power to purchase in relation to the production of commodities and services without the question of prices and, consequently, monetary prices being involved. For our purpose, then, anybody who owns anything that can be exchanged for anything else possesses purchasing power. The thing or things owned may be capital or income, including payment for services, and may be either in the form of money or in the form of commodities. The extent of purchasing power depends not merely upon the quantity of the thing or things owned, but upon their market value in relation to other commodities and services. For example, if the thing owned is money, the purchasing power of £100 may be greater after a fall in prices than £120 was before the fall in prices; or, on the other hand, after a rise in prices £100 might purchase less than £80 before the rise. Similarly, the purchasing power of a hundred head of cattle would vary as the market value of other commodities and services rises or falls in relation to cattle. The market value of commodities and services and money in relation to each other depends upon the extent of the entire supply of each and the manner in which it is being utilised; for every subjection of the use of any supply to a lower utility affects its purchasing power in accordance with the law of diminishing utility. Whatever the extent and manner in which the supplies of the different commodities and services are utilised, and their market value in relation to each other, theoretically they are all exchangeable with each other, and, therefore, the greater the quantity of commodities and services produced in relation to the number of people, the greater is the purchasing power per head of population. Nevertheless, where money exists the total purchasing power theoretically arising from the total production of commodities and services for sale cannot actually purchase these same commodities and services unless and until they are

all ready for sale at the best prices obtainable in money from buyers. In practice, those who have sold, or are able to sell, their commodities and services satisfactorily for money, and whose purchasing power is thus converted, or readily convertible, into money, are by no means always disposed to employ it in buying those commodities and services which, failing the existence of money, they would have had to have taken in exchange for their own. Further, in the case of an increased quantity of commodities and services, buyers for fi nal consumption and deferred utilisation do not readily buy larger quantities than usual unless they can get a reduction in the price, whilst producers and distributors do not readily sell supplies at reduced prices. Thus, in any case, some delay must occur before the theoretic additional purchasing power arising from increased production is, in fact, used for purchasing. The delay, however, affecting the sale of the increased supply of commodities and services also affects the whole supply; and, as a result, the production of new supplies diminishes to an extent proportionate to the diffi - culties of marketing. Thus, the additional purchasing power arising from increased production is usually stillborn, and the damage does not always end with this loss. Manufacturers and merchants know by experience, for which most of them have paid heavily, that a fall in wholesale prices means losses to them. They always have a certain quantity of commodities in course of production, in transit or in stock, and this quantity is based upon estimates of the effective demand at a reasonable price. Suddenly the market breaks and buyers withdraw. The break is induced by the inevitable outrunning of production over the effective demand. The position may be held for a time by manufacturers refusing to reduce their prices and by merchants holding on to stocks and taking over the stocks of weaker holders; but the longer it is stayed the worse it is when it does come, for it fi nds the market overloaded with stock, and bankers tired and nervous of advances made upon it. Severe liquidation then sets in, accompanied by stop-loss selling and bankers calling in loans. Fortunes are lost and large fi rms smashed. It will be objected that these manufacturers and merchants brought it upon themselves by overtrading; that the manufacturers produced too much and the merchants bought too much. Such an argument is “back-jobbing.” If the manufacturer and merchant must not produce or buy more than their clients require, neither must they produce or buy less-or they lose their clients. This is the whole essence of business, but it is not so easy as it seems. If all the manufacturers and merchants had produced and bought less, there would have been a shortage, and prices would have gone up instead of down; and if some of the manufacturers and merchants had produced and bought less, prices might have remained steady, but those who had produced or bought with least restraint would score at the expense of those who had been more prudent. The manufacturer and the merchant must produce and buy for the effective demand to the best of their ability to estimate it, and the better it looks and the greater the confi dence it creates, the more is it urged upon them to do their share. They must follow the market and produce and buy with the rest; and, together with the rest, they must sooner or later bring about the downfall of the market, each one endeavouring not to be the hindermost that are taken by the devil. It is common knowledge that this sort of thing happens time

after time in all wholesale markets. Every time it happens the folly of it is apparent, nevertheless, again and again everybody is dragged in. Natural judgment, long experience, prudence bought and paid for by many a hard hit, unlimited fi nancial support, all go for little more than mere survival. There is no room for any fools on the wholesale markets, and it is only a matter of time for the cleverest and luckiest to get caught. Unless they retire in time, “those who live by the sword shall die by the sword.” It is important to notice that this argument applies as much to capital goods, such as tools, machinery, factories, and those things by which transport of every kind is effected, as it does to commodities for fi nal consumption. The use of capital goods by the producers, and the resulting effective demand for them, is strictly in accordance with the quantity of commodities for fi nal consumption which are, rightly or wrongly, being produced. It is an error to believe that, under present conditions, the quantity of capital goods produced and the extent in which they are kept in repair varies inversely as voluntary abstinence by the public in the consumption of commodities for fi nal consumption. The producer can always secure suffi cient capital goods for the production of commodities for fi nal consumption, for which a market at a reasonably profi table price is believed to exist; but the consumption of the latter goods is generally disappointing in the end. The cause of this failure to consume will be dealt with presently; meantime, it must be emphasised that it is not due to over-production of capital goods taking place at the expense of the production of consumable goods, for, as a matter of fact, the continuous over-production of all capital goods in the right proportion to each other, if pressed to the limits of raw materials, means of production and man power, would ensure the same quantity of employment for these capital goods as if they were being used to produce commodities for fi nal consumption. One hears talk of committees of producers and consumers being appointed to decide what commodities should be produced and the quantities of each; but if there is anybody who could nominate a committee capable of this, “the world is his and all that’s in it.” It is quite unnecessary for such a person to wait for his party to get into power before he starts his work of elevating society. Let the committee show its ability on the wheat and cotton markets, where statistics of production and consumption all over the world have been compiled in a very complete manner for many years past; and, if the people on the committee are really as clever as they think, they can soon make enough to buy all those whom they cannot convince. Thus, whatever the increase in the quantity of commodities and services produced and the increased purchasing power they theoretically represent, should a fall in prices take place either as a result of failure to utilise fully the entire supply or for any other reason, those who had produced most would not necessarily be gainers. The prices of commodities and services would not all have fallen proportionately to the same extent, so that the only gainers would be those who bought when prices had fallen most and sold when prices had fallen least. Those who had produced any commodity the total quantity of which had been increased in relation to that of other commodities and services, would probably fi nd that the price

at which they had to sell had fallen most; and in this case they would be losers not only in actual money but relatively, also, in commodities and services. In practice, therefore, under existing conditions, it is suicidal for any individual or company to attempt to increase the total quantity of any particular commodity; and not only does every business man shun such a proceeding, but he endeavours to produce or buy only those commodities or services of which there is rather a shortage in the total supply.