Southwest Washington labor press. [volume] (Hoquiam, Wash.) 19??-19??, 1926-10-22

e two faetors trade and pEies indez.
We shall next. Tor convenienes. chanaa
the left hand side. The left hand
side gives s1o0. 900, 000, 900 IS the to-
I'll sum Of dollars spent or exchanged
during the year. This 800. 000. 900 900
Is much more than the total currency
in existence because each dollar IS
spent several times in q year.
The average number Of times The
fetal currency Is spent. or turned over
IN year is called the velocity Of
oireulation Il may Be, say, 40 times
year. Then the total number Of
dollars spent viii be the number Of
dollars II circulation fsay $500, 900, :
0o0) multiplied by the average We
locity Of circulation (say fortyl which
makes up the 100000. 100000 or to-
tending gradually TO increase.
The other two factors, trade and
currency, fluctuate far more. Trade
tends to increase. II currency would
keep pace steadily the price index
would keep steady. But currency IS
sometimes inflated out Of al proper
ton to trade and sometimes debated.
Practically then, it IS the currency
which is the most variable and unruIy
factor. It's. initiation and deflation
raise or lower prices far more often
and more sharply than any variation
tai spent.
So we. have as our equation of ex-
change, in its final form: $2,500, O00,-
900 in circulation multiplied by forty
times year is equal to 20,000,0O0, 600
units multiplied by S. per unit.
Or, in general terms, currency in
circulation multiplied by its velocity
Of circulation is equal to the volume
Of trade multiplied by the Index Num-
Der or price level. This is the most
important principle fixing the price
level.
To illustrate, if the currency should
be doubled in quantity inflated"
becoming say $5,O00,000;000) while
the velocity should remain unchanged
(say at forty) and the volume Of
trade should also remain unchanged
100000, 100000 units), the price IN
dex would have to double Ito $1,000
per unit). Of course, in actual fact,
the velocity does not stay constant
nor do any other elements in the
equation. They are all constantly
changing, but yet in such way as to
keep the equation true.
The velocity Of circulation changes
the least and slowest. It is largely fix
ed by the convenience Of the people.
Some people find it convenient to keep
in their pockets, or in the bank, a
great deal Of ready cash in proportion
to their annual expenditures and turn
it over slowly; others like to get
along with very little and turn it,
over rapidly. In a city, money circu-
lates faster than in the country and
in large city faster than in a small
one. It is also true that the velocity
of circulation fluctuates up and down
with the short time fluctuations of
the volume of trade. In the long run,
however, the velocity changes slowly,
in the velocity of circulation or even
in the volume Of trade. In other
words, the master key to the price
level is the initiation or deflation Of
the currency. The great reason why
prices rose millions Of times in Ger
many after the war, was the infla-
ton of paper money (although at the
same time velocity Of circulation IN
creased and the volume Of trade de-
creased; and the great reason why
prices in Germany today have snap
ped back is that the over plentiful
paper marks were abolished and their
place taken by the scarcer gold marks.
In,the same way the great reason why
prices today are high in France and
Italy and the franc and Ira are worth
so little is initiation. The great rea-
son why the price level in America
is so per- cent above the pre-war level
is that there are more dollars Of cur
rency in circulation both in the form
Of money in peoples pockets and tills
and in the form Of deposits subject TO
check in the banks.
In short, currency-that is money
and deposits-is little like any other
goods in that when It is scare it is
dear and when it is abundant It is
cheap.
The chief conclusion is that infla-
ton, increasing the number Of dol
lars in circulation relatively to the
volume Of trade to be done with those
dollars tends to raise prices in gem
eral while deflation, or decreasing the
number Of dollars in circulation rel
ativeIy to the volume Of trade to be
done tends to lower prices.