RELATION OF BANK CREDIT TO PRICES Marginal Utility and Price Trade is fundamentally barter; the money economy and the credit economy sprang from the barter economy. Under the money economy one commodity possessing the quality of general acceptability was exchanged for any other commodity. The barter nature of such transactions is obvious. Credit simply introduced the idea of exchanging present commodities against future commodities; if credits are offset by credits, the ultimate payment of balances is in kind or money. The person who sells shoes for money or credit gets, in real fact, commodities which the money or credit commands. Exchanges are, then, goods for goods; and the amount of one kind of goods given for a unit of another is the price of the latter. Since goods are generally ex changed for gold or representatives of gold, prices are usually stated in terms of gold, and price becomes the quantity of gold for which a unit of an article will exchange.
Commodities serve in different degrees the wants of man. The capacity to satisfy a want is known in political economy as "utility." The utility of any unit of a commodity decreases as the number of units of that commodity increases. The utility of a unit more or less than any given group is spoken of as "marginal" utility. The asking price of any commodity will depend upon the ratio of the marginal utility of the com modity and the marginal utility of gold, that is, money, to the seller; the bidding price is likewise the ratio of these utilities to the buyer. When a sale or purchase takes place there is an equalization of these ratios of utilities, at a "price." In any market where buyers and sellers compete freely there can be but one price for a commodity at any time; this resultant price is the "market price." Basis of Price Level It is apparent that the market price of any commodity will be high if that commodity has high utility or if the commodity is relatively scarce, or, on the other hand, if money is plentiful and therefore has low marginal utility. The price of any commodity
depends, therefore, upon its relative utility as compared with other commodities and upon the price of other commodities in general, that is, the price level; but the price level is an average ratio between the quantities of goods exchanged and the quantity of money against which they are exchanged. The quantity of money has two elements: the number of units of money, and the number of times that these units are exchanged against goods within a period. Ignoring for the time being the influence of de posit currency, the price level depends upon three factors: (I) the quantity or number of money units in circulation, (2) their velocity of circulation, and (3) the quantity of goods against which they are exchanged. The price level varies directly as the quantity of money and the velocity of circulation and inversely as the volume of goods traded. This is the quantity theory of money. The price level varies with the total purchasing power of the community, and this purchasing power is the product ob tained by multiplying the number of dollars in circulation by the number of times the dollars circulate within a period. Or stated inversely, the value of a dollar (its power to command articles in exchange) decreases as the number of dollars or their rate of cir culation increases.
Effect of Money and Deposits on Price Level The purchasing capacity of an individual at any time (his power to command goods in the market) is increased by his bank deposits subject to transfer by check—instead of paying by money he pays by check. The statement of the quantity theory must, therefore, include the volume of bank deposits and the rate at which they circulate. The best statement of the theory is probably contained in Professor Irving Fisher's formula, MV plus =P T, in which M is the quantity of money in circu lation, V the rate of turnover of money, M' the quantity of de posits subject to check, V' the rate of turnover of deposits, P the price level, and T the volume of trade.