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History of Political Economy Annual Supplement to Volume 33 (2001) 137-161
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Episodes in the Quantitative Assessment of the Value of Money
Kevin D. Hoover and Michael E. Dowell
Historische Kaufkraftvergleiche schweben also immer mehr oder weniger in der Luft.
—Wilhelm Röpke, Die Lehre von der Wirtschaft
Money and Measurement
Nothing is more familiar than the value of money. Every time we buy a book or a beer or note the price of a computer or a car, we simultaneously update our information about the value of money expressed in units of books, beer, computers, or cars. Money is nevertheless not like these physical goods. Value (or price) and quantity are separate characteristics for physical goods. A copy of Keynes's General Theory is the same book whether it costs $10 or $10,000. But a ten-dollar bill is, in a relevant sense, a different thing when a copy of the General Theory costs $10 than when it costs $10,000. That the real quantity of money depends on the prices of goods was understood well before the dawn of modern economics. It is sometimes not enough to evaluate that real quantity with respect to a book, a pint of beer, a computer, or a house. Both because it is a useful portmanteau statistic and because it plays a causal role in our theories of the macroeconomy, we sometimes need to know the real quantity of money with respect to goods in general—that is, we need to know the general price level. [End Page 137]
We are now so familiar with the idea of price indices that the idea of a general price level no longer appears problematic. But consider the recent discussion of the measurement of the Consumer Price Index (CPI), particularly in the wake of the December 1996 report of the Advisory Commission to Study the Consumer Price Index (commonly known as the Boskin Commission [Boskin et al. 1996]). Getting the right value for the price indices is important on several dimensions. There is a scientific interest in, for example, measuring the real Gross Domestic Product (GDP) or productivity growth. If the price indices are too high, we appear less prosperous and productive than we really are. Real GDP and productivity data, as well as inflation data that are based directly on the price indices, affect the policy actions of the central bank and so have important consequences for the future prosperity of the country. And they affect various index-linked payments in pensions and contracts, thereby affecting the distribution of income and government finance.
The Boskin report concluded that the CPI overstated inflation by 1.1 percentage points. While some commentators disputed the particular estimates, almost no one observed what a conceptually odd conclusion the report had drawn. Index numbers reduce the changes in prices of many goods to a single summary statistic. There is no unique, correct way to make that reduction. Although there are better and worse ways to make it, the class of theoretically admissible indices is infinite. To conclude that the CPI overstates true inflation by a precise amount is implicitly to claim that there is a precisely true price index, a unique value of money—but there is no such true index.
The problems of what the value of money is and how to measure it are not new. Both classical political economists and policymakers in the eighteenth and nineteenth centuries faced the same problems that we do today, albeit in an era much less rich in economic data and statistical understanding. They were perhaps less complacent about how to address the problems; for, although index numbers appeared during the same period, they had not yet come to dominate the thinking about the general price level. The goal of this essay is to look back to this earlier time and to a selection of classical authors to ask, What did they mean by the “value” of money? And how did they measure it?