between farmers and non-farmers, as between taxpayers and taxing authorities, and as between producers and consumers, are universal and all inclusive. And yet, in spite of the clear cause and effect relations between price changes and all these things, popular opinion invariably attributes the ills which flow from inflation and deflation to causes other than the value of money. Business men themselves attribute the maladjustments of economic life to everything and anything except changes in the value of money. Not that the value of money is the only force which requires attention, but that it is one force which rarely receives the kind of attention which it unquestionably deserves. Much of the confusion in the public mind about the cost of living, profiteering, unemployment, wage unrest, price fixing, watered stock, high rents, unjust taxation, Wall Street, and other vital issues can be cleared up only by a realization of the part which the changing value of money plays in our economic life.

BIBLIOGRAPHY

ANDERSON, B. M., JR., The Value of Money.

COMMISSION OF GOLD AND SILVER INQUIRY, UNITED STATES SENATE, European Currency and Finance, 1925.

DARWIN, L., Bimetallism.

ECONOMIST, Monthly Supplement.

FISHER, I., The Making of Index Numbers.

The Purchasing Power of Money.

HAWTREY, R. G., Currency and Credit.

Monetary Reconstruction.

KEMMERER, E. W., High Prices and Deflation.

Money and Credit Instruments in Relation to General Prices.

KEYNES, J. M., Monetary Reform.

LAUGHLIN, J. H., Money and Prices.

LEAGUE OF NATIONS, Memorandum on Currency, 1913-1923.

MITCHELL, W. C., History of the Greenbacks.

United States Bureau of Labor Statistics, Bulletin No. 284.

ROBERTSON, D. H., Money.

CHAPTER XXVI

PRICE MOVEMENTS

Since all economic forces crystallize in the form of prices, it is an essential of economic science to study the movements of prices. It is difficult to conceive of any influence whose economic significance is not measured and interpreted in a price movement somewhere.

Instead of limiting our study to value in the abstract, or to value as a subjective concept, we can make the study definite by considering concrete price movements. Price study is simply one way of analyzing value, but it is a specific and objective way. It is a way which permits of measurement by the use of index numbers. Value in the abstract cannot be measured. Value as reflected in prices can be measured by price indexes. Such indexes do not tell us everything that is desired about value. They are not a complete key to all the problems of value. But they offer the most positive and useful method of studying value which we have.

The Price Index as a Measuring Device.—(1) The Base Period. As a rule, a base period is selected to represent 100, and this base may be average prices for a year, or for a number of years. Thus, the wholesale price index of the Bureau of Labor Statistics originally took the average for the period 1890-1899 as a base of 100. Since the World War, the chief comparison has been between post-war and pre-war prices, and consequently the base year has been shifted to 1913. Saurbeck's (now continued by the Statist) index number of wholesale prices in England takes as a base period the decade 1867-1877. The deciding factor in selecting a base period is simply which base will give the most significant comparison for the particular purpose in hand. A base period in the recent past tends to develop greater accuracy in the index number than a base period in the remote past. The remoteness of the base period and the purpose of the price comparison are important in determining the most serviceable base period.

(2) The Average Derived from Widely Differing Price Fluctuations. An increase in the index of the average price of a number of individual commodities does not imply that the price of each commodity has undergone a uniform increase. On the contrary, even when the prices of hundreds of commodities are averaged it is difficult to find any two commodities which have undergone the same increase. In any year a considerable percentage of the commodities fall in price while a somewhat smaller percentage remain more or less unchanged and a considerable percentage rise in price. A price average consists of a great diversity of fluctuations of individual commodities, some rising, some falling, some

remaining unchanged. However, in the midst of this wide diversity, there appears this outstanding characteristic, that the fluctuations are highly concentrated about a central tendency. Small fluctuations up or down show a much greater frequency than extreme variations, and this dense concentration reveals a general drift in the whole mass of changes. Because of the fact that the widely diverse fluctuations are highly concentrated about a central tendency, it is possible to measure variations in the general average with a close approximation to accuracy.

To illustrate the diversity of price movements we may compare the prices of a variety of commodities in July, 1921, with their prices in the year 1913.

In the midst of this diversity, there was during this same period a central tendency of price fluctuations. This central tendency was measured by the fact that the price index for the average of all commodities at wholesale in July, 1921, stood at 148 as compared with 100 in 1913. The general average represented the change in the purchasing power of the dollar, or the change in the value of money.

(3) The Number of Commodities. The number of commodities to be included in a price index will depend upon the purpose for which the index is intended. An index to be used as a business barometer for forecasting purposes may require as few as ten commodities. This is the number included, for instance, in the index computed by the Harvard Committee of Economic Research. An index of food prices may conveniently include a somewhat larger number. For example, the Annalist index is based upon twenty-five food commodities. An index of the general purchasing power of money should include a relatively large number of commodities. Several European indexes include about fortyfive commodities. The principal index number in the United States, that published by the Bureau of Labor Statistics, includes more than four hundred articles, and the index published during the war by the War Industries Board included 1,437 articles. Regarding the number of commodities, Irving Fisher offers the following opinion: "Seldom are index numbers of much value unless they consist of more than twenty commodities and fifty is a much better number. After fifty, the improvements obtained from increasing the number of commodities is gradual,

and it is doubtful if the gain from increasing the number beyond two hundred is worth the extra trouble or expense. Fisher's own index number of general purchasing power consists of approximately two hundred commodities. A large number of commodities tends to wipe out possible errors from weighting, or inaccurate price calculations, or selection of unfair samples of commodities.

(4) The Selection of Commodities. An index number of the general purchasing power of money cannot include each and every commodity involved. The index has to be based upon samples which are supposed to be fairly representative of the whole mass of commodities. But the task of sampling and selecting leaves room for a great deal of personal opinion and possible error on the part of the index statistician. The difficulty lies in deciding which samples are truly representative and which are not.

The assortment of samples depends in large measure upon the purpose of the index number. Whether to include raw materials or finished products, foods or minerals, luxuries or necessities, and in what proportions to include them is a perplexing problem. An index to be used for business forecasting would include sensitive prices which tend to move in advance of the great mass of prices. The purpose of the index is all important. In using any of the general indexes it is important to know upon which basis the commodities are selected before putting the index to any use requiring precision and accuracy.

If the assortment of commodities is fair, the number of commodities included may be very small without impairing accuracy. Where the sampling is haphazard and loose, the inclusion of a large number of commodities tends to wipe out in part the errors of sampling.

A general principle of choice is that those commodities are preferable that are substantially uniform from market to market and from year to year. Commodities which are highly erratic and which show violent degrees of fluctuation are to be shunned. They obscure the central tendency of the price movements.

The Bureau of Labor Statistics selects 404 commodities from nine main groups. For instance, the index for August, 1924, was made up from the following groups:

Moreover, the distribution within these major groups must give due consideration to several guiding principles. For instance, it is proved by statistics that raw materials show wider oscillations in price than finished commodities. Likewise, it is known that the prices of farm crops are highly responsive to weather conditions and climate, whereas prices of minerals are more responsive to forces of the business cycle. Consumers' goods are steadier in price than producers' goods. To make an accurate index a fair amount of samples must be drawn from all the important groups and classes of commodities.

(5) The Collection of Data. Two kinds of data are required, prices and quantities. The quantities are necessary in order to "weight" the price quotations used. If twice as much of one commodity is sold as of another, then the former commodity is twice as important in affecting the general price level. The price index of general purchasing power should reflect the relative importance of each commodity. The estimate of quantities has to be procured from trade associations, government reports, and census records. These reports offer so many conflicting estimates of production that the reconcilement of the estimates requires much skill and patience. An approximate price measurement may be secured without bothering to weight the estimates. If strict accuracy is not required, price averages without weights may be used. These seldom allow of error greater than 10 per cent, and especially when a large number of commodities are used in the index, the error is so small that the index is sufficiently accurate for general purposes.

The collection of prices is a highly complicated task. Most American index numbers are made from market prices, but some indexes here and abroad are made from import and export values, from contract prices, and from institutional prices. In any market, there are several grades of each commodity. The field collector of prices must settle upon a certain grade, and keep to that grade uniformly over a period of years. Moreover, prices vary from locality to locality, and from hour to hour during the day on which they are quoted. The gaining of uniform price quotations is therefore a task requiring "intimate familiarity with the statistical methods by which they are made, endless patience, judgment of a high order, and tactful diplomacy."2

The studies of Mitchell indicate that in so far as the price indexes computed by different authorities fail to agree perfectly, the discrepancies are due largely to differences in computing weights and price quotations and in selecting the sample of commodities. The importance of the field work is of paramount importance. If there is error or laxity at this stage of the process, the index number will be false, no matter how perfect the mathematical formula may be which the statistician uses.3

(6) Formula and Mathematical Method. The most familiar index formula is the simple arithmetic average. If we take the price of wheat, 2 Bulletin 284 U. S. Bureau of Labor Statistics, p. 26, W. C. Mitchell. 3 Ibid., p. 104.