12: Social Consequences of Variations in Exchange Value
Variations in the exchange value of money create variance in the distribution of income and property. This occurs when individuals overlook the variable nature of the value of money, and because the variance in the exchange value does not affect all goods and services uniformly and simultaneously.
This is of particular interest to credit: individuals who are, in effect, paying for present goods with goods that will not be produced until some time in the future fail to account for the variations in exchange value that will occur while the balance of the loan remains outstanding.
In practice, it is quite common to make an immediate payment for goods to be delivered in future (credit is extended to the seller) or to promise a future payment for goods tendered immediately (credit is extended to the buyer). All such transactions involve risk, and the risk is considered in the process of negotiation (most evident in the trading of commodities futures, where payment is made for goods to be delivered in future).
Those who engage in such exchanges may not be fully aware of the speculative nature of such a transaction - but instead rely on the (mis)perception that money or goods have a stable value.
Legal systems are acutely prone to ignore the variable value of money: the need for definiteness and certainty in a contract or law leads to the consideration that a given quantity of money is fixed in its exchange value against goods.
Even were they aware of the inherent fallacy, they are paralyzed unless they ignore it. Hence the desire of the State to seek a method for fixing the value of money, or at the very least undertaking measures to moderate the fluctuation of its future value.
(EN: I wonder how much of this remains true in the present day. There is a greater attention to the future value of money among both the consumer and commercial sectors, as interest-bearing loans have become more common to compensate a party extending credit for both the risk of repayment and the potential fluctuation in the value of money - that is, future value is considered, in such accuracy as it can be estimated.)
It's also noted that this is not a problem specific to credit money: even if the exchange is in commodities, such as precious metals, the agreement for a future payment necessarily assumes the risk of the exchange value of the commodity in future. In effect, the creditor has to consider his loss when at a future date, when the money repaid represents less purchasing power, and charge interest for his loan to represent this loss, in addition to his estimation of the risk of default.
There is also the notion of credit speculation, in which a debtor will take on a loan when he estimates that the future value of money will be even less than the creditor estimates. In effect, if the value of money decreases by a higher percentage than the interest rate of the loan, the debtor has profited by that difference.
Currency speculation is also the product of uncertainties in future value, and the expectation that the future value of one currency will outpace the future value of another. However, this notion remains imprecise, as the currency represents a physical amount of an actual commodity (a coin representing an ounce of gold today will represent an ounce of gold two years hence), though it may accurately be said that while the exchange rate of a currency for gold remains fixed, the market value of gold, in exchange for other goods, is subject to fluctuation.
The value of currency can also be tied to the value of various consumer goods for which it can be exchanged, though it's noted that this does not measure the change in value of money, but of the consumer goods, and price indexing is thus affected by fluctuations in the basket of goods on which the index is based, which is difficult to estimate or to predict with accuracy.
(EN: An aside is that inflation, which is often ascribed to money, may well be the effect of an increase in population, resulting in an increased demand of goods, the supply of which is prone to lag demand. This is only vaguely related to the present topic, so I won't explore it further at this time.)
A proposal to assuage monetary liabilities is for buyers and lenders to express the amount loaned and owed in return in terms of a commodity (specifically, gold) rather than in a monetary amount. Hence the lender is repaid the amount that he loaned and does not need to increase interest to compensate for the unpredictable fluctuation of the value of money.
While the popularity of such notions are indicative of a lack of confidence in monetary systems of the day, they are nonetheless flawed: gold, as a commodity, fluctuates in value, and the same risks are still borne by lender and borrower alike. This does, however, eliminate the caprices of government, which may debase a commodity-backed currency or issue fiat currency in regard to its own needs, both of which are a significant source of inflation in market prices.
Consequences of Variations in the Value of a Single Currency
In an immediate exchange of goods for money, there is the variation in the price of goods, emanating from the variations in the value of the commodity as well as variations in the exchange ratio of money.
In terms of goods, there are economic "agents" who produce and sell a good, and others who purchase and consume them, and the determinants of pricing are based on the price that consumers are willing to pay for the benefit of consuming the good, derived from their subjective assessment of need.
There is a (seemingly arbitrary) division among producers of consumer goods, which seems to reflect upon the facility with which they can control the flow of goods to market - to increase or decrease production at-will. For some goods (such as lumber), there is greater flexibility in determining the amount of good produced and brought to market, or (such as iron) the ability to hold goods in inventory indefinitely. For other goods (such as crops) the length of time required to produce the good means that the decision of quantity is made far in advance of the time the goods will be brought to market, and a compulsion to sell the entire quantity produced (the products, being perishable, cannot generally be set aside for later introduction into the market - they are sold at harvest, or they rot).
The factors influencing the value of money are different. Every economic agent (buyer or seller) maintains a stock of money according to the degree to which he perceives it to be necessary for use in the market. As these are managed individually, the likelihood of a singular event that simultaneously and uniformly alters the individual stocks of money is, which theoretically possible, highly unlikely to occur in practice.
Referring to the previous example of consumer goods, money takes on the semblance of a good that is not perishable, though the analogy is not entirely precise (money tends to lose value over time) it can generally be observed to be so. (The notable exception being paper money "in times of war" where it is doubtful that the money will have any value at all if the issuing state is defeated - but this is an unusual situation.)
In the case of international trade, there is a rise and fall of the value of money due to a difference in the available money in given markets that does not necessarily correspond to the rise and fall of the availability of consumer goods in the respective economies.
There is some reference to the rapid economic growth in America, where the rapid increase in the factors of production (land, natural resources, labor) enabled a great quantity of goods to be produced, exceeding the growth of its monetary supply, and this increasing the value of money in international trade: it was able to purchase goods from Europe at discount prices due to the increased value of its currency in international trade. In most instances, however, there is a "gradual diminution" in the value of money in a mature market in which the influx of goods is less rapid.
It's likewise noted that the introduction of new wealth ripples through participants in an economy, based on their proximity to the market. The merchant class benefits first, followed by producers who provide goods to the merchants, followed at last by laborers who work for the producers. This occurs in different locations and different industries at differing paces, and the greatest profit is made by the first sector to be able to raise the price of the products they sell.
The opposite is true when money decreases in value: it reflects an abundance of consumer goods in demand that surpasses the supply of money to offer in trade of it, which also begins in specific locations, classes, and markets from which it ripples outward, and those who are the last to have to reduce the prices of the products they sell stand to make the greatest profit.
Consequences in the Variations in Exchange Rations Among Currencies
Economists have been chiefly interest in the exchange rations between different kinds of money, as a consequence of the increase in trade among nations that precipitated from industrial-era innovations in travel and transport that have made it more common for people and goods to flow across borders with increasing frequency.
From a purely commodities perspective, international trade resulted in the migration of goods across borders. If a nation where wheat was abundant trades with one where silver is abundant, the trade among their peoples resulted in the movement of silver to the wheat-rich nation and the movement of wheat to the silver-rich nation - each good going to where it was in the shortest supply.
(EN: which points to a common objection - over time, the wheat-rich nation will "drain" silver from the other market. And a month later, it still has the silver whereas the wheat has been consumed. Arguably, the nation that obtained food has the long-term benefits of a well-fed people, chief better health and more citizens, but if you restrict your perspective to the commodity itself, it does raise the hackles of those who are fond of demonstrating inequity.)
Small-scale trade across borders has no significant effect on the local market, though if trade grows, the demand for goods in the foreign market may affect the price of goods in the domestic market. Such is always the case of import and export, as suppliers must consider whether greater profit is to be had selling locally or exporting (if a good demands a higher price in the foreign market, the price may rise and availability decrease in the domestic) and buyers must consider whether greater value is to be had by purchasing locally or from a foreign market (if a good demands a lower price in the foreign market, buyers will not shop domestically).
The same may be said to be true of foreign monies - their exchange value being more or less in different markets - though this overlooks the "value" of the money being derived from the value of the goods it can command. As such, the ratio of exchange among monies reflects the value of goods in their respective markets. And as previously mentioned, the wealth of a nation has little to do with its currency, but with the economic value of the goods available in its market.
There remains the notion of speculation - where a change in the value of a currency ripples outward from a point of origin, and that entrepreneurs with better analytical and predictive capabilities can exploit the difference to accumulate more currency. This is not unique to money, but instead reflects the abundance or shortage of goods.: when money increases or decreases in value, it does not cause an increase or decrease in the volume of consumer goods, but is an effect of it.
There is a bit more commentary on the impact to importers and exporters, who may have a monetary gain or loss due to the inequities in the exchange ratio of currency, especially in credit transactions where the moment of payment (in goods or currency) is separate in time from the moment at which the parties agreed upon the quantities to trade, which will fluctuate over time to favor one party over another. Likewise, this cannot be controlled or prevented, only predicted - and with a fair degree of inaccuracy.