WEBVTT NOTE 11.09. Interlocal Exchange 1 00:00:00.000 --> 00:00:04.000 9. Interlocal exchange 2 00:00:04.000 --> 00:00:10.000 a. Uniformity of the geographic purchasing power of money 3 00:00:10.000 --> 00:00:17.000 The price of any commodity tends to be the same throughout the entire area using it. 4 00:00:17.000 --> 00:00:27.000 We have seen that this rule is not violated by the fact that cotton in Georgia, for example, is priced lower than cotton in New York. 5 00:00:27.000 --> 00:00:36.000 When cotton in New York is a consumer's good, cotton in Georgia is a capital good in relation to the former. 6 00:00:36.000 --> 00:00:50.000 Cotton in Georgia is not the same commodity as cotton in New York, because goods must first be processed in one location and then transported to the places where they are consumed. 7 00:00:50.000 --> 00:01:01.000 Money is no exception to the rule that the price of every commodity will tend to be uniform throughout the entire area in which it is used. 8 00:01:01.000 --> 00:01:05.000 In fact, the scope for the money commodity is broader. 9 00:01:05.000 --> 00:01:14.000 Other commodities are produced in certain centers and must then be transported to other centers where they are consumed. 10 00:01:14.000 --> 00:01:20.000 They are therefore not the same good in different geographical locations. 11 00:01:20.000 --> 00:01:23.500 In the producing centers, they are capital goods. 12 00:01:23.500 --> 00:01:29.500 Money, it is true, must first be mined and then shipped to places of use. 13 00:01:29.500 --> 00:01:35.500 But, once mined, the money commodity is used only for exchange. 14 00:01:35.500 --> 00:01:42.000 For these purposes, it is, from then on, shipped back and forth throughout the world market. 15 00:01:42.000 --> 00:01:51.000 Therefore, there is no really important capital good location for money separate from a consumer's good location. 16 00:01:51.000 --> 00:01:59.000 Whereas all other goods are first produced and then moved to the place where they are used and consumed, 17 00:01:59.000 --> 00:02:06.000 money is used interchangeably throughout the entire market area, moving back and forth. 18 00:02:06.000 --> 00:02:11.000 Therefore, the tendency toward geographical uniformity in the purchasing power of money 19 00:02:11.000 --> 00:02:23.000 The purchasing power of money holds true for the physical commodity gold or silver, and there is no need for that commodity to be treated as a different good in one place or another. 20 00:02:23.000 --> 00:02:30.000 The purchasing power of money will therefore be identical over the entire area. 21 00:02:30.000 --> 00:02:36.480 Should the PPM be lower in New York than in Detroit, the supply of money for the exchange 22 00:02:36.480 --> 00:02:41.920 of goods will diminish in New York and increase in Detroit. 23 00:02:41.920 --> 00:02:47.960 Prices of goods being higher in New York than in Detroit, people will spend less in New 24 00:02:47.960 --> 00:02:54.920 York and more in Detroit than heretofore, this shift being reflected in the movement 25 00:02:54.920 --> 00:02:56.240 of money. 26 00:02:56.240 --> 00:03:02.220 This action will tend to raise the purchasing power of money in New York and lower it in 27 00:03:02.220 --> 00:03:07.480 Detroit until its purchasing power in the two places is equal. 28 00:03:07.480 --> 00:03:14.020 The purchasing power of money will, in this way, tend to remain equal in all places where 29 00:03:14.020 --> 00:03:20.580 the money is used, whether or not national boundaries happen to intervene. 30 00:03:20.580 --> 00:03:26.740 Some people contend that, on the contrary, there do exist permanent differences in the 31 00:03:26.740 --> 00:03:30.580 purchasing power of money from place to place. 32 00:03:30.580 --> 00:03:36.040 For example, they point to the fact that prices for food in restaurants are higher in New 33 00:03:36.040 --> 00:03:38.820 York City than in Peoria. 34 00:03:38.820 --> 00:03:45.080 For most people, however, New York has certain definite advantages over Peoria. 35 00:03:45.080 --> 00:03:52.060 has a vastly wider range of goods and services available to the consumer, including theaters, 36 00:03:52.060 --> 00:03:58.580 concerts, colleges, high-quality jewelry and clothing, and stock brokerage houses. 37 00:03:58.580 --> 00:04:05.220 There is a great difference between the Commodity Restaurant Service in New York and the Commodity 38 00:04:05.220 --> 00:04:07.980 Restaurant Service in Peoria. 39 00:04:07.980 --> 00:04:14.380 The former allows the purchaser to remain in New York and to enjoy its various advantages. 40 00:04:14.380 --> 00:04:32.380 Thus, the two are distinct goods, and the fact that the price of restaurant service is greater in New York signifies that the preponderance of individuals on the market value the former more highly, and consider it a commodity of higher quality. 41 00:04:32.380 --> 00:04:39.380 Costs of transport, however, do introduce a qualification into this analysis. 42 00:04:39.380 --> 00:04:44.380 Suppose that the PPM in Detroit is slightly higher than in Rochester. 43 00:04:44.380 --> 00:04:49.380 We would expect gold to flow from Rochester to Detroit, 44 00:04:49.380 --> 00:04:56.380 spending relatively more on goods in the latter place, until the PPMs are equalized. 45 00:04:56.380 --> 00:05:04.480 If, however, the PPM in Detroit is higher by an amount smaller than the transport cost 46 00:05:04.480 --> 00:05:12.620 of shipping the gold from Rochester, then relative PPMs have a leeway to differ within 47 00:05:12.620 --> 00:05:16.080 the zone of shipping costs of gold. 48 00:05:16.080 --> 00:05:21.840 It would then be too expensive to ship gold to Detroit to take advantage of the higher 49 00:05:21.840 --> 00:05:23.260 PPM. 50 00:05:23.260 --> 00:05:31.600 The inter-spatial PPMs may vary in either direction within this cost of transport margin. 51 00:05:31.600 --> 00:05:38.720 As we shall see, however, inter-local clearing can greatly narrow these limits. 52 00:05:38.720 --> 00:05:44.980 Many critics allege that the PPM cannot be uniform throughout the world because some 53 00:05:44.980 --> 00:05:50.080 goods are not transferable from one locale to another. 54 00:05:50.080 --> 00:05:57.400 Some square or Niagara Falls, for example, cannot be transferred from one region to another. 55 00:05:57.400 --> 00:06:00.480 They are specific to their locale. 56 00:06:00.480 --> 00:06:07.160 Therefore it is alleged the equalization process can take place only for those goods which 57 00:06:07.160 --> 00:06:10.160 enter into inter-regional trade. 58 00:06:10.160 --> 00:06:14.560 It does not apply to the general PPM. 59 00:06:14.560 --> 00:06:19.340 Plausible as it seems, this objection is completely fallacious. 60 00:06:19.340 --> 00:06:26.380 In the first place, disparate goods like Times Square and other main streets are different 61 00:06:26.380 --> 00:06:31.860 goods so that there is no reason to expect them to have the same price. 62 00:06:31.860 --> 00:06:39.520 Secondly, so long as one commodity can be traded, the PPM can be equalized. 63 00:06:39.520 --> 00:06:47.540 The composition of the PPM may well be changed, but this does not refute the fact of equalization. 64 00:06:47.540 --> 00:06:54.120 The process of equalization can be deduced from the fact of human action, even though, 65 00:06:54.120 --> 00:07:00.940 as we shall see, the PPM cannot be measured since its composition does not remain the 66 00:07:00.940 --> 00:07:02.260 same. 67 00:07:02.260 --> 00:07:10.300 Finally, since any good can be traded, what is there to prevent, for example, Oshkosh 68 00:07:10.300 --> 00:07:13.660 capital from buying a building on Times Square? 69 00:07:13.660 --> 00:07:20.060 The Oshkosh capitalists need not literally transport a good back to Oshkosh in order 70 00:07:20.060 --> 00:07:23.980 to buy it and make money from their investment. 71 00:07:23.980 --> 00:07:28.440 Every good, then, enters into interregional trade. 72 00:07:28.440 --> 00:07:35.900 No distinction between domestic and interregional, or international, goods can be made. 73 00:07:35.900 --> 00:07:41.540 Thus, suppose the PPM is higher in Oshkosh than in New York. 74 00:07:41.540 --> 00:07:48.980 New Yorkers tend to buy more in Oshkosh, and Oshkoshians will buy less in New York. 75 00:07:48.980 --> 00:07:55.700 This does not only mean that New York will buy more Oshkosh wheat, or that Oshkosh will 76 00:07:55.700 --> 00:07:58.100 buy less New York clothing. 77 00:07:58.100 --> 00:08:04.740 It also means that New Yorkers will invest in real estate or theaters in Oshkosh, while 78 00:08:04.740 --> 00:08:10.060 Oshkoshians will sell some of their New York holdings. 79 00:08:10.060 --> 00:08:15.420 B. Clearing in Interlocal Exchange 80 00:08:15.420 --> 00:08:21.760 Clearing is particularly appropriate for interlocal transactions, since costs of transporting 81 00:08:21.760 --> 00:08:29.220 money from one locale to another are likely to be heavy. Bills of exchange on each town, 82 00:08:29.220 --> 00:08:37.820 that is, IOUs owed by each town, can be reciprocally cancelled. Suppose that there are two traders, 83 00:08:37.820 --> 00:08:48.460 A and B in Detroit and 2 in Rochester, C and D. A sells C a refrigerator for 200 gold grams 84 00:08:48.460 --> 00:08:56.620 and D sells B a TV set for 200 grams. The two debts can be cleared and no money need 85 00:08:56.620 --> 00:09:03.100 be shipped from one place to the other. On the other hand, D's sale of a TV set may 86 00:09:03.100 --> 00:09:06.100 A total of 120 grams. 87 00:09:06.100 --> 00:09:11.100 Suppose for a moment that these are the only traders in the two communities. 88 00:09:11.100 --> 00:09:17.100 Then, 80 grams will have to be shipped from Rochester to Detroit. 89 00:09:17.100 --> 00:09:25.100 In the latter case, the citizens of Detroit have, on net balance, decided to add to their cash holdings, 90 00:09:25.100 --> 00:09:31.100 while the Rochesterites have decided to diminish their cash holdings. 91 00:09:31.100 --> 00:09:40.380 Economists have often described interlocal trade in terms of gold export points and gold import points. 92 00:09:40.380 --> 00:09:48.220 The use of such expressions assumes, however, that even though two localities both use gold money, 93 00:09:48.220 --> 00:09:55.260 it makes sense to talk of an exchange rate of the money of one locality for that of another. 94 00:09:55.260 --> 00:10:03.020 This exchange rate is set between the margins fixed by the cost of transporting money, the 95 00:10:03.020 --> 00:10:07.360 gold import and gold export points. 96 00:10:07.360 --> 00:10:11.860 This does not hold true on the free market, however. 97 00:10:11.860 --> 00:10:18.660 On such a market, all coins and bullion are expressed in terms of weight of gold, and 98 00:10:18.660 --> 00:10:24.820 it makes no sense whatever to speak of an exchange rate of the money of one place for 99 00:10:24.820 --> 00:10:27.060 for the same money in another. 100 00:10:27.060 --> 00:10:33.320 How can there be an exchange rate of an ounce of gold for an ounce of gold? 101 00:10:33.320 --> 00:10:39.460 There will be no legal tender or other laws to separate the value of the coins of one 102 00:10:39.460 --> 00:10:41.460 area from those of another. 103 00:10:41.460 --> 00:10:48.660 Therefore, there may be slight variations in the PPM in each locale within the limits 104 00:10:48.660 --> 00:10:56.080 of the Cost of Transporting Gold, but there could never be deviations from par in interlocal 105 00:10:56.080 --> 00:11:03.560 exchange rates, for there are no exchange rates on the free market except for two or 106 00:11:03.560 --> 00:11:06.560 for more coexisting money commodities.