Economics for Helen by Hilaire Belloc

There is a special point in Economics which has been very little dealt with, or rather not properly dealt with at all, and which you will find interesting as a new piece of study, because it will help you to understand history as nothing else will: and that point is the _Social (or Historical) Value of Money_.

You read how, in the past, the King of England, wishing to wage a great war, managed to raise, say, a hundred thousand pounds; and how that was thought a most enormous sum: whereas to-day, for the same sized army, we should need thirty times as much. You read how Henry VIII. suppressed the Monastery at Westminster which had an income of four thousand pounds a year, and how this income was then regarded as something very large indeed -- much as we to-day regard a half million a year or more -- the income of some great shipping company. You read how the National Debt later on actually reached _one_ million, and people trembled lest the State could not bear the burden.

Yet here we are to-day, raising hundreds of millions yearly in taxation, spending thousands of millions in our wars.

What is the explanation of this apparently totally different meaning of money in different times? It puzzles nearly everybody who reads history intelligently, and it wants explanation. Most attempts to explain it have failed, or have been very insufficient; some of them quite vague, as: "The value of money was very different in those days from what it is now. " Or: "Money was then at least ten times as valuable as now" (whereas it is clear from the chronicle that it was _enormously_ more valuable! ) Sentences like that leave the unfortunate reader as much in the dark as he was before. We need a more precise explanation, and that I think can be given.

There are three things which, between them, decide the social value of money at any period, and unless we consider _all_ three we shall go wrong. The reason why most people have gone wrong in trying to solve the problem -- or have abandoned it -- is that they only consider the first of the three. These three things are as follows: --

1. _The actual purchasing power of whatever is used as currency_ -- in our case, for nearly the whole of European history, gold[7]: the amount of wheat and leather and building materials and all the rest of it, which so much weight of gold (say an ounce) will purchase at any time. This varies in different periods according to the amount of gold present in circulation, and its efficiency in circulation. We saw how these were the factors of price, that is, of the purchasing power of money, when we spoke of money earlier in the book.

2. _The number of kinds of things_ which money can be used to buy in any society -- or, to put it in learned words, "the number of categories of purchasable economic values."

3. _The economic scale of the community_, that is, the number of its citizens and the amount of its total wealth at a given time.

When we go into the full meaning of all these three things we shall see how, in combination, they make up the social value of money at any time, and why that value differs so very much between one historical period and another.

1. _The actual purchasing power of the currency._

Given the same currency (and in Western Europe it has, for all practical purposes, been gold for the last two thousand years), we can measure the purchasing value of such and such a weight of gold in any period by what is known as the _Index Number_ of that period.

The Index Number is a thing important to understand, because it comes into a great deal of modern discussion as well as historical discussion; for instance: wages are nowadays largely based upon an Index Number.

A particular year is taken, say the year 1900, and the records of what various commodities were fetching in gold in the market during that year are examined. Thus it is found that an ounce of gold in that year would buy (let us say) four hundred pounds weight of wheat, 600 pounds weight of barley, 80 pounds weight of bacon, 80 gallons of beer, a quarter of a ton of pig iron, and so on. A list is drawn up of all the principal commodities which are used in the community. Suppose that 100 such commodities are taken and between them make up by far the great part -- say seven-eighths -- of all the values commonly consumed in that community. The next thing to do is what is called to "weight" each commodity, for it is evident that a commodity which is very largely bought -- such as bread -- must count more in estimating the purchasing power of money than a commodity of which very much less is used -- such as tin.

According to the value of each commodity used in any one period of time (say a year) the various commodities are "weighted. " Thus you count bread (let us say) as twelve times more important than lead, because the value of the bread used in the community for one year is twelve times as much as the value of the lead used in the community during that year. Then let us suppose that the value of the leather used is three times that of the lead, the value of the iron five times, etc. You put against each commodity these "weight" numbers.

Next you find out what an ounce of gold would purchase of each of those commodities in that particular year. For instance: you find it would purchase a quarter of a ton of lead, 400 pounds weight of bread, and so on, only you multiply by your weight number the use of gold in each particular article. For instance: you count the gold used in buying bread as twelve times more important than the gold used in buying lead.

You then add up all the prices measured in an ounce of gold in your column; you divide by the number of items in your column, each multiplied by its weight number, and the result is that your ounce of gold for the year 1900 will be found to have a certain _average purchasing power_ which you call, for the sake of further application, arbitrarily, "100."