Reflect Relative Quantities

Money prices adjust to reflect the quantities of goods in demand.

Changes in money prices reflect changes in relative quantities of economic goods.

• Rising prices indicate relative shortages
• Falling prices indicate relative surpluses.

Fixed Numerator Required

The quantity of money need not increase at all.

To convey the most reliable information in the market, money prices require a fixed numerator—the quantity of money. This applies to loan “prices” as well as any other transactions.

No reasons exist for increasing the quantity of money in an economic system. First, greater quantities of money add nothing to the economic welfare of the actors in the market. Second, changing the quantity of money distorts the role that money plays in the market pricing mechanism. A fixed quantity of money more accurately reflects the changes in relative quantities of the other economic goods in the market.

Changing the quantity of money in an economy would, in some ways, be analogous to changing the length of the yardstick when measuring distances at different points in time. You would not be able to compare one distance with another—in either time or space.