Yet another, and perhaps simpler, approach to the same conclusion is by pointing out that an individual, deciding to buy, must take account of the prices of other things in his budget--that individual demand-schedules would be different if market prices of other things--which depend on the value of money--were different.
The doctrine that supply and demand (and cost of production, the capitalization theory, and other elements in the current price-analysis) presuppose a fixed value of money, must be sharply distinguished from the doctrine of Professor Fisher (_Purchasing Power of Money_, ch. 8), and others, that a fixed _general price level_ is assumed by supply and demand, etc. I should deny that a fixed general price level is assumed. The point rests in the distinction between value as _absolute_ and value as _relative_. For my theory, it is perfectly possible for the general price level to rise, with the value of money constant, because of a rise in the values of _goods_. In a later chapter, on "The Passiveness of Prices," I shall examine the doctrine of Professor Fisher more closely, and set these two views in clearer contrast. For the present, it is enough to point out one vital difference between a rise in prices due to a fall in the value of money and a rise in prices due to a rise in the values of goods, with the absolute value of money unchanged: in the latter case, there is an increase in the psychological stimulus to industry, an increase in economic power in motivation, which energizes and increases production. In the latter case, especially when the fall in the value of money is rapid, and the rise in prices is clearly due to that cause (as in the case of Confederate paper, or the French _Assignats_), we find a reverse effect on industry. Intermediate cases, where money is falling in value, but where goods are also rising, give us intermediate results.
In what follows, I shall from time to time refer to this distinction. In my own exposition, I shall always use "value of money" in the absolute sense, as distinguished from the mere "reciprocal of the price level,"--a practice which I have sought to justify in the chapter on "Value," and in other places there referred to.[47]