Relation of Commodity Prices to the Price Level

Abstract

processes enshroud our efforts of today in a maze of uncertainty with regard to the morrow. We seek to exchange the greater part of our productive application for the things which others, through creative endeavor or other means of acquisition, are able and willing to offer us. In order to keep commodities moving along the channels of exchange we have developed a highly organized and specialized credit system from whose fountain head pours forth the means whereby our exchanges of goods and services are effected. In the development of this system we have attempted to keep pace with the agencies of invention and industrial technique, with the result that its sensitive threads transmit stimuli to the bases of all forms of economic activity. The price system comprises all the elements in our economic experience identified with and related to prices of commodities, services, capital, credit, land, etc. All these are knitted together into a closely integrated arrangement. Forces concentrating their energies along any of the strands in this intricate system tend to be carried along to different points, sometimes creating new sets of forces, always giving rise to long-continued oscillations. Only when these various forces have dissipated their respective energies is there an approach to a condition of stability. The delicacy of the price mechanism at once suggests a need for elements of control which shall be applied by those who have a full understanding of its many parts and of their relation to each other. It is essential that the separate parts be isolated and that their relation to the whole system be carefully appraised. The relationship between individual prices and the general price level, represents a distinction which must be clearly understood by every one who would aim at a comprehension of the influence which commodity prices bring to bear upon the general level of prices. In mathematical expression the price level appears as a relative, as a measure of the purchasing power of the monetary unit, in terms of which price quotations are stated. The price level is a dynamic composite determined by cumulative forces of the past and indicative of future trend. It is measured by an index number which represents the present point of a continuous trend.