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 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.”

Then you take another year, say 1920, and you find what the ounce of gold would purchase in the same conditions, similarly weighted, in the year 1920. You discover that the ounce of gold on the average in 1920 would only purchase half the weight of stuff it purchased in 1900. In other words, prices have doubled, or, what is the same thing, gold has halved in value. You put down for the year 1920 the figure “200,” which means that average prices are twice as great as they were in 1900, and the economist’s way of saying this is: “With the year 1900 as a base, the Index Number for 1920 is 200.”

In the year 1921 he makes the calculation again, and finds that prices have fallen, that is, gold has become rather more valuable as compared with other things, and prices are only three-quarters more than they were in 1900. The economist writes down: “The Index Number for 1921 is 175, with the prices of 1900 as a base.” He goes back to 1880 and finds that in 1880, after making a similar calculation, an ounce of gold would on the average buy five pounds of material where in 1900 it could only buy four. In other words, prices are lower in 1880 by one-fourth. So he writes down: “The Index Number for 1880, with 1900 as a base, is 75.”

These Index Numbers taken for each year with a particular year as a base, or year of reference, show the fluctuations in the purchasing value of gold.

To make the process clearer, we will take a simple instance and imagine a community in which there were only three things purchased on a large scale by the citizens—wheat, bacon, and iron. We take for our year of reference, let us say, the year 1880, and we find that an ounce of gold would purchase one ton of wheat, half a ton of iron, and a quarter of a ton of bacon. But the amount spent on wheat was ten times the amount spent on bacon and twenty times the amount spent on iron.

You add up the twenty tons of wheat, the half ton of iron and the half ton of bacon—half a ton of the latter because twice as much is spent on it as is spent on iron, and therefore though it is half the price of iron you must double the amount, because twice as much is bought.

You get 21 tons. To buy this 21 tons of stuff 3 ounces of gold were needed. You divide the 21 tons by 3, and you get 7 tons of material on the average.

Next, as you are taking this particular year for a “base” (or year of reference) you call the 7 “100,” so that you may compare in percentages the rise or fall of prices in other years. You then do exactly the same thing with these three staple commodities in another year—say 1890—and you find that your ounce of gold purchases no longer 7 tons of stuff, but 14 tons of stuff. Taking the year 1800 as your base number, you will see that the Index Number for 1890 is “50.”

Then you do the same thing for the year 1920, and you find that with the same ounce of gold you can only purchase 3½ tons of stuff. 7 is to 3½ as 100 is to 200, so the Index Number for 1920 will be 200 as compared with the base year—or year of reference—which is 1880.

You cannot use the Index Numbers without knowing what your base year is and what average prices were in that base year, but, having settled that, your Index Number is nothing more than a statement of average prices, or again, the average purchasing power of a fixed weight of gold in the various epochs you examine.

In reality the calculating of an Index Number involves a great many more difficult points than these, and of course the number of commodities taken is very much more than three; but that is the method in its general outline, and if you go over it carefully I think you will not find it difficult to understand.8

The first thing, then, in finding out the social value of money at any historical period is to find out the purchasing value of a given weight of gold—say, one ounce. Supposing we are comparing the time when Henry VIII. dissolved the monasteries and took their wealth (1536–9) with our own time, before the War, when our currency was still normal and in gold, you will find that with 100 as your base for prices in 1536–9 the Index Number of 1913 is, according to different calculations, somewhere between 2,000 and 2,400. I have gone into it myself very carefully, and I make it out to be at least 2,400 (though historians some time ago, who had not gone into it very fully, used to make it lower); that is, where one ounce of gold would purchase the things which Englishmen regarded as their staple commodities in 1536, 24 ounces of gold would be necessary to-day.

That is the first thing you have to consider when you are comparing the social value of money at that time with the social value of money in our own time. You multiply right away by 24. You hear, for instance, that a man had £100 a year paid him by the King for looking after the garrison at Dover. You translate it into modern money, and say that he had £2,400 a year paid him in our money.

Most people stop there, and that is why they get their answer to the problem all wrong. In reality the social value of money then was very much more than 24 times what it is now, and £100 a year under Henry VIII. meant a great deal more than what £2,400 means now.

In order to see how true this is we have to consider the next two points which I mentioned.

2. The number of purchasable categories.

Suppose you put a man into a little primitive place like Andorra (which is a tiny independent state shut off from the world in a valley of the Pyrenees), and he is paid there £1,000 a year. He cannot live in a house with more than a small rental, because there are no big houses to be had. Everybody lives in simple, little houses. He cannot spend his money on many things. There are no roads, no use for a motor car; no railways, so he cannot spend money on railway fares; no theatres or cinematographs—none of the hundred things which we have here on every side. He can buy bread and meat, and wine and clothing, and very little else—for there is nothing else to be bought. In other words, the number of sets of things (that is what the word “categories” means—“sets of things”) on which he can spend money is a great deal less than what it would be in London. A man with £1,000 a year in London and a family to keep is, of course, very much better off than a labouring man, but still he is not rich, as rich people use the term. He will live in a house for which he must pay perhaps £200 a year, counting rent and taxes. Then he will—he usually must—travel, and that will cost him perhaps £50 a year. Then his friends will expect to meet him and he must have them at his house, and he will have to spend a good deal in postage and telegraphing—and so on. The man in Andorra with £1,000 a year simply would not know what to do with it. He would be so “well off” that he would have a very large surplus—more than half—to give away, or to help other people with, or to save and invest. But exactly the same sort of man, with the same ideas and bringing-up and necessities, put down in London would certainly not be able to save a penny of his £1,000 a year.

So we see that the social value of £1,000 a year in Andorra is very different from the social value of the same sum in London. Some people might be inclined to laugh at this difference, and to say: “Oh, yes! but the man in London could, if he liked, save, simply by not spending on those various categories, as you call them.” Yes; he as an individual might choose to live an odd life of his own and not do what other people do. But Society as a whole—that is, all the community round him—in London is, as a fact, spending upon those various, very numerous, categories, while in Andorra he does not, for he cannot, spend upon them; they are not there to be purchased. Therefore it is true that the social value of the same sum, with the same index number, is on the average very much higher in Andorra than in London.

You cannot give this difference precisely in figures as you can an index number, because nobody can precisely calculate the number of categories nor the respective importance of each, but the least knowledge of history shows you that in Henry VIII.’s time, in 1536, the number of categories was very much smaller than it is to-day. So the man to whom Henry VIII. paid £100 a year as salary for looking after one of his castles, though the purchasing value of his income—the amount of rye or pork or what not that he could buy with it—was what we should call to-day £2,400 a year, had a much higher income relatively to the people of the time than has a man with £2,400 a year to-day. He counted much more than a man to-day counts who has five thousand a year.

But this second point is not all. There is again a third point, as we have seen, and we must next turn to that.

3. The purchasing value of the whole community.

The third factor in the making up of the social value of money is the relation of any sum to the total wealth of the whole community. That of course depends upon two things: the average of wealth of each family in the community, and the number of those families.

Supposing, for instance, with things at their present prices, you consider two communities: (1) the people of Iceland, (2) the people of Australia. In both countries you can get pretty much the same amount of stuff for an ounce of gold, and though there are less categories of purchasable things in Iceland than in Australia, yet most of the things a civilised man requires can be got in Iceland—at least in the capital, or can be imported there by the inhabitants if they need them or can afford to pay for them. Both communities are of our own race and of much the same standard of culture and the same idea of how one should live. But Iceland has only four thousand families, and these families are poor for the most part. Australia has a million families, that is, 250 times as many, and they are much richer than the families in Iceland on the average. There are much worse differences of rich and poor in Australia than there are in Iceland. There are far more miserable and starving people in Australia than there are in Iceland; but the average wealth of a family in Australia is much higher than that in Iceland.

Now suppose that the Government of Iceland were to want to build a new harbour for the capital, which is on the sea, and in order to get the money were either to confiscate the wealth of certain rich people or to tax all the people—supposing it wanted, for instance, £400,000 in order to complete the work. And supposing the people of Australia similarly wanted to build a harbour and also wanted £400,000 to be got in the same way. The index number is the same in both places. An ounce of gold will roughly purchase the same amount of things in both places, for the index number at any moment is much the same all over the white world, measured in gold, and we may imagine the categories of purchasable things to be much the same in both places. Yet the social value of the £400,000 is quite different in Iceland from what it is in Australia. In Iceland it means taking an average of £100 from each of the poor families—if you get it by taxation—or the confiscation of all the wealth of the very few rich men there may be. But in Australia it means no more than the taking of about 8s. from each family, and that from an average family income much higher than the average family income in Iceland. Under this heading the social value of £400,000 in Iceland is enormous and in Australia is small. If Iceland tried to build such a harbour it could hardly do so. The economic effort would be very great, and if it succeeded it would fill a big place in the history of the island. In Australian history it would pass almost unnoticed.

Now let us add the influence of all these three points together, and we shall see that there is a vast difference between the social value of money in the time of Henry VIII., when the monasteries were dissolved, and the social value of the same amount of money to-day. We shall see, for instance, why the King, taking away the annual revenues of the Monastery of Westminster and keeping them for himself, made such a prodigious splash, although the actual amount in pounds, or weight of gold, in which the income of Westminster Abbey could then be measured was only £4,000 a year. In the first place, you must multiply by 24, so that the actual income or annual purchasing value in wheat, beef, rye, pork, beer, which was confiscated, was nearly £100,000 in our money. Then you must remember that it took place in a community where there was a very much smaller number of purchasable categories; that is, where people had a very much small number of “sets of things” upon which to spend money.

And, lastly, you must remember that it took place in an England the population of which was hardly more than a sixth—some people would say it was hardly more than a tenth—of to-day’s, and that population actually a great deal poorer on the average than the present population of England. It is true that there was not then the great herd of starving or half-starving people which we have to-day in England, and that labouring people were then much better off than they are now; but, on the other hand, there was nothing like the same number of very rich people, and therefore the average family income was much smaller. Put all that together, and it is clear what a tremendous business the confiscation of this one Abbey meant. It was somewhat as though the Government to-day were to confiscate one of the smaller railway companies, or to take away the rentals now paid by a northern manufacturing town to the great landlords owning the soil, and put the money into its own pocket.

From this example of the confiscation of the Abbey of Westminster you can argue to all the other expenditure of the time—expenditure on armies and navies, and so on—and in this way you can see how, why and in what degree the social value of money differs between one period and another.

It is most important to get this point in Economics clear in your mind if you are reading history, because it helps to explain all manner of things which otherwise puzzle one in the past.