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which it is put-its use in industry and the arts, the "arts demand," and its use as a medium of exchange, the monetary demand." It is generally believed that between onefourth and one-third of the world's annual production of gold goes into the arts. This industrial demand comes from many sources, from manufacturers of jewelry, watches, plate, ornaments, and the like; from dentists and surgeons; and from users of gold leaf in bookbinding and decoration. Our mints and assay offices refine practically all the gold metal produced in or brought to this country, allowing the depositors of the metal to take the proceeds either in money or in gold bars for industrial use.

The monetary demand includes not only the demand for money as a medium of exchange, but also as a reserve basis for credit, and as a store of value for future exchanges. Let us consider these in inverse order. The amount of money required by individuals and merchants for pocket and till money depends upon the habits of the people, density of population, volume of retail transactions and many other considerations. The pay rolls of manufacturing concerns and corporations call for the use of considerable sums of money, and a very large volume of retail and small store business is done on a "cash" basis. This demand for hand-to-hand money is reduced, however, by the increasing use of the check even in retail transactions. In normal times people keep on hand or stored away only as much money as they expect to use in the near future. When panic comes many people try to convert other forms of property, including bank deposits, into money because this is the one commodity which can always be exchanged.

The monetary demand is affected also by the requirements of governments which must maintain reserves of gold to redeem token and credit money, and by the needs of banks which must always be ready to meet their note and deposit obligations in money. The large stores of money in banks are not really hoarded or idle; they supply the foundations of credit which does several times as much work as the money itself would if in actual circula

tion. In the last few decades many countries have adopted the gold standard, which has necessitated the creation of gold reserves sufficient to insure the convertibility of other forms of money in circulation. In the United States, for example, over $346,000,000 of greenbacks are supported by a gold reserve of $150,000,000 held in the Treasury. It is estimated that more than one-third of the entire stock of gold is required to satisfy the reserve demand. Changes in seasonal requirements and fluctuations in international trade affect the reserves and so influence the demand for and the value of money.

In a general way it may be said that the demand. for money as a medium of exchange depends upon the volume of exchanges to be affected by it, though it must constantly be borne in mind that credit is the great exchange medium.1 The volume of exchanges is subject to many influences and fluctuations. Generally speaking an increase in population increases the volume of business. But the per capita test is a poor criterion of the real demand for money; business may be bad with a larger population and brisk with a smaller one. Again, it may be said that the demand for money increases with increase in the volume of goods produced and actually exchanged, though this may be offset by an expansion of credit and by an increase in the supply. Improved business organization and consolidations which dispense with middlemen and lessen the number of exchanges between producer and final consumer tend to lessen the need for money, while increasing division of labor which makes a larger number of people dependent upon others for their supplies tends to increase the need for a medium of exchange.

Another important influence affecting the volume of exchanges and the demand for money is the so-called "rapidity of circulation," that is, the number of times money is exchanged for goods in a year or any given period. Assuming for the moment that the volume of business and the price level remain the same, an increase in the rapidity 1 But see Laughlin: Principles of Money, p. 325.

of circulation of money will lessen the quantity of money required to effect the business exchanges, while a slower rate or velocity of circulation will increase the quantity of money needed. If the velocity of circulation be doubled and the volume of exchanges remain unchanged, prices will be doubled. But of course the volume of exchanges does not remain unchanged. Trade, also, has its rapidity of circulation or rate of turn-over, depending upon general business conditions, the habits of the people, legislation, and many other factors. If, therefore, the number of business exchanges be doubled while money remains unchanged, prices will fall by one-half.

44. Supply of money.-Conditions which govern the supply of money are less complex than those affecting the demand. In the first place we must distinguish between the supply of money and the supply of the precious metals. As already noted, a considerable proportion of the world's production of gold and silver is used for non-monetary purposes. The industrial consumption varies not only with changes in the value of gold, that is, in the general price level, but also with changes in people's habits and tastes. The absorption of gold by the arts is in general lost to the monetary supply. Another important drain upon the world's supply of specie that otherwise would be available as money is the steady flow of gold and silver to Oriental countries, notably India, where vast amounts have been absorbed by hoarding and for ornaments.

It is sometimes said that the value of gold depends upon its cost of production at the poorest mine, or, as the economists express it, upon the marginal cost of production. But, as Professor Taussig and other writers have pointed out, there seems to be but little correspondence between the cost of gold and its value.1 This is due to the durability and comparative steadiness of the total stock of gold and to the irregularity in the discovery of new supplies. It is estimated that the world's total stock of gold in 1850 was between $2,000,000,000 and $3,000,000,000 and that 1 Taussig: Principles of Economics, Vol. I, Ch. 19.

the present stock is over $14,000,000,000. In the decade 1841 to 1850 the annual production averaged $36,000,000, which was three times the average annual production for the preceding half of the century. In the decade 1851 to 1860 the annual average rose to $133,000,000. Since then the annual production has increased steadily but with great periodic fluctuations, as, for example, with the discovery of gold in South Africa.

It should be remembered that gold, unlike other commodities such as iron or wheat which when once prepared for use or consumption are withdrawn from the market, remains indefinitely as a part of the monetary supply. The annual additions of new gold, therefore, affect but slightly the world's total stock of money and its value is but slowly affected. But in time, changes in the rate of annual increase make themselves felt. A lower cost of producing money in so far as it increases the quantity of money tends to raise the general level of prices.

The supply of money should be distinguished from the supply of money utility or value. The usefulness of money, that is, its power of serving, increases as its value increases. This characteristic is peculiar to money. Wheat gets its value from its food utility and this would not be changed in the least if the value of wheat were doubled. A bushel of wheat when worth a dollar will feed no more people than when worth fifty cents. But the more money is worth the more commodities it will exchange. As Professor Johnson says, "The desired amount of money utility will always be in existence, for it is created by the need for it. If the supply of money is $1,000,000, the need for value in a form immediately exchangeable will give to that million dollars a purchasing power sufficient to render it capable of transacting all the business of the community. As the population increases, the community may be obliged to send out to get more flour or wheat, but it will be under no such necessity of increasing its supply of money, for the value of the existing supply will increase as the demand increases; in other words, the purchasing

power of each money unit will increase and the prices of goods fall."1

2

45. The quantity theory of money. As stated by the early economists, the quantity theory of money holds that the value of money depends on its quantity, and that, other things being equal, prices vary directly with the amount of money in circulation. This bald statement of the theory, however, disregards certain fundamental considerations. In the first place, the value of money, as of other things, depends neither upon supply alone nor upon demand alone, but upon the balancing of supply and demand. As we have seen, the level of prices may be influenced on the one hand by changes in the rapidity of circulation as well as in the quantity of money, and on the other hand by changes in the volume and velocity of exchanges. This theory also disregards credit operations and the use of money as a reserve and as a store of value. The statement, therefore, that the value of money varies with its quantity, holds good only under the simplest conditions.

A more nearly exact and acceptable conception of the quantity theory is that the value of money or the general level of prices depends on the total purchasing power expressed in terms of money. As expressed by Professor Irving Fisher, the purchasing power of money, that is, the general level of prices, depends on five factors the quantity of money in circulation its velocity of circulation, the quantity of deposits subject to check its velocity, and the volume of trade. These groups of causes and their effects, prices, he connects by an "equation of exchange, a statement in mathematical form of the total transactions effected in a given community in a certain period, and he shows that "prices must as a whole vary proportionally with the quantity of money and with its velocity of circulation, and inversely with the quantity of goods exchanged."3 The

1 Johnson: Money and Currency, p. 28.

2 For a criticism of this theory, see Laughlin: Principles of Money, Chs. VII-IX; and Scott: Money and Banking, Ch. IV.

* Fisher: Purchasing Power of Money, p. 18.