culation for the redemption of its notes. The new reserve bank notes are issued and redeemed under the same terms and conditions as national bank notes, except that the amount to be issued is limited only to the face value of the bonds deposited. The Federal reserve notes which are obligations of the Government are redeemable in gold on demand at the Treasury or in gold or lawful money at any of the Federal reserve banks. They are secured by reserves in gold of not less than 40 per cent of the notes in circulation and collateral security consisting of notes and bills accepted for rediscount or purchased in an amount equal to the notes in actual circulation. Furthermore, each reserve bank to which these notes are issued must keep in the Treasury a 5 per cent gold deposit to redeem them, though this deposit may be counted as part of the 40 per cent reserve required. In the several ways here outlined, all kinds of money in the United States are kept at a parity with the standard, gold. Despite the defects in our monetary system, there is no longer serious doubt as to the ability of the Government to maintain the gold standard. Some writers regard the greenbacks as a possible menace to the Treasury gold reserve and urge their gradual retirement by the application of surplus revenues of the Government or by a bond issue. The idle hoard of silver dollars in the Treasury is not in itself dangerous, but it involves an unnecessary waste of capital. The silver dollar is credit money in all essential respects like the greenback, its value being due not to the silver it contains, but to the Government's pledge to keep it equal to gold. Silver dollars and silver certificates are indirectly redeemable in gold. One serious objection to this large volume of government credit money, which together with bank notes serves as hand-to-hand money, is that it keeps out of circulation an equal amount of gold. If this credit money were retired, and gold certificates were authorized in the small denominations needed, a corresponding amount of gold in the form of gold certificates would come into circulation. Such an addition to the volume of gold actually used in the circulating medium would greatly strengthen our currency and credit system. The practice of the Federal Reserve Board of permitting Federal Reserve Agents to issue Federal Reserve notes against the deposit of gold, a practice which was legalized by the amendments of June, 1917, has accomplished this in part. In the natural course of events, however, our monetary situation tends to become more secure. While the amount of government credit money remains fixed, gold is steadily being added to the monetary stock, thus increasing the proportion of gold and diminishing the proportion of credit money. Furthermore, as the population grows, the existing supply of credit money becomes more widely diffused among the people, and a smaller proportion is held by the banks, thus lessening the probability of presentation for redemption in gold. READING REFERENCES Fisher: Purchasing Power of Money, Ch. VII. Moulton: Principles of Money and Banking, Pt. I, Ch. Seager: Principles of Economics, Ch. XIX. United States Treasury Department, Information Respecting United States Bonds, Paper Currency and Coin, etc. CHAPTER VI VALUE OF MONEY AND PRICES 42. Value and price.-Before entering upon the discussion of the important question of the value of money and its relation to prices and profits, it will be helpful to get clearly before us the precise meaning of the terms, "value" and "price." In economics value means exchange power or purchasing power, the exchange relation of a commodity to other commodities. Price is value expressed in terms of money. The value of a bushel of wheat can be determined only by comparing it with other commodities for which it may be exchanged. To make this comparison as simple and easy as possible, it is necessary to have some convenient unit of value. In the United States the unit of value is the dollar composed of 23.22 grains of pure gold, and prices are expressed or registered in terms of dollars and cents. Now, since price is value expressed in terms of money and value is simply exchange power, the exchange relation of one commodity to another, money itself cannot have any price; a thing cannot be exchanged for itself. Under our coinage laws an ounce of pure gold is worth or is coined into $20.67, and this is sometimes referred to as the price of money (gold).1 More properly, this is the 1 Our gold coins are only nine-tenths fine and so their gold content is worth $18.60 per ounce. The "price" of gold is always $18.60 because the Government fixes its price by fixing the weight of the dollar. As an ounce of gold contains 480 grains and a dollar contains by government decree 25.8 grains of gold, an ounce of gold is 18.6 times as heavy as a dollar. Thus gold is always worth $18.60. mint price of an ounce of gold bullion. When the gold is made into coins it becomes money and has no price. Reference is constantly made in the financial papers to the "price" of money in the loan markets of the world. In this connection price is a loose and convenient term to express the rate of interest on bank loans, the right to draw upon deposits. But though money has no price it has, like other things, value. By the value of money we mean its purchasing power and this can be determined only by reference to the general level of prices. If the price of wheat rises from 50 cents to a dollar, it may be due either to a change in the relation of the supply of wheat and the demand for it, or to a change in the value of money. If the prices of all commodities except wheat remain stable, the change is traceable to causes affecting wheat alone, but if all prices have tended to advance, clearly the value of money has decreased. A general rise or fall in prices indicates a change in the value or purchasing power of money. rises as the general level of prices falls, and falls as general prices rise. "The value of money is inverse to the level of prices." 43. What determines value.-The value of money is determined, like that of other commodities, by the principle of demand and supply. In the case of money, however, the conditions affecting supply and demand are somewhat complex and call for some detailed analysis. Demand may be defined as need or desire coupled with ability to pay for the thing desired. The demand for money is measured by the amount of commodities or services which will be given in exchange for it. Now the demand for money is limited, more so than the demand for other commodities. Iron or wheat may be put to many different uses, but money is used primarily for exchange purposes. Men seek to acquire money in order that they may exchange it for other commodities. It has aptly been said that money has no use except to be spent. The demand for gold arises from two principal uses to 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 |