trade and expanding business are causes which operate not to raise, but to lower prices; for by enlarging the work that money has to do they raise its value, i.e. provided that other things remain the same. Another more obvious deduction is that a large addition to the stock of money does not necessarily raise prices, since money is only effective when brought into circulation.
The chief topic of dispute in respect to the theory of money-value has been concerned with the question as to the ultimate regulating influence. The value of freely produced commodities is—according to economic theory—determined by “cost of production,” or, where the article is produced at different costs, by the cost of production under the most unfavourable circumstances. As demand varies with price, it follows that an adjustment of value takes place through the interaction of cost and demand, the latter indicating the influence of the utility of the commodity on the quantity required. In applying the theory to the special case of money, the first consideration is the fact that gold and silver, the principal money materials, are the products of mines, and are produced at different costs, so that their values depend on the portions raised at greatest cost. We thus obtain the proposition that has figured in so many textbooks; viz. that “the value of money depends on its cost of production.” The theory of normal value, however, involves certain assumptions, which are significant in this connexion. Competition is conceived as absolutely free; it is assumed that there are accurate data for computing costs, and that the determination of value by cost is effective only “in the long run.” It is recognized, also, that cost operates on value through its power in regulating supply. “The latent influence,” says Mill, “by which the value of things are made to conform in the long run to the cost of production is the variation that would otherwise take place in the supply of the commodity.” From such considerations it follows that the influence of cost on the value of money is not so predominant as a rigid interpretation of the theory of value seems to suggest.
In earlier times it has been a common proceeding on the part of governments to restrict or stimulate both mining for the precious metals and the business of coining. At all times the working of gold and silver mines has been rather a hazardous speculation than a legitimate business. “When any person undertakes to work a new mine in Peru,” says Adam Smith, “he is universally looked upon as a man destined to bankruptcy and ruin, and is upon that account shunned and avoided by everybody. Mining, it seems, is considered there in the same light as here, as a lottery in which the prizes do not compensate the blanks.” The modern capitalistic organization of gold mining has not done much to alter this condition. As regards the adjustment of supply to meet an altered cost of production the difficulties are, if possible, greater. The actual supply of money is so large, when compared with the annual production of the precious metals, that a change in output can operate but slowly on its value. The total stoppage of fresh supplies from the mines would not be sensibly felt for some years; and though increased production is more rapid in its operation, it takes some time to produce a decided effect. Hence the conclusion is reached that “the effects of all changes in the conditions of production of the precious metals are at first, and continue to be for many years, questions of quantity only, with little reference to cost of production.” This is the position which is usually known as that of the “quantity” theory; though very different degrees of doctrine are comprised under the general title. With due qualification and comment it may be taken as the prevalent theory. At all events it is beyond dispute that the cost of production is not for short periods the controlling force which governs the value of money; while even for long periods its influence is very hard to ascertain, in consequence of the speculative nature of the industries of gold and silver mining. Another peculiar feature of the problem of money value arises from the fact that it is only through an actual change in the supply of money that its value can be altered. With other commodities the knowledge that they can be produced at lower cost will bring about a reduction in their value. In the case of money, this does not hold. There must be an adjustment of the amount, or of the efficiency, of the money stock, since, as explained above, it is in a constant state of supply and demand. Its value is established in the very process of carrying on exchanges, and that process is influenced by the available supply. In regard to another form of money the effect of the amount in existence is still more decisive. This is paper money, not immediately redeemable in coin. In this case the idea of cost is manifestly inapplicable; the quantity in circulation is evidently, as proved by abundant experience, the ruling influence on value. In fact, the “quantity ” theory receives its simplest illustration in the case of inconvertible paper. The truth that the theory is but an instance of the action of supply and demand is equally shown by this prominent class of instances. Where metallic coinage is artificially limited the same principle holds good. The value of such currencies plainly depends on the conditions of supply and demand.
The immense growth of credit and its embodiment in instruments that can be used as substitutes for money has led to the promulgation of a view respecting the value of money which may be called the “credit” theory. According to the upholders of this doctrine, the actual amount of metallic money has but a trifling effect on the range of prices, and therefore on the value of money. What is really important is the volume of credit instruments in circulation. It is on their amount that price movements depend. Gold has become only the small change of the wholesale markets, and its quantity is comparatively unimportant as a determinant of prices. The theory has some connexion with the view of “money” as consisting in the loanable capital of the market, taking shape in the cheques that transfer liabilities. Thus the rate of interest comes to form a factor in the creation of “money,” and the mercantile use of the phrase “value of money” receives a justification. Like the pure “cost” theory of money value, the “credit” theory gives too one-sided a view of the facts. In particular, it fails to recognize the ultimate dependence of all kinds of credit on the stock of money in the full sense, i.e. on metallic legal-tender money. The truths adumbrated in the theory are better expressed in the statement of the quantity theory in its developed form, as set forth above. It is necessary to take into account the varying quantities of the precious metals, the modes of use in respect to them; the influence of cost of production, and the way in which credit expedients replace standard money. A complete theory must include all these elements, while not unduly emphasizing any one of them.
At the beginning of statistical inquiry much attention was given to the question: What quantity of money does a country require for the proper working of its industrial system? Petty and Locke were ready to give definite answers; but modern inquirers decline making any quantitative statement, and content themselves with indicating the conditions to be considered. Amongst these are: Population, amount of transactions, the efficiency of money, the development of credit, and the height to which banking organization has attained. Other elements in the problem are the disposition towards hoarding, and the employment of some form of barter in transactions. The contrast between India and the United States in monetary and industrial habits supplies an effective series of illustrations on this matter. The conclusion is obvious that economic progress is accompanied by a more sparing use of money. The most important aspect of the question in modern times is in relation to the division of money between countries. Regarded from this point of view, the quantity of money that a country needs is that which will keep its prices in due level with those of the countries with which it has commercial relations. For, this is the condition of equilibrium; there would otherwise be an excess of either exports or imports, involving a transfer of money to adjust the balance. It may be added that the organization works automatically, since fluctuations in the stock of money are corrected by the action of trade. The best estimates place the gold circulation of the United Kingdom at somewhat under £100,000,000, the token currency at about £15,000,000, and the note circulation as nearly £43,000,000. The French use of metallic money is much larger; probably over £200,000,000, and the note circulation is also over £200,000,000.
3. Early Forms of Currency.—Up to the present we have considered money as being fully established and properly adapted to fulfil its various functions. We have now to trace the steps by which a suitable system of currency was evolved from a state of barter. It is important for a right understanding of the question to grasp the fact that exchanges took place originally between groups, and not between individuals. The slow growth of exchanges is thus explained, as each group produced most of the articles necessary for itself, and such acts of barter as took
