Page:Encyclopædia Britannica, Ninth Edition, v. 16.djvu/749

Rh . In mercantile phraseology the value of money means the interest charged for the use of loanable capital. Thus, when the market rate of interest is high money is said to be dear, when it is low money is regarded as cheap. Whatever may be the force of the reasons in favour of this use, it is only mentioned here for the purpose of excluding it. For our present subject, &ldquo;the value of a thing is what it will exchange for; the value of money is what money will exchange for, or its purchasing power. If prices are low, money will buy much of other things, and is of high value; if prices are high, it will buy little of other things, and is of low value. The value of money is inversely as general prices, falling as they rise and rising as they fall.&rdquo; Now in the general theory of value it appears that the proximate condition which determines it is the equation between supply and demand; and this is clearly the case with reference to money. These terms, supply and demand, need, however, some elucidation. Let us consider what is meant by the supply of, and demand for, money. The supply of a commodity means the quantity of it which is offered for sale. But in what shape does the sale of money take place? By being offered for goods. &ldquo;The supply of money, then, is the quantity of it which people are wanting to lay out;&rdquo; or, to put the point more concisely, it is &ldquo;all the money in circulation at the time.&rdquo; Again, to take the case of demand,—the demand for a commodity is the purchasing power offered for it. Demand in the special case of money consists of all the goods offered for sale. There is, however, a peculiar feature in the case of money which arises from its position as the medium of exchange, viz., that money is, so to say, in a &ldquo;constant state of supply and demand,&rdquo; since its principal service is to act as the means of purchasing commodities. From this it follows that the factors which determine the value of money within a given time are: (1)the amount of money in circulation, and (2)the amount of goods to be sold. On closer examination it will, however, appear that there are other elements to be taken into account. In the first place, the quantity of money is not by itself the sole element on the supply side. In some instances a coin will not circulate more than two or three times in a year, while another coin may make hundreds of purchases. In determining the value of money these varying rates of circulation have to be considered, and by taking an average we may establish the existence of a fresh element to be estimated, namely, the average rapidity with which money does its work, or, to use Mill's expression, &ldquo;the efficiency of money.&rdquo; On the side of demand, again, it is not the quantity of commodities that is the determining element, but the amount of sales, and the same article may, and generally does, pass through several hands before it reaches the consumer. From this it follows that (if the consideration of credit in its various forms be omitted) the value of money is inversely as its quantity multiplied by its efficiency, the amount of transactions being assumed to be constant. This formula requires, however, some further explanations before it can be accepted as a full expression of the truth on the subject. It must be noticed that it is not commodities only that are exchanged for money. Services of all kinds constitute a large portion of the demand, while the payment of interest on the various forms of obligation requires a large amount of the circulating medium. The potent influence of credit also must be dwelt on. This latter force is the main element to be considered in dealing with variations of prices; but so far as it is based on a deposit of metallic money it may be looked on as a means of increasing the efficiency of money, and therefore as coming within the formula given above. In its other aspects it lies outside the range of this article. Some interesting conclusions may be deduced from the results we have arrived at. One of these is that the &ldquo;increased development of trade,&rdquo; or &ldquo;expansion of commerce,&rdquo; of itself tends to lower not to raise prices; for, by increasing the work which money has to do while the amount remains the same, it raises its value. Another consequence is that a large addition may be made to the money in a country without any effect being produced on prices. This is evident, since money only acts on prices by being brought into circulation; therefore, if the money which is added to the national stock is not used in this way, prices will remain unaffected. We have now sufficiently considered the proximate conditions which determine the value of money; the next step is to inquire: What is the ultimate regulator of its value? The value of freely-produced commodities is—according to the ordinary theory of economists—determined by their &ldquo;cost of production,&rdquo; or, where the article is produced at different costs, by the cost of production of the most costly portion. We have now to consider how far this theory applies to the special case of money. Gold and silver, the principal materials of money, are the products of mines, and are produced at different costs; therefore the cost of the part produced at greatest cost ought to determine their value. This theory is, however, true only under certain conditions—namely, that competition is perfectly free, and that there are accurate data for computing the cost of production, and even then it is true only &ldquo;in the long run.&rdquo; Moreover, cost only operates on value by affecting supply. &ldquo;The latent influence,&rdquo; says Mill, &ldquo;by which the values 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.&rdquo; From these considerations it follows that cost of production does not so influentially affect the value of money as some writers have supposed. In former periods it was a common proceeding on the part of the state to either restrict or stimulate coinage and mining for the precious metals. At all times the working of gold and silver mines has been rather a hazardous speculation than a legitimate business. &ldquo;When any person undertakes to work a new mine in Peru,&rdquo; says Adam Smith, &ldquo;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;&rdquo; and all subsequent experience confirms this view. With regard to the adjustment of supply to meet an altered cost of production, the difficulties are, if possible, still greater. The supply of money is so large compared with the annual production, that any change can operate but slowly on its value. The total stoppage of fresh supplies from the mines would not be felt for some years in the increased value; and an increased amount of production, though more rapid in its operation, takes some time to produce an effect. &ldquo;Hence 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.&rdquo; On these grounds it is apparent that cost of production is not, for short periods, the controlling force which governs the value of money, and even for long 