a certain percentage of the bullion brought to the mint for coinage. It is generally understood to-day to mean the charge made by the government to defray the actual cost of coinage. When the government bought silver at the market price (50 cents or 60 cents) and coined it into silver dollars, the profit accruing to the government was also called seigniorage.

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"Right," "Heavy," "Light," Money. When the coins that issue from the mint have the exact weight and fineness required by law, i.e. 25.8 standard grains (23.22 fine) for the gold dollar, and 412.5 standard grains (371.25 fine) for the silver dollar, such coins are said to be "right." When they have more grains than required, which happens generally through the inadvertence of the assayer, the coins are said to be "heavy." When, through the same inadvertence or through abrasion, they have not the requisite number of grains, they are said to be "light."

QUESTIONS

1. Explain barter. Does it exist to-day? What various objects were used as money among different nations? How did our present stamped coins come into use?

2. Why were gold and silver chosen as money?

3. When is money legal tender? What is "lawful money" in the United States? What are the different kinds of money? Give examples. 4. What are the defects of paper money? If a government were to issue a billion dollars' worth of paper money, would the wealth of the country be increased?

5. What are the signs of an over-issue of paper money?

6. Mention the kinds of money in use in the United States.

7. What are the functions of money? What is coinage? What is seigniorage?

CHAPTER VI

MONEY AND PRICES. GRESHAM'S LAW

I. MONEY AND PRICES

Relation between Money and Prices. Prices are measured in money. Prices express a relation between the value of commodities and money used as a unit of measure. Prices tell us how much of a commodity will exchange for a given amount of money.

Prices tell us conversely how much money will exchange for a given amount of the commodity. In every sale or purchase that is made, money buys commodities, but it is just as true to say that commodities buy money. The purchaser of a commodity is the seller of money; the seller of a commodity is the buyer of money.

The price of a commodity will vary not only through a change in the value of the commodity, but also through a change in the unit of measurement. Thus, if a measuring unit is twelve inches long, any object measured by it will have a certain length expressed in terms of the measuring unit. The expressed length of the object will vary not only by increase and decrease of the object, but also by increase and decrease of the measuring unit. If the rule that serves as the measuring unit is only ten inches long, objects measured by it will contain a greater number of units of measurement than would be the case if the measuring unit were twelve inches long. Objects, though they do not really change, appear to be longer or shorter when reckoned in terms of the different measuring units.

It is the same with regard to commodities. The prices of commodities will depend on the status of the measuring unit,

money, and when we say that commodities have risen or fallen in price, it may be that it is the unit, money, which has changed. Variations in Money. Money may vary in two ways. It may increase or lessen in quantity, and it may increase or lessen in value.

That it may increase or lessen in quantity is evident, for gold and silver, the basis of all money, may be produced in greater or less abundance by the mines; may enter or leave a country through importation or exportation; may be used in greater or less measure by the industrial trades that deal in gold and silver in various forms. Thus, in 1891, the production of gold in the world amounted to $130,650,000; of silver, to $177,352,300. In 1901, the production of gold in the world amounted to $260,992,900; of silver, to $223,691,300. (Stat. Abstr. U. S., 1912.)

Money will increase or lessen in value, because the metals which constitute money have a commercial as well as a monetary property, and will depend for their value on the available supply of the metals, and the demand there is for them, as do all other commercial objects. Being commodities no less than steel, iron, copper, lead, they are liable to fluctuate in value just as any of these others.

Laws of Prices.

Hence, the following laws affecting money and prices are formulated (Gide, Principles of Political Economy, 1905 edit., p. 224):

1. Every fluctuation in the value of money causes a proportionate inverse fluctuation in prices. This means that whenever money increases in value, it acquires a greater purchasing power; it can command more commodities than before, and consequently commodities will diminish in price. Likewise, whenever money decreases in value, it will have less purchasing power; it can command less commodities than before, and consequently commodities will increase in price.

2. Every fluctuation in the quantity of money causes a proportionate change in prices. This means that, should the quantity of money in a country increase, the value of money will

decrease and the former law will operate, so that the prices of commodities will rise. Should the quantity of money in a country decrease, more value will accrue to the money remaining, and the prices of commodities will fall.

This second law is called the "Quantity theory of money." The laws might be reduced to the law of supply and demand, for prices depend on the value of money, and the value of money will depend on the supply there is of it and the demand for it.

Supply of Money. The supply of money consists of all the actual money of whatever kind employed in carrying on the commercial transactions of the country.

Says Walker (Money, Trade, and Industry, p. 40): “The supply of money consists of the quantity in circulation, multiplied into the average number of times that each piece changes hands in exchange for goods."

And J. S. Mill: "The supply of money is the quantity of it which people are wanting to lay out; that is, all the money they have in their possession, except what they are hoarding, or at least keeping by them as a reserve for future contingencies. The supply of money, in short, is all the money in circulation. at the time." Whatever be the quantity of money in the country, only that part of it will affect prices, which goes into the market of commodities and is there actually exchanged against goods." (Political Economy, Bk. III, ch. VIII, §§2, 4.)

The amount of money in circulation will depend ultimately on the output of the precious metals, gold and silver, from the mines. Gold and silver are produced like any other product, in order that the producers may make a profit. Just as men will invest their money in producing a commodity that has great value, and their efforts in producing will be determined by the rise or fall of the value of the commodity, so the producers of gold and silver will be influenced in producing it by the rise or fall in the value of the gold and silver.

When the value of gold and silver is high, there will be more profit derived from its production, and consequently its production will increase. Mines that are worked at great expense will

be run as well as those in which the expenses are less. But when the value of money diminishes, whether on account of the increased production or otherwise, then the profits will not be so great, and the most expensive mines will have to shut down. The result will be that the overproduction will cease and an equilibrium will be established.

Demand for Money. The demand for money is a variable quantity, depending on many things. A certain amount of money is needed in a country to carry on its commercial exchanges. There is an immense amount of business done each day before the product, upon leaving the hands of the producer, reaches its natural destination, the consumer, and this business requires a great sum of circulating money.

It is not necessary, however, that the amount of circulating money should equal the sum of commercial transfers which take place. Those engaged in commercial exchanges are the producer, the wholesale dealer, the retail dealer, and the consumer. Money must pass from each of these upon an exchange of goods. The producer receives money from the wholesale dealer in exchange for his product; the wholesale dealer receives money from the retail dealer; the retail dealer from the consumer. But the same piece of money may do service for all these transfers. We might follow the course of one piece of money, for example, a $20 gold piece. The producer of cloth stuff employs laborers who work for him. He pays a certain one of his laborers a $20 gold piece for his wages. This laborer is a consumer; he buys from a retail dealer a suit of clothes, and pays him the $20 gold piece. The retail dealer buys his ready-made clothes from a wholesale dealer, and pays in part payment for the clothes he buys the same $20 gold piece. The wholesale dealer buys his cloth from the producer, and in part payment for the cloth pays the same $20 gold piece. When it comes back to the producer, he may again pay it out to the laborer, and thus the circle is begun again. Again, the producer and the dealers may have bank accounts, and some of the above transactions can be carried through by the use of the same bank check.