The reader must be on his guard against misunderstanding the dia gram. It does not represent the heights of any particular, prices of the different countries compared with each other either at any one date or for the entire period. The average prices of selected groups of com modities are compared every year with the average of the prices for 1890-1899 in each country, respectively. The important facts to observe are the fluctuations, both their times and their directions, both the larger tidal movements and the lesser wave-like movements within the business cycles. The figure indicates that both American and German average prices have risen somewhat, as compared with the English and French prices, since the period before 1860.
This figure should be studied in connection with that on gold pro duction. The figures indicate that the rapidly growing monetary use of gold offset a large part of the effects of increasing gold production between 1840-1860 and 1884-1914. Between 1884 and 1896 prices actu ally continued to fall after gold production had begun to climb. Like wise the growing monetary use of gold accentuated strongly the effects between 1873 and 1883 of a comparatively small decrease in gold pro duction.
be 120. A tabular index number is the per cent that the price of a selected group of articles at any certain date is of the price of the same group of articles at a date that has been taken as the base. Numerous tabular index numbers have been worked out for different countries and periods.
A chart of the principal index numbers of the leading coun tries is shown in Figure 1. The fact that from 1862 to 1879 inclusive prices in the United States were expressed in an irredeemable paper standard makes comparisons for that period misleading. A better idea is obtained by using as the base for each of the several series the average of prices in each country for the years 1890 to 1899.
§ 3. Definition of the standard of deferred payments. As a medium of exchange, money comes to be the unit in which most prices are expressed and compared; in other words, it becomes the common denominator of This makes it also the most convenient unit in which to express the amount of credit transactions and of existing A credit transaction is a trade lengthened in time ; one party fulfils his part of the contract by delivering the goods or money, the other party promises to give an equivalent at a later date. The equivalent may be in any kind of goods; for example, in barter one may part with a horse on the prom ise of a cow to be received later ; or a small horse on the promise of a large one; or a flock of sheep on the promise of its return at the end of the year with a part of the increase of the flock. A simple standard in which to express the debt
is the thing borrowed, as horse, sheep, wheat, house. Again, the thing to which the value of debts is referred may be a thing quite different from the goods borrowed, and, with the growth of the monetary economy and the use of the interest contract, money comes more and more to be used as the standard. At length the law declares that in the absence of any other agreement, the amount of a debt is to be payable 2 See Vol. I, p. 262.
3 See Vol. I, p. 263, on credit transactions, and p. 302, on interest contract.
in terms of the unit of standard money, which thus is made legal tender as well as the customary standard of deferred payments. A standard of deferred payments is the thing of value in which, by the law or by contract, the amount of a debt is expressed and payable.
§ 4. Increasing importance of the standard. Until the use of money develops, the use of credit is difficult and limited; it becomes easy when the value of all things is ex pressed in terms of a common circulating medium. It there fore generally is true that the importance of money as the standard of deferred payments increases with the use of money as a medium of trade. The volume of outstanding debts expressed in terms of money now very greatly exceeds the total value of the circulating medium. Changes in the general level of prices have, therefore, great effect upon all existing debts. The value of all debts changes in the same proportion as does that of the standard unit of money; when this rises or falls in value, it means increase or reduction, in the same ratio, of the purchasing power of every creditor. It is as if he had in his possession metal dollars equal in amount to the face of the debt, and they had changed by so much in purchasing power. The debtor's interests in such changes are, of course, just the reverse of the creditor's interests.
Outstanding contract debts may be roughly divided into two classes: short-time loans, running less than a year; and long-time loans, running for a year or Fluctuations are rarely rapid and great enough to affect appreciably the debtors and creditors in the ease of short-time loans. The results are appreciable in the case of loans running from one to five years, and may be very great in the case of loans made for still longer periods, such as the bonded indebtedness of nations, states, municipalities, and business corporations, and as mortgages given by farmers on their land or by owners of city real estate. A multitude of interests are thus affected by a change in the value of money. When money rises in 4 See Vol. I, p. 304.