5. Industrial development increases money de writers have laid much emphasis on the distinction between a natural economy and a money economy. The phrases are not in use in the United ,States, tho nowhere is the contrast between the conditions which they describe more recent than here. Under a natural economy the German writers describe a condition of affairs by which men singly or in groups satisfy their needs directly without call ing upon the aid of outsiders. The western frontiers man and the southern planter of the last century rep resented these t,,Tes. For food, shelter and clothing each relied upon his own efforts or upon the efforts of those immediately associated with him. Money he needed only to a limited extent. If all society were organized upon such a basis the demand for money would be very small because there would be little work for money to do.
A natural economy is a direct contrast to what is termed a money economy. In its highest form money economy represents a condition of society in which no one produces any article whatever for his direct personal consumption. Such a condition of affairs- is found in our cities today with minor and insignificant exceptions. Industrial centers like cities, however, offer a contrast to the agricultural communities. The farm grows a large quantity of crops which are used directly either for personal con sumption or in the operations of farming as feed for live stock.
It is sufficient, perhaps, to have described these different conditions to make it clear how industrial development increases the demand for money. As the people of the United States have passed success fully from a group of backwoodsmen to a nation of agriculturists and finally to a people of large indus trial undertakings, the demand for money has grown insistently, for the money work of' the nation has immeasurably increased.
6. Extension of credit lowers demand for money. —Having in view the enormous development of busi ness during the last century, not only in the United States but tbruout the whole civilized world, it is clear that there would be at present an overwhelming demand for money had there _not been during this period a parallel development of the machineu of credit, which was described in the preceding chapter. The demand for money is conditioned, as we have seen, by the volume of exchange, but directly only by such exchanges as are effected by means of money. Where the exchange is effected by credit the demand for money is limited to the amount necessary to serve as a basis of credit.
If in a community which experienced no Thange in the volume of business a credit organization was developed which made it possible to conduct exchanges with one-fifth of the money previously current, it is perfectly clear that the demand for money would diminish, and the money would fall in value or be dispensed with by exportation or by use in the arts. As a matter of fact, the development of credit does not take place in this way. It usually accompanies an increased volume of exchanges. Its effect is not so much actually to decrease the demand for money as it is to prevent the demand for money from growing as rapidly as it otherwise would.
7. Money hoards and rapidity of circulation..— _Money , we have seen, serves a use as a hoard or store of value. It is not a use which the economist ap proves but it is none the less one .with which Ile has to reckon. If such use of money is extensive there will be a greater demand for money than when hoard ing is practically negligible. With the general prog ress of enlightenment this form of money demand tends to diminish. But while the habit is disappear ing there are occasional recrudescences which are apt to occur when they are most harmful, namely, in times of panic.
The use of money as a store of value diminishes its ' efficiency for the purposes for which it is intended. It therefore increases the demand for money since an inefficient instrument does less work. Conversely, whatever increases the efficiency of money lessens the ? demand for it. Whatever increases the rapidity with which money circulates therefore diminishes the de mand. It is one of the advantages of the introduction ' of banking habits that men carry less money in their pockets, and thu,s money acquires a greater rapidity of circulation.
8. Supply of nioney.—The supply of money is the quantity of standard money in existence. The supply of money in any given country when any commonly used standard, such as gold or silver, is employed as money is automatically regulated thru international trade. If the supply is excessive prices rise, and the country having such prices becomes a good country in which to sell goods. Merchants in other countries improve the opportunity and in settle ment of the exchanges gold, for instance, is exported. Such export reduces the quantity of gold in one coun try and increases it in the others, thus bringing about an equilibrium.