A similar process would be involved between countries using silver as the monetary unit. Where standards differ, exchanges are hampered and the supply of money is not so regulated. When fiat money usurps the place of standard money its volume is apt to be in excess of the trade needs of' the country issuing it and its value, thru excess of supply, dimin ishes. In other words prices rise.
9. Changes in, the money supply.—When, as in the case of fiat money, the supply of money is dependent upon nothing more certain than the capricious needs of government, the value of money will vary rapidly and violently. In the case of money based on gold, changes are less rapid. From country to country the processes of exchange effect, as we have seen, an auto matic distribution of the money metal and bring about a comparative equality of prices.
In the world at large there may be notable changes in the supply of money. These changes in the pro duction of gold from year to year are not so great as in the case of agricultural products, for example. A demand for money cannot be inunediately met by increasing the supply. The processes of mining are laborious. A fall in prices or a high value of gold will indeed induce mining operations which might otherwise be unprofitable, but this will not materially change the volume of the product. Rising prices of commodities will render the working of some mines unprofitable.
The product of agriculture is used up practically each year, and changes in its amount are quickly re flected in prices. It is, however, not the annual pro duction but the existing stock which controls the value of gold. Such changes as are observed from year to year make only an inappreciable change in the money supply.
It is otherwise with the great gold discoveries. When gold was discovered in California and Aus tralia a flood of the yellow metal was turned into the commerce of the world. After the first year or two the gold stock was considerably increased; prices rose and the value of gold declined. Later came a lull in gold production. The increase of supply was no longer sufficient to meet the increase in the demand for money, and prices fell. With the more extensive exploitation of the Rand of South Africa, the annual gold production began to rise until it exceeded the height of the California output. The stock of gold
in the world was considerably augmented and an era of rising prices was ushered in.
10. Money values expressed in value 1 of money is equivalent to its purchasing power. There is no way of expressing this purchasing power except in terms of what money will buy—in other words, by the commodities which will be exchanged for a given quantity of money. Hence, price and value of money are reciprocal terms. When prices ) are low the value of money is high because a given quantity of money will command a large amount of , commodities. If prices are high the value of money is low because a smaller quantity of commodities can be purchased by a given quantity of money. If the price of any single article could be a criterion of the prices of all articles this reciprocal relation would be plain at a glance. The price of any single commod ity, however, is the result of a combination of factors of which the value of money is only one.
H. Prices of which take place in the prices of commodities may be due either to changes which affeet the commodity only or, since price is the relation of the commodity to money, to changes which take place in the value of money. Change in price may therefore arise from a change in (1) the demand for, or (2) the supply of the com modity. Changes of this. nature are reflected in the price of one commodity- as compared with another; their positions in the price scale change.
A change in the demand for money will change prices. If the demand increases without change of supply an increased burden is placed on each money unit. There are more exchanges to be made but there is the same money with which to make them. Hence units of money must command larger quantities of commodities; prices fall and this indicates the in creased value of money. Conversely, when the de mand for money decreases, prices rise and the value of monelv falls.
Changes in the supply of money work similar re sults in prices. If the supply diminishes prices fall and the value of money increases. Should the supply of money increase, the prices of commodities rise and the value of money falls.