The supply of money is the amount of money in existence. This has led some writers to say that the value of money depends upon its quan tity. Other things being equal. this is true: but it does not in itself furnish an adequate ex planation of the value of money. Assuming that no other influences are at work, it must he ad mitted that any increase in the quantity of money will lower its value and that any decrease will enhance it. There is a certain money work to be performed, a certain volume of exchanges to be If the of money are numerous. each transaction will call for a larger 11111111w of units than when the money units are relatively fcw. Every increase ill the world's money supply has been followed by a rising in Flees or a fall in the value of money. If the fall is not commensurate with the increase in amount, it is because the quantity of money is not the exclusive factor in fixing the value of money. legislation endeavors to adjust supply to demand by providing an automatic regulation of the quantity of money. rnder a metallic cur reney system we usually find provisions for the free coinage of the standard money metal. Should money increase in value, i.e. should prices fall and thus reveal an inadequate supply, free coinage will in a measure eon eel this by attract ing to monetary use such supplies of the metal as are available for this purpose. So far as na tions using the same standard are concerned there is a natural flow of the metals from one country to another which prevents any undue deficit or redundancy in any one of the countries involved. This adjustment takes place auto matically through the course of Wile. When currency is redundant in any emnitry, prices \rill be high in that country and imports will be large relatively to exports. The settlement of the resulting unfavorable balances will diminish the currency of the country where it was formerly redundant and so diminish prices. If money is scarce in any country, prices will be low, exports large relatively to imports, and the resulting favorable balances will bring gold into the coun try. It is obvious, therefore, that international trade speedily corrects any local excess or deficit.
A general excess or deficit in the money sup ply carries with it a certain correction also, but the operation is slower. If prices rise, showing a fall in the value of money, mining enterprises become less profitable, and the additions to the volume of money will tend to grow less. On the other hand. if prices fall, showing a rise in the value of money, mining enterprises corre spondingly profitable and ea pital will seek em ployment in them. This 4 likely to increase the production of the metals and by increasing the supply to check t-he rise in value. These effects will not be immediate, as capital has gro.at in ertia, and its withdrawal from one line of ac tivity and transfer to another cannot be instan taneous.
The value of money, as of any other commod ity, is immediately dependent upon supply and demand. The supply of money admits of easy definition; but the demand for money eannot be so precisely stated. It has been paraphrased as the amount of money work to be done, hut this money work cannot be expressed in statistical statements. The elements which enter into it
can, however, be stated. The most important and the positive elemept in the case is the volume of exchanges to be accomplished. Whaterer in creases the volume of exchanges increases the de mand for money; whatever diminishes the volume diminishes the demand. Division of labor and the evolution of a money economy are the most important factors in this increase of the money demand. Without a commensurate increase of supply, prices under such coedit ions must fall. .\ diminution in the world's demand for money is not likely, but a diminution in the local de mand, effecting a temporary rise of prices before the correcting influence of international trade is felt. may and does occur.
But the volume of the exchanges is only one of several elements iu determining the demand for money. The first of these is the rapidity of monetary circulation, the second the use of credit, both of which economize the use of money. It is obvious that all simultaneous cash transac tions require the use of different pieces of money. But the transactions of a day or a year are not simultaneous and the same piece of money may fill its functions as a medium of exchange many times. When the circulation is sluggish the de mand for money for a given volume of exchanges is far greater than when it is rapid. Savings banks, for example, serve to increase the rapidity of circulation. They gather up the savings of the poor which would otherwise be locked up, and restore this money to circulation. In coun tries where savings take the form of private hoards, as is largely the ease in France, more money is required per capita than in Great Brit ain or the United States.
Far more important in its effect upon the money de111:111(1 is the use of credit (q.v.), bal ances only being paid in money. The country storekeeper who takes from the farmer butter and eggs on account, paying in supplies as his customer's needs arise. furnishes a homely illus tration of the way in which credit minimizes the demand for mney. In the larger business world the trade relations are rarely of such great sim plicity, but by the mechanism of centres of credit or banks the transactions of a town or of even larger area are reduced to a mutual exchange of goods and debts are canceled without the inter vention of money. Banks and clearing-houses (.sec those articles) are the agencies by which credit is organized.
Supply Lind demand as affecting the value of money are not wholly unrelated phenomena, and the explanation of monetary changes cannot he found in one element without the other. An ex cess of supply stimulates demand, and prevents prices from rising as high as they otherwise would. A diminution of supply slackens demand and prevents prices from falling as much as they otherwise would. This inf(q.action of supply and demand prevents changes in the money supply from producing effects in the increase o• decrease of prices commensurate with the changes in the volume of money. It modifies hut does not obliterate the significance of such changes.