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 correct this by attracting to monetary use such supplies of the metal as are available for this purpose. So far as nations 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 automatically through the course of trade. When currency is redundant in any country, prices will 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 country. It is obvious, therefore, that international trade speedily corrects any local excess or deficit. A general excess or deficit in the money supply 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 become correspondingly profitable and capital will seek employment in them. This is likely to increase the production of the metals and by increasing the supply to check the rise in value. These effects will not be immediate, as capital has great inertia, and its withdrawal from one line of activity and transfer to another cannot be instantaneous.
The value of money, as of any other commodity, is immediately dependent upon supply and demand. The supply of money admits of easy definition; but the demand for money cannot be so precisely stated. It has been paraphrased as the amount of money work to be done, but 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 element in the case is the volume of exchanges to be accomplished. Whatever increases the volume of exchanges increases the demand 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 conditions must fall. A diminution in the world's demand for money is not likely, but a diminution in the local demand, 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 in 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 transactions 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 demand 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 countries where savings take the form of private hoards, as is largely the case in France, more money is required per capita than in Great Britain or the United States.
Far more important in its effect upon the money demand is the use of credit (q.v.), balances 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 illustration of the way in which credit minimizes the demand for money. In the larger business world the trade relations are rarely of such great simplicity, but by the mechanism of centres of credit or banks the transactions of a town or of even larger areas are reduced to a mutual exchange of goods and debts are canceled without the intervention of money. Banks and clearing-houses (see those articles) are the agencies by which credit is organized.
Supply and 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 excess 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 interaction of supply and demand prevents changes in the money supply from producing effects in the increase or decrease of prices commensurate with the changes in the volume of money. It modifies but does not obliterate the significance of such changes.
Having considered what fixes the value of metallic money, we are now ready for the question what determines the value of paper money. Despite differences of detail, there are for the purpose of this discussion but two classes of paper money—convertible and inconvertible. The first is secondary money, representing metallic money, and deriving its value from the latter; the second is itself primary money, and, like all primary or standard money, derives its value from the relation of supply and demand.
Paper money in the first instance was purely secondary or representative money. It was practically a storage receipt for gold and silver. Such receipts calling for metallic money on demand could and did serve in lieu of the latter in making exchanges. Such money offers no theoretical difficulties. Its circulation is that of metallic money in another form. The advantage of such money is that it forms a convenient mode of avoiding the cumbersomeness of metallic money. This is the function of the gold and silver certificates issued by the United States Government, each of which represents a corresponding quantity of metal in the United States Treasury, and whose presence in the monetary circulation does not in the slightest degree affect its volume.
But such certificates are not the only form of representative paper money, nor the most important. The history of banking shows that the depositaries of metallic money soon learned that under normal conditions coin would not be de-
