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 UNIVERSITY OF CALIFORNIA 
 AT LOS ANGELES
 
 THE INFLUENCE OF THE GOLD 
 SUPPLY ON PRICES AND PROFITS
 
 MACMILLAN AND CO., Limited 
 
 LONDON . BOMBAY . CALCUTTA 
 MELBOURNE 
 
 THE MACMILLAN COMPANY 
 
 NEW YORK . BOSTON . CHICAGO 
 DALLAS . SAN FRANCISCO 
 
 THL NL\CMILLAN CO. OF CANADA, Ltd. 
 
 TORONTO
 
 THE INFLUENCE OF 
 THE GOLD SUPPLY ON 
 PRICES AND PROFITS 
 
 Sir DAVID BARBOUR 
 
 K.C.S.I., K.C.M.G. 
 
 Financial Af ember of the Council of the Governor-General of India from 
 1888 to 1893," Member 0/ the Royal Covtinission on Gold and Silver ; 
 Member of the Indian Currency Committee (1898) ; Chairman 
 of the Committee on the Currettcy of the Straits Settle- 
 ments ; Author of" The Theory of Bimetallism" 
 and " The Standard of Value 
 
 MACMILLAN AND CO., LIMITED 
 ST. MARTIN'S STREET, LONDON 
 
 1913
 
 COPYRIGHT 
 
 Richard Clay and Soks, Limited, 
 
 brunswick street, stamford strekt, s.e., asd 
 
 bungav, sukfoi.k.
 
 
 PREFACE 
 
 The increase in the yearly production of Gold 
 % and the rise in Prices which have occurred in 
 recent years have led to a renewal of the con- 
 troversy as to the influence of JNloney on Prices. 
 
 - One party to this controversy holds that, under 
 
 - modern conditions, the Quantity of JSloney has a 
 "^ very slight and negligible influence on Prices, 
 
 which are mainly determined by Credit. Their 
 
 opponents hold that the Quantity of Money has 
 
 a substantial influence on Prices, and assert that, 
 
 \ *' other things being equal, the general level of 
 
 ^ Prices is determined by the Quantity of 
 
 ""-^ Money : " they admit that during any portion 
 
 of time which may be chosen the " other things " 
 
 which are assumed to be equal in the statement 
 
 of the Quantity Theory may vary in such 
 
 manner as to exercise a material influence on 
 
 Prices. 
 
 I propose in the present work to show in wliat 
 
 38S378
 
 vi PREFACE 
 
 way the Quantity of Money affects Prices, and 
 to explain tlie limitations involved in the 
 assumption that " other things are equal." In 
 doing so I cannot avoid dealing with the rela- 
 tion between Credit and Prices, and must, of 
 course, refer to the Quantity Theory, but I do 
 not discuss the latter Theory fully or at great 
 length. In my opinion its soundness, subject to 
 certain limitations, is beyond question and the 
 controversy ought to be closed. 
 
 I also propose to call attention to the great 
 economic influence exercised by a general Rise 
 in Prices due to an increase in the Quantity 
 of Money, and by a general Fall in Prices due 
 to the opposite cause. This influence is so pro- 
 found and far-reaching that it often leads to 
 important social and political changes. 
 
 I have always dreaded the proposals of the 
 Inflationists who hope to increase real wealth in- 
 definitely by mere additions to the Currency, but 
 I find myself driven by the logic of facts into 
 holding that the question of the influence of 
 the Quantity of Money is one of the first im- 
 portance in the present day, and will be of 
 increasing importance as time rolls on. 
 
 I iiave seen the fall in the Prices of agricultural
 
 PREFACE vii 
 
 produce stimulate the Land Agitation in Ireland, 
 and the Land Agitation put new life into tiie 
 Home Rule JNlovement which has plunged the 
 country into a sea of difficulties. The fall in the 
 Prices of agricultural produce was very largely 
 due to foreign competition, but if that competi- 
 tion had coincided with a great increase in the 
 supply of Gold instead of with a great increase 
 in the demand for it, the claim for the reduction 
 of rents would have been weakened. 
 
 I have seen many of the Irish peasants pur- 
 chase their holdings when the rents had been 
 reduced owing to the fall in Prices, and do so 
 with the assistance of the Public Credit, when 
 that Credit was at its highest owing to the 
 reduction in the rate of profit caused by the 
 general fall in Prices. 
 
 Prices are now rising and loans cannot be 
 obtained on as easy terms as formerly, even 
 though the Credit of the British Government 
 be pledged. 
 
 Similar purchases, whether in Ireland or else- 
 where, could not be made in the present day on 
 the same terms, nor, possibly, with equally 
 satisfactory results. 
 
 1 have seen Protection flourish in Foreign
 
 viii PREFACE 
 
 Countries and Fair Trade make great progress 
 in England while Prices were falling, and I have 
 seen Protection discredited in those Countries, 
 and Tariff Reform wither in England under the 
 influence of rising Prices. The growth of the 
 Public Revenue reduces the difficulty which 
 Governments would otherwise experience in 
 meeting the liberal scale of expenditure which 
 prevails in the present day, and Ministers of 
 Finance build up reputations on results which 
 are due to the increased production of Gold. 
 
 These are merely examples of the profound 
 and subtle influence which the Standard of 
 Value can exercise on human affairs. 
 
 A general Fall in Prices sets up stresses in the 
 social fabric which search out the weak points in 
 the structure. A general Rise in Prices smooths 
 away many difficulties, but may create others. 
 The increase in the cost of living, as measured 
 in JMoney, is an important element in the 
 Labour Unrest at the present moment and 
 Legislation is invoked to adjust Wages to 
 Prices. 
 
 I put forward no proposals for a remedy. I 
 merely state the conclusions at which 1 have 
 arrived, in the hope that others may be induced
 
 PREFACE ix 
 
 to turn their attention to the subject, and that 
 unanimity on the theoretical aspects oi' tlie 
 question may be obtained before the difficulties 
 arise which seem likely to occur in the future, 
 though not, so far as I can see, in the immediate 
 future. 
 
 I should feel relieved if it could be shown 
 that my apprehensions were groundless.
 
 CONTENJS 
 
 CHAPTER I 
 
 PAGE 
 
 PRELIMINARY REiMARKS 1 
 
 CHAPTER II 
 
 ALTERATIONS IN RELATIVE PRICES AND THE DISTRIBUTION OF 
 GOLD THROUGHOUT COUNTRIES USING A GOLD CURRENCY 
 DETERMINED BY ECONOMIC INFLUENCES .... 7 
 
 CHAPTER III.- 
 
 THE QUANTITY THEORY OF MONEY ■ . i^ . . . . 14 
 
 CHAPTER IV 
 
 THE MODERN SYSTEM OF CREDIT 19 
 
 CHAPTER V 
 
 INDIRECT INFLUENCE OF GOLD ON PRICES^ .... 32 
 
 CHAPTER VI 
 
 VALUE OF MONEY DETERMINED BY SAME LAW AS VALUE OF 
 
 OTHER ARTICLES 40 
 
 CHAPTER VII 
 
 LIMITATIONS TO THE QUANTITY THEORY OF MON&Y ... 47 
 
 CHAPTER VIII 
 
 SUMMARY OF CONCLUSIONS 60 
 
 zl
 
 xii CONTENTS 
 
 CHAPTER IX 
 
 PAOK 
 PRACTICAL VALUE OF THE QUANTITY THEORY .... 65 
 
 CHAPTER X 
 
 CONSEQUENCES OF A GENERAL FALL OR RLSE IN PRICES . . 71 
 
 APPENDIX 
 I 
 
 EXTRACT FROM "INTERNATIONAL BIMETALLISM," BY THE 
 LATE FRANCIS A. WALKER, PRESIDENT OF THE 
 MASSACHUSETTS INSTITUTE OF TECHNOLOGY ... 89 
 
 II 
 
 EXTRACT FROM "THE EFFECTS OF GREAT DISCOVERIES OF 
 
 THE PRECIOUS METALS," BY J. SHIELD NICHOLSON, 
 
 Sc.D., LL.D., PROFESSOR OF POLITICAL ECONOMY IN THE 
 
 UNIVERSITY OF EDINBURGH 95
 
 THE INFLUENCE OF THE GOLD 
 SUPPLY ON PRICES AND PROFITS 
 
 CHAPTER I 
 
 PRELIMINARY REMARKS 
 
 Before attempting to investigate the manner 
 in which Gold acts on Prices, under modern con- 
 
 ERRATUM. 
 
 Page 58, line 18, for "Rupee," rmd "proper." 
 
 coins of full weight and also Monetary Gold, 
 the latter term denoting uncoined Gold held 
 in Banks as a reserve and which can be coined 
 at any time if necessary. 
 
 In the term JNIoney, as ordinarily used, a 
 number of things are included which are not of 
 
 B
 
 2 THE GOLD SUPPLY ch. 
 
 the same nature, and if we are to avoid error 
 and eonfusion it is essential to attach a definite 
 meaning to the word beforehand and to adhere 
 consistently to that meaning. I recognise that 
 Token Coins and Paper Currency are commonly 
 kno^\^l as Money, and that what is called Money 
 in the Money JMarket is something of a totally 
 different nature, but for the purposes of my 
 argument I do not include these under the term 
 Money. 
 
 Most of the errors which are committed in 
 discussions regarding the Standard of Value are 
 due to the fact that in ordinary life we measure 
 the Values of all other things by reference to 
 M oney, and thus fall into the habit of treating 
 INIoney as if it had an inherent or intrinsic Value. 
 This error is fundamental and has obtained such 
 a hold upon our minds that it is almost impos- 
 sible for anybody to discard it so completely that 
 he shall run no risk of falling into it at unguarded 
 moments. Value in Political Economy means 
 Value in Exchange, and the Value of anything 
 as compared with anything else is simply the 
 ratio in which it will exchange for that other 
 thing, and no article can possess inherent or in- 
 trinsic Value. If the value of A changes in 
 relation to B, the value of B changes at the same 
 time in relation to A in the same deg-ree but in 
 the opposite direction. 
 
 It is sometimes said that the Value of Gold
 
 T PRELIMINARY REMARKS 3 
 
 has changed and that, as a consequence, Prices 
 have risen or fallen, as the case may be, the 
 assumption being that it was a prior change in 
 the Value of Gold which caused the change in 
 Prices. 
 
 This mode of expression is misleading, as there 
 is not a quality of Value inherent in Gold which 
 by its alteration causes Prices to rise or fall. It 
 is the rise or fall in Prices which constitutes 
 the alteration in the Value of Gold, and the 
 Value of Gold in relation to any commodity has 
 not changed unless, and until, the Price of that 
 article has risen or fallen. 
 
 It will be shown hereafter, however, that an 
 alteration in the Prices of some articles, if due to 
 an increase or decrease in the Quantity of Money, 
 does, under the operation of economic forces, 
 bring about an alteration in the Prices of other 
 articles. For example, if A and B, under eco- 
 nomic influences, exchange against each other in 
 a certain ratio their respective prices will con- 
 form to that ratio, and if the price of one of 
 them rises owing to an increase in the Quantity 
 of money such rise in price will necessarily be 
 followed by a corresponding rise in the price of 
 the other. In this sense it may be said that the 
 Value of Gold having altered in respect to A its 
 Value will also be altered in regard to B ; this 
 result would not be due to an alteration in an 
 intrinsic or inherent Value in Gold but would be 
 
 B 2
 
 4 THE GOLD SUPPLY ch. 
 
 brought about by the existence of a ratio of 
 exchange between A and B determined by eco- 
 nomic considerations. 
 
 Let us now consider what is meant by 
 '' Price." 
 
 If a farmer sells a bullock for £20 he is entitled 
 to receive from the purchaser twenty golden 
 sovereigns and, practically, that means that he is 
 entitled to receive the amount of Gold contained 
 in twenty sovereigns. He may, however, take a 
 cheque on a Bank for £20, and he may pay the 
 cheque into a Bank with which he has an account. 
 Subsequently, when he makes a purchase he may 
 transfer the claim to the £20 which is at his 
 credit in the Bank, to the person from whom he 
 made the purchase. In such a case he will not 
 have handled, or even seen, the Gold to which 
 he had a claim, and which claim he afterwards 
 transferred to another person. But if he had 
 chosen to do so he might have demanded twenty 
 sovereigns from the purchaser, or he might have 
 demanded twenty sovereigns from the Bank at 
 which the cheque which he received was payable. 
 And the person to whom he transferred his 
 claim miglit have taken the cheque which he 
 recei\'e(l to the Bank upon which it was drawn 
 and demanded twenty sovereigns from that 
 Bank. 
 
 We thus see that, in buying and selling, Gold 
 in the form of sovereigns (commonly expressed
 
 I PRELIMINARY REMARKS 5 
 
 as Pounds Sterling) is used as a Measure of 
 Value, and may be so used to effect the ex- 
 change of commodities for commodities without 
 any Gold passing from hand to hand, but always 
 subject to the condition that the person who 
 sells an article may insist on being paid in Gold 
 by the purchaser, or, if he accepts a cheque, may 
 insist upon being paid in Gold by the Bank on 
 which the cheque is drawn. Gold is, therefore, 
 something more than a mere abstract Standard 
 of Value which is used to express the relations in 
 which commodities will exchange for each other. 
 The quantity of Gold which is assumed to 
 represent the Value of an article that is being 
 sold may be demanded from the purchaser, is 
 always liable to be demanded, and sometimes 
 is demanded. 
 
 When a man possesses Gold and wishes to 
 exchange it for commodities, he makes the 
 exchange in accordance with the scale of market 
 Prices. 
 
 If he wishes to obtain Gold for use in the 
 Arts, for hoarding, or for any other purpose, 
 the commodity he parts with in order to obtain 
 Gold is valued at the market Price, and the 
 quantity of Gold he receives corresponds with 
 that Price. 
 
 Prices may be used as a convenient means of 
 expressing the ratio in which commodities will 
 exchange for commodities, and generally are
 
 6 THE GOLD SUPPLY ch. i 
 
 so iised,^ but the scale of Prices always 
 represents the actual Value of commodities as 
 compared with Gold, and the man who wishes 
 to exchange Gold for commodities or com- 
 modities for Gold, must make the exchange in 
 accordance with Market Prices. The persons 
 who extract Gold from the JNlines exchange that 
 Gold for commodities, in one way or other ; the 
 Gold that is used in the Arts is obtained by 
 exchanging commodities for Gold ; the Gold that 
 is hoarded in India and elsewhere is obtained in 
 exchange for commodities ; the Gold that is 
 passed from hand to hand in buying and selling, 
 and the Gold that is moved from one Bank to 
 another or from one Country to another, is one 
 of the articles which are included in the World's 
 system of exchanges. 
 
 Money is, therefore, not an abstract, or 
 nominal. Measure of Value, but represents a 
 definite quantity of a metal called Gold, which 
 metal is continually being exchanged against 
 other things. 
 
 ' It was 111) doubt in reliance on this use of prices that Lord 
 Castlereagh said in 1811 " that a pound might be detined as a sense 
 of value in reference to currency as compared witli commodities."
 
 CHAPTER II 
 
 AI>TERATIONS IN RELATIVE PRICES AND THE DIS- 
 TRIBUTION OF GOLD THROUGHOUT COUNTRIES 
 USING A GOLD CURRENCY DETERMINED BY 
 ECONOMIC INFLUENCES. 
 
 " Gold and Silver having been chosen for the 
 general medium of circulation they are by the 
 competition of commerce distributed in such 
 proportions amongst the different countries of 
 the world as to accommodate themselves to the 
 Natural Traffic which would take place if no 
 such metals existed, and the trade between 
 countries were purely a trade of barter." 
 
 In this passage two principles of great 
 importance are laid down by Ricardo. Trade 
 is stated to be carried on as if under a system of 
 barter : in other words, the ratios in which 
 commodities exchange for commodities are 
 determined by economic considerations and are 
 independent of the Standard of Value and of the 
 particular form of Currency which may happen
 
 8 THE GOLD SUPPLY ch. 
 
 to be in use. The Price of each article rises 
 or falls under the operation of economic in- 
 fluences ; Prices, tlicrefore, bear such relations 
 to each other as ' economic considerations 
 require. 
 
 I do not consider it necessary to spend time in 
 proving the truth of this proposition. It is 
 almost self-evident and, so far as I know, it has 
 never been challenged by any Economist. It 
 does not mean, of course, that Prices are always 
 in exact accordance with economic influences, 
 for Prices are determined by human beings who 
 are liable to make mistakes. But there are 
 influences at work which tend to correct such 
 mistakes, and Prices always tend to Jbe regidated 
 by economic considerations. 
 
 In buying and selling, all transactions are 
 expressed in Prices, and it follows from what has 
 just been said that Prices move in such manner 
 as to ensure that the exchange of commodities 
 for commodities shall be carried on in accordance 
 with the play of economic forces. If the supply 
 of any commodity falls off its Price rises. In 
 otlier words, a smaller quantity of it will ex- 
 change for the same quantity of any other 
 article. Its Price has moved in obedience to 
 an economic force and the rise in Price re- 
 presents exactly the alteration of the ratio in 
 whicli it exchanges for other things. 
 
 The scale of Prices which prevails at any
 
 II ECONOMIC INFLUENCES 
 
 moment represents the ratio in which commodi- 
 ties exchange for each other. ^ 
 
 If Silver were used as the Standard of Value 
 instead of Gold, Prices would bear the same 
 relation to each other as Prices stated in Gold 
 do. The quantity of metal changing hands, or 
 supposed to change hands, in each transaction 
 would be greater ; the proportions between the 
 quantities of metal in each case would be the 
 same. 
 
 The second proposition which Ricardo lays 
 down is to the effect that Gold and Silver having 
 been chosen as the general medium of circulation 
 they are distributed by the competition of 
 commerce amongst the different countries of the 
 world in such proportions as are required. 
 Ricardo speaks of Gold and Silver as the general 
 medium of circulation. At the time at which 
 he wrote. Gold and Silver were used as Currency 
 under what has been called a Biinetallic system, 
 and, practically, the same ratio of Value was 
 maintained between the two metals, so that for 
 the purpose which Ricardo had in view they 
 might be treated as one. This is the case no 
 longer, and as all the chief nations of the world 
 now use Gold alone as the Standard of Value it 
 will be convenient to substitute Gold for Gold 
 
 1 The reader should bear in mind that commodities exchange 
 I for each other by quantity in the inverse ratio of their Prices. The 
 I higher the price of an article the smaller is the quantity of it which 
 1 will exchange for the_sarae..quantity of other things. 
 
 \
 
 10 THE GOLD SUPPLY ch. 
 
 and Silver in dealing with Ricardo's proposition, 
 and this is the course which I shall adopt. 
 
 It will be obvious that no man engaged in 
 business, and no Bank, will keep more Gold in 
 hand than is held to be necessary for business 
 purposes. To do so would amount to neglecting 
 an opportunity to make a profit. Gold may be 
 considered to be Capital and affords the easiest 
 means of obtaining other forms of Capital, and 
 to keep Capital lying idle is wasteful. On the 
 other hand no Bank and no business man could 
 afford to keep less Gold in hand than is required 
 for business purposes. As a consequence, every- 
 body engaged in business is careful to see that 
 his supply of Gold is adjusted to his wants and 
 is neither greater nor less than he requires. If 
 every person so manages his affairs that his 
 supply of Gold is equal, and not more than 
 equal, to his wants, the supply of Gold through- 
 out the world must be so adjusted from time 
 to time as to be just sufficient for the wants 
 of every place where Gold is required. The 
 adjustment is made in accordance with the inter- 
 pretation of these wants by men of business who 
 are possessed of great experience in such matters, 
 and whose interest it is to come to a sound 
 decision and to keep only the exact amount of 
 Gold which they need. 
 
 Under modern conditions the trader depends 
 upon his Bank to keep a sufficient supply of Gold,
 
 II ECONOMIC INFLUENCES 11 
 
 and every Banker who finds his stock of Gold 
 falling below what he considers safe, takes steps 
 to stop the drain, and, if necessary, to add to his 
 reserves. 
 
 If the Banker holds a larger amount of Gold 
 than he considers necessary he extends his busi- 
 ness until the excess is absorbed. 
 
 The exports of each country, and the claims 
 it may have against other countries, are set off 
 against its imports and the claims on other 
 accounts which foreign countries may have 
 against it. And if there is an unfavourable 
 balance against any country the Rate of Exchange 
 falk ^ ^i^Jfall stimulates exports and checks 
 imports, and if equilibrium is not thereby restored, 
 the Rate of Exchange must continue to fall until 
 it becomes profitable to export Gold : if necessary, 
 this export of Gold must continue until there is 
 such a fall ^ in Prices in the country against which 
 there was an unfavourable balance, and such a 
 rise of Prices in foreign countries, that equili- 
 brium is restored by still further increasing 
 exports and diminishing imports. What I have 
 just explained is a necessary consequence of the 
 law that the exchange of commodities for com- 
 
 ' The fall in prices or rise in prices, as the case may be, is due to 
 the fact that Bankers adjust their business to the quantity of Gold 
 which t hey h old. They will neither allow Gold to lie idle nor run 
 the risk of carrying on their business with insufficient cash. I need 
 hardly say that if the Gold imported into a country is hoarded, it 
 produces no eflfect on prices in that country.
 
 12 THE GOLD SUPPLY ch. 
 
 modities is regulated by the play of economic 
 forces, because this result can only be secured by 
 a proper adjustment of the respective scales of 
 Prices in all countries that have commercial and 
 financial relations with each other. 
 
 If the one country has a Gold Standard and 
 the other has a Silver Standard, or makes use of 
 inconvertible paper, this flow of the material of 
 the Standard from one country to the other 
 becomes impossible, and the adjustment of the 
 balance of indebtedness between them must be 
 effected by an alteration in the Rate--Qf..JEb^ 
 change, and cannot be brought about by an 
 export of the cm-rent Money with a consequent 
 adjustment of the scales of Price in the two 
 coiHitries. The fall in Exchange must, in such 
 cases, be carried out to any extent that may be 
 necessary, and involves a corresponding " depre- 
 ciation " of the Currency of the one country as 
 compared with that of the other. I do not 
 overlook the fact that a temporary adjustment of 
 the balance of indebtedness may be effected by 
 one country incurring debt to the other or trans- 
 ferring securities to it, but such a temporary 
 adjustment in no way supersedes the necessity 
 that the scales of prices in the two countries 
 must, sooner or later, bear the due economic re- 
 lation to each, and that due relation must, sooner 
 or later, be brought about by a general rise or 
 fall in relative prices, if the two countries use 
 the saine Standard of Values. The incurring
 
 Ti ECONOMIC INFLUENCES 13 
 
 of debt or the transfer of securities from the 
 debtor to the creditor country can only produce 
 a temporary equiUbrium. Such methods of 
 paying a balance really make the permanent 
 position of the debtor country worse than it 
 was, since the incurring of debt or the transfer of 
 securities makes it necessary to increase exports 
 in future years. 
 
 It will thus be seen that when countries have 
 the same Standard of Value, alterations in Prices 
 and fluctuations in the Rate of Exchange provide 
 the means by which the exchange of commodi- 
 ties for commodities is carried on in accordance 
 with economic influences, and that there is a 
 natural process by which Gold, when that metal 
 is used as Currency, is automatically distributed 
 throughout all Gold Standard countries in such 
 proportions as may be required in each place. 
 
 When the countries have different Standards 
 of Value, the respective scales of Prices in the 
 two countries cannot be so adjusted as to 
 conform to economic requirements, and equi- 
 librium is secured by an alteration in the relative 
 Value of the two Monetary Standards. 
 
 If the two countries have Gold as the Standard 
 of Value, but one of them, as in India in the 
 present day, does not use Gold as Currency, the 
 adjustment of the scales of Price is not auto- 
 matic, and artificial means, which I need not 
 explain in this place, must be adopted to secure 
 that result.
 
 CHAPTER III 
 
 THE QUANTITY THEORY OF MONEY 
 
 It will be admitted that an increase in the 
 Quantity of Money must cause some rise in 
 Prices, unless the increase is counteracted by 
 some other cause, and as the exchange of 
 commodities for commodities is regulated by 
 economic considerations, and carried out in prac- 
 tice by alterations in Prices, the rise in Prices 
 due to an increased Quantity of Money must, 
 when the rise is completed, be in the same 
 proportion in the case of each commodity ; if 
 this were not the case the ratios in which com- 
 modities exchanged for each other would be 
 altered in such a w^ay that exchange of commo- 
 dities for commodities would no longer take 
 place in accordance with economic influences. 
 Nor does it seem to me to be possible to suppose 
 that any other law regulates the rise of Prices 
 when the Quantity of Money is increased than 
 that which asserts that the rise in Prices is 
 proportional to the increase in the Quantity of
 
 CH.iii QUANTITY THEORY OF MONEY 15 
 
 ; 
 
 'Money^^l other thinos ait' equal. The influence 
 of an increase in the Quantity of Money, other 
 things being equal, must be regulated by some 
 law and cannot be haphazard, and it seems to be 
 impossible to substitute any other law for that of 
 the Quantity Theory. 
 
 In the present work I have set myself the task 
 of explaining the method in which Gold affects 
 Prices, and I do not propose to set forth all the 
 arguments which can be employed in support of 
 the Quantity Theory. They will be found else- 
 where and I need not repeat them, though I 
 shall find it necessary to call attention to the 
 very important limitations of that Theory which 
 are due to the condition that other things must 
 be assumed to be equal. 
 
 Some persons have supposed that an increase 
 in the Quantity of Money caused a direct and 
 general increase in real wealth, but this is not the 
 case. By increasing the Quantity of Money you 
 can raise Prices, and the Value of the wealth of 
 a country measured in Gold will show an increase, 
 but the -xeaL3!:e^ltii_ will 3,e just the same as 
 before, except in so far as Gold may be required 
 for purposes other than that of Currency, and 
 Gold will have fallen in Value in exact propor- 
 tion to the rise in Prices. 
 
 A large increase in the production of Gold 
 may cause a special disturbance of Prices in the 
 country where it is produced, and a further disturb-
 
 16 THE GOLD SUPPLY ch. 
 
 ance in the countries where it begins to be used as 
 Money, but, as we have already seen, forces are 
 at work which distribute the Gold in due pro- 
 portion over all countries which make use of a 
 Gold Standard and Currency. When the adjust- 
 ment of Prices has been completed business will 
 go on as before. What happens in such a case 
 is analogous to what occurs when a large quantity 
 of water is suddenly poured into a lake. There 
 is a great disturbance and a higher water level at 
 the point of entry, but natural forces quickly 
 distribute the water all over the lake and raise its 
 general level. 
 
 When it is said that a rise in Prices due to an 
 increase in the Quantity of Money does not 
 increase the real wealth of the world, the state- 
 ment must be understood to be limited by the 
 condition that the corresponding adjustments of 
 Prices and fixed money payments have been 
 fully carried out throughout the commercial, 
 industrial, and financial world. Until that is the 
 case an increase or decrease in Prices due to an 
 increase or decrease in the Quantity of Money 
 may, indirectly, have important economic effects 
 as I shall endeavour to show hereafter. 
 
 As I have already said, I do not propose to 
 repeat the arguments in support of the Quantity 
 Tlieory of Money ; they are available to the 
 student in other works and I could add nothing 
 to what has already been said on the subject.
 
 til QUANTITY THEORY OK IM()^E^' 17 
 
 The argument, and in my opinion the sole 
 argument which is even phiusihie, that has been 
 employed hi attacking the Quantity Theory is 
 based on the great de velopm ent of Credit in 
 modern times. Prices, it is said, are determined 
 mainly by Credit, and the increase or decrease in 
 the Quantity of Money has little or no effect on 
 them. 
 
 An Economist, of some eminence, has even 
 gone so far as to assert that JMoney is Credit, 
 that Credit has the same influence on Prices as 
 Money, quantity for quantity, and that as the 
 quantity of Credit in the United Kingdom is 
 £6,000,000,000 1— and the quantity of Gold only 
 £100,000,000, any considerable alteration in the 
 Quantity of Money could only affect Prices in a 
 very slight degree, so that even if the Quantity 
 of Money were doubled the increase in prices 
 would only be in the proportion of 6,100,000,000 
 to 6,200,000,000 or as 61 to 62, being 1*6 per 
 cent. 
 
 The assertion that Money is Credit is a contra- 
 diction in terms, and needs no special notice. 
 Such a proposition can only be supported by 
 pervertuig the natural meaning of language. 
 
 ^ In another place the same Econoiuist puts the amount of 
 Credit at £10,000,000,000— instead of £6,000,000,000— and the 
 amount of Gold at £120,000,000 instead of £100,000,000. The dis- 
 crepancy is large but the precise figures are of no importance in 
 dealing with the general argument. The amount of Credit as 
 estimated for the purpose of the argument is, in any case, enor- 
 mously in excess of the amount of Gold. 
 
 C
 
 18 THE GOLD SUPPLY ch. hi 
 
 The question of the relative influence of 
 Money and Credit on Prices I shall deal with at 
 some length, as there are writers on Currency 
 Questions other than the Economist to whom 1 
 have just referred, who hold that Money has 
 very little influence on Prices in the present day, 
 though I believe, that none of them supports 
 the theory which that Economist propounded on 
 this subject. 
 
 Clear views regarding the relations between 
 Credit and Money are essential in dealing 
 with the limitations to the working of the 
 Quantity Theory in practical life.
 
 CHAPTER IV^ 
 
 THE MODERN SYSTEM OF CREDIT 
 
 The word Credit has many shades of meaning 
 and it is necessary to make clear in what sense 
 it is used when we speak of Credit as contrasted 
 with Money. On turning to the Dictionary ] 
 find that Credit is explained to mean Belief, 
 Credence, Trust, Faith ; if we examine the use 
 of the word in the daily business of the world we 
 find that it is correctly employed, the essential 
 fact being that, under a system of Credit, men 
 part with valual)le property, without at the same 
 time receiving something of equivalent Value, 
 and are content to accept a promise that an 
 equivalent will be forthcoming at a future date. 
 They trust the persons with whom they are 
 dealing in the belief that they will fulfil their 
 promises at the appointed time. 
 
 The giving of Credit in this way is not a 
 modern invention, and prevails even in the most 
 backward countries ; in such places the local 
 shopkeeper is in the habit of supplying his cus- 
 
 19 ^2
 
 20 THE GOLD SUPPLY ch. 
 
 toniers with what they require, debiting them 
 with the amount of the Price and, subsequently, 
 crediting them with the V^alue of the products 
 which they ^1 to him. 
 
 Even the elaborate system of Credit which we 
 find in London is not a purely modern invention 
 as the following extract from Lord Clarendon's 
 Flistory of the Rebellion against Charles 1 will 
 show : — 
 
 " The Prince of Orange said that he believed 
 that they who knew London so well would 
 wonder very much that he should have been en- 
 deavouring above ten days to borrow twenty 
 thousand pounds and that the richest men in 
 Amsterdam had promised to supply him with it 
 and that one half of it was not yet provided. . . . 
 He could have double the sum in less time if he 
 would recei^ e it in paper which was the course 
 of that country ; and when, bargains being made 
 for one hundred thousand pounds to be paid 
 within ten days, it was never known that twenty 
 thousand pounds were brought together at one 
 time, but by bills . . . and he did really believe 
 that Amsterdam could pay a million upon any 
 good occasion, yet they would be troubled to 
 bring twenty thousand pounds together in any 
 one room." 
 
 For the purpose I have in ^'iew it is essential 
 that the real nature of Credit should be clearly 
 understood, and I shall now proceed to show 
 how the modern system of Credit could have
 
 IV MODERN SYSTEM OF CREDIT 21 
 
 grown up. What 1 shall say does not pretend 
 to be a description of the way in which the 
 system did actually grow up, and I deal with the 
 matter as I propose to do simply because this 
 course enables me to bring before the mind of the 
 reader the essential features of our system of 
 Credit. 
 
 If two persons have numerous transactions 
 with each other in the way of buying and selling 
 they will soon find that it will save trouble if, 
 instead of one or the other paying over cash on 
 the completion of each transaction, they decide 
 to keep accounts of their transactions and at 
 fixed intervals to pay or receive only the balance 
 shown by the accounts. By so doing they (1) 
 save themselves trouble and (2) effect an economy 
 of Money and thereby secure a saving. For 
 carrying on business in this way it is necessary 
 that they should have confidence in each other 
 so that their system of deaUng becomes, to some 
 extent, one of Credit. 
 
 If there were half-a-dozen men dealing with 
 each other on this principle they would soon 
 discover, if they all had confidence in one 
 another, that instead of each man paying a 
 balance to, or receiving a balance from, each 
 of the other five, it would be convenient for 
 them to meet periodically and settle their 
 accounts jointly, each man paying or receiving 
 as the case might be. In this way, each man
 
 22 THE GOLD SUPPLY ch. 
 
 would have only one meeting to attend and only 
 one payment to make or receive, and a 
 further economy of time and Money would be 
 effected. 
 
 If a seventh person wished to join, it might 
 happen that five of the original group had no 
 knowledge of his financial position or character 
 and w^ere unwilling to trust him. The sixth 
 person might possess such knowledge and be 
 willing to trust the newcomer, and even to give 
 a guarantee on his account up to a certain 
 amount provided that all transactions between 
 the newcomer and the other five were promptly 
 made known to him so that he should be kept 
 informed of changes in the financial position of 
 the person whom he had guaranteed. Similar 
 guarantees might subsequently be given in 
 favour of other persons who wished to join, 
 and the Guarantor could fairly make a charge on 
 account of the guarantees which he gave. 
 
 Under such conditions there would not merely 
 be a saving of time and trouble, and an economy 
 in the use of Money, but, in addition, the 
 persons who were guaranteed would be enabled 
 to purchase commodities although they had no 
 Money in their possession, and in this way could 
 obtain the use of capital without having to pay 
 Money for it, or to transfer any article of value 
 in excliange for it beforehand. 
 
 A further advance would be made if all the
 
 IV MODERN SYSTEM OF CREDIT 23 
 
 persons concerned had such confidence in tlie 
 original Guarantor as to leave their balances in 
 his hands, and so save themselves the trouble of 
 paying out or receiving cash, on condition that 
 the Guarantor would undertake to repay on 
 demand to each person any balance that might 
 happen to be standing to his credit. When this 
 stage had been reached the Guarantor would, for 
 practical purposes, have attained to the position 
 of a modern Bank, and the effect of this ex- 
 tension of the system of Credit would have 
 been : — 
 
 1. To effect a saving of time and trouble in 
 connection with the buying or selling of com- 
 modities, as well as in other transactions in- 
 volving the paying or receiving of Money. 
 
 2. To effect a great economy of Gold. 
 
 3. To enable persons, who were trusted, to 
 obtain commodities, or the use of capital, with- 
 out requiring thein to part at once with Money 
 or other valuable property. 
 
 The latter consideration is of great importance. 
 
 Under a system of Banking the public keep 
 their balances at a Bank. The control of the 
 capital which is represented by these balances is 
 thereby concentrated and placed in the hands of 
 one authority instead of being scattered among a 
 number of persons who would find it difficult to 
 combine for any common purpose. The Banker 
 in virtue of the Gold which he owns, and the
 
 24 THE GOLD SdPPLY ch. 
 
 balances deposited with him, is able to make 
 advances to his customers and the advance of 
 £10,000 to a customer is practically a guarantee 
 by the Bank that the customer shall be able to 
 pay all claims against him up to a limit of 
 £10,000. The Bank's customers will ordinarily, 
 and to a greater or less extent, leave their 
 balances in the custody of the Bank. Conse- 
 quently the Banker, in making loans and 
 ad\ances, is not limited to the amount of capital 
 with which he commenced business plus the 
 amount of his deposits. He is able to make 
 loans and advances to any extent, subject only 
 to the condition that he shall be able to meet 
 all claims against him, and, specially, that he 
 shall be able to give Gold to any customer who 
 asks for it. As has been well said. Banking does 
 not create Capital out of nothing, but the control 
 of Capital is concentrated at the Bank, and the 
 l^anker by means of loans and advances, in one 
 form or other, enables the persons in whom he 
 has confidence to obtain the temporary use of 
 Capital. The Banker is under the strongest 
 inducement to see that Capital passes into the 
 hands of those persons who are able to use it to 
 the best advantage. The person who can use 
 Capital to the greatest advantage will be anxious 
 to <)])tain it and will be in a position to pay 
 ibr the facilities afforded him, and if the 
 lianker makes an advance to a person who
 
 IV MODERN SYSTEM OF CREDIT 2.5 
 
 cannot use Capital profitably he runs the risk of 
 loss. 
 
 Owing to the existence in different parts of 
 the world of Banks which ha\'e a good knowledge 
 of the character and standing of their respcctiv^e 
 customers, and are well informed as to the 
 financial position of each other, the whole 
 civilized world is linked together by a gigantic 
 system of Credit, and apart from the very 
 important economic effect thereby produced, by 
 concentrating control over Capital and ensuring 
 that the power of obtaining Capital shall be 
 conferred on those who are able to use it to the 
 best advantage, an enormous economy in the 
 use of Gold is effected. The Banks, in addition 
 to their other functions, serve as Clearing Houses 
 for their customers, where claims are set off 
 against each other and Money need not pass 
 from hand to hand in each transaction. 
 
 In Gold Standard countries the Price of an 
 article represents the exact amount of Gold for 
 which it will exchange, and it is difficult to see 
 how the system of Credit which exists, could 
 cause Prices to be liigher than they otherwise 
 would, except in so far as tliat syjitem effects an 
 economy of Gold, and in this way renders a 
 larger quantity of it available for general pur- 
 poses. The use of Credit does not directly affect 
 the quantities of commodities that are for sale, 
 and if these commodities are found to be the
 
 26 THE GOLD SUPPLY ch. 
 
 equivalent of a larger amount of Gold it is 
 reasonable to hold that the available supply of 
 Gold must have increased. 
 
 The saving of time and trouble in making 
 payments and the facilitating of the profitable 
 employment of capital, which are the other chief 
 results of our modern system of Banking, render 
 it possible for commodities to be produced, and 
 dealt with, at less cost, and could not possibly 
 tend to raise their Prices, since Prices represent 
 the ratios in which they exchange for Gold. On 
 the other hand, economy in the use of Gold 
 would naturally cause all Prices to rise by 
 lowering the A^alue of Gold in relation to other 
 articles. 
 
 But this simple explanation of the manner in 
 which, and the extent to which. Banking, or the 
 system of Credit which now prevails, affects 
 Prices is not universally accepted. 
 
 The persons who reject the Quantity Theory 
 of Money attach an influence to the effect of 
 Credit on Prices which might fairly be described 
 as magical. They say that Credit lias the same 
 influence on Prices as Money, quantity for quan- 
 tity, and as the quantity of Credit is mucli greater 
 than the quantity of Money, and fluctuates much 
 more in amount, they, or some of them, hold 
 that the influence of Money is practically negli- 
 gible. 
 
 'J'Jjere is a sense in which it is true that Credit
 
 IV MODERN SYSTEM OF CREDIT 27 
 
 has the same effect on J^riccs as Money, quantity 
 £Qr_qiiantilEy7~and "there is a sense in which the 
 statement is wholly incorrect. If 1 go into a 
 horse-fair in Ireland with £10,000 to my credit in 
 the local Bank and use it in purchasing horses I 
 produce exactly the same effect on the Price of 
 horses in that fair as if I had 10,000 sovereigns 
 in my possession and purchased the horses by 
 transferring the sovereigns to the sellers. In 
 such case a Credit for £10,000 will have had the 
 same effect on the local Price of horses as an 
 equal amount of Money would have had. But 
 to assert that the granting of a million pounds 
 sterling of Credit to one or more persons and the 
 use of that Credit in purchasing certain articles 
 has the same effect on the general level of Prices 
 as the addition of £1,000,000 in Gold to the 
 Money of the world is a totally different propo- 
 sition. 
 
 If gold of the value of £1,000,000 is obtained 
 from the mines it quickly finds its way into a 
 Bank. 
 
 No Banker will allow £l ,000,000 sterHng to lie 
 idle, and he will issue Credit against it in order to 
 make a profit. 
 
 The amount of Credit which may be issued 
 against a reserve of £1,000,000 in Gold varies 
 in the case of different Banks, but is greatly 
 in excess of £1,000,000, and consequently 
 £1,000,000 in gold has a greater effect on Prices
 
 28 THE GOLD SUPPLY ch. 
 
 than £1,000,000 of Credit because it gives rise 
 to an issue of several millions of Credit. 
 
 It must also be recollected that the granting 
 of a credit of £1,000,000 to any particular person 
 probably, and ordinarily, involves a restriction in 
 the amount of Credit granted to other persons, 
 if there has not been simultaneously an increase 
 in the Bank's reserve, so that the grant of a Credit 
 of £1,000,000 by no means indicates an increase 
 of the total of Credit by that amount ; it is more 
 likely to indicate that though there is a greater 
 demand for the articles that are to be dealt with 
 by means of that Credit there is a corresponding 
 reduction in the demand for certain other articles, 
 so that the rise and fall in Prices balance each 
 other with more or less accuracy, and leave the 
 ffeneral level of Prices im affected. 
 
 All Prices must bear the due economic relation 
 to each other, and no possible increase in the 
 amount of Credit given by the Banks can raise 
 tlie average le^cl of prices beyond the limit 
 imposed on certain classes of Prices by the 
 necessity of using Gold in connection with them 
 either {is coin to be passed from hand to hand 
 or as Banking reserve. If some Prices are regu- 
 lated by the amount of Money, all Prices in 
 couTitries that use the Gold Standard must, 
 under economic influences, conform thereto. 
 This point I sliall deal witli at greater length 
 hereafter.
 
 IV MODERN SYSTEM OF CREDrr 29 
 
 The present system of Credit no doubt pro- 
 vides greater opportunities for a speculative rise 
 in certain Prices than would exist if Money only 
 were used in buying and selling. If Money only 
 were used the person who wished to speculate 
 would find it more difficult to obtain the means 
 of doinff so. He would have to borrow Money 
 in the form of coin from a number of persons in- 
 stead of obtaining Credit from a single Bank. 
 But a temporary rise in the Prices of certain 
 articles due to speculation is a totally different 
 thing from a general rise in the average level of 
 all Prices. 
 
 The theory of the equality of the influence of 
 Gold and Credit on Prices, quantity for quantity, 
 is carried to the extreme when it is said that there 
 is £6,000,000,000 of Credit in the United King- 
 dom and only £100,000,000 of Gold, and that, 
 consequently, the eff*ect of doubling the quantity 
 of Gold, would only be to raise Prices in the pro- 
 portion of £6,100,000,000 to £6,200,000,000, as 
 61 to 62 or by 1*6 per cent. This reasoning 
 assumes that Credit and Gold are used in exactly 
 the same way in modern business and are in 
 practice interchangeable, and that the result of 
 increasing the Quantity of Money leaves the 
 amount of Credit, measured in pounds sterling, 
 unaltered. Nothing could well be further from 
 the truth. 
 
 It is impossible to believe that the Banks
 
 30 THE GOLD SUPPLY ch. 
 
 would, unless there was some great change in the 
 conditions, hold reserves of twice the magnitude 
 they now do and at the same time not increase 
 the amount of their loans and advances, or, in 
 other words, add to the amount of Credit, and 
 unless the amount of Credit issued by the Banks 
 is independent of the magnitude of the reserves, 
 the argument above referred to falls to pieces. 
 
 It may also be pointed out that a reduction of 
 Credit by £100,000,000 spread over the United 
 Kingdom would not have a very great effect on 
 the average level of Prices, but a reduction of 
 much less than £100,000,000 of Gold would in- 
 volve the whole commercial system in ruin for 
 the time being. This shows that Gold and Credit 
 cannot be treated as portions of the circulating 
 medium which are interchangeable in all respects. 
 
 It has even been said that an increase in the 
 quantity of goods that can be pledged as 
 security to a Bank increases the amount of Credit 
 proportionately, and that this increase of Credit 
 causes a general rise of Prices. 
 
 A remarkable result if it could be accepted ! 
 for it amounts to holding that a great increase in 
 the quantities of goods causes a smaller and not 
 a larger quantity of goods to be the equivalent of 
 the same quantity of (iold. 
 
 The man who possesses goods which he is 
 prepared to pledge as security can, no doubt, 
 get an advance or loan from a Bank, but
 
 IV MODERN SYSTEM OF CREDir ',U 
 
 Banks cannot make loans to any amount 
 without regard to their reserves of Gold, and 
 it would seem more reasonable to hold that a 
 great increase in the quantity of goods would 
 lead to each man getting a less amount of Credit 
 measured in pounds sterling in proportion to 
 the quantity of goods pledged and dealt with in 
 the market, and to a consequent fall in Prices, 
 not to a rise. In other words, a great increase 
 in Commodities, while the Quantity of Gold 
 remained the same, might naturally be expected 
 to lead to less Gold, and not more Gold, being 
 exchangeable for the same quantity of Com- 
 modities. ■— -- 
 
 Thirty years ago the world's annual produc- 
 tion of Gold was about £20,000,000. In recent 
 years about the same amount has been hoarded 
 yearly in India on the average, while an equal 
 amount has been used up in the arts. It would 
 be interesting if some of the persons who hold 
 that an increased production of Gold has 
 practically no effect on Prices would explain how 
 long Prices would continue to rise as they have 
 been doing in recent years, while £40,000,000 
 yearly was being withdrawn from the Money 
 of the world and only £20,000,000 added to it, 
 and would satisfy our not unreasonable appre- 
 hension as to the ultimate results of such a 
 state of things.
 
 CHAPTER V 
 
 INDIRECT INFLUENCE OF GOLD ON PRICES 
 
 I SHALL now give an illustration which will 
 bring before the mind of the reader the method 
 by which an increase in the quantity of Money 
 affects all Prices under our system of Credit. 
 Let it be assumed that there are six countries 
 which have commercial intercourse with each 
 otlier and effectively maintain the Gold Standard, 
 of which five use Credit to the greatest possible 
 extent, while the sixth uses Gold only and not 
 Credit in any form. We know that the relations 
 which Prices bear to each other in all countries 
 that have commercial intercourse and use the 
 same Standard of Value are determined by 
 economic considerations, and are independent 
 of the particular Standard of Value wliich may 
 be in use. 
 
 It necessarily follows that the scales of Prices 
 in the five countries that use Credit must bear 
 the due economic relation to the scale of Prices 
 in the country that uses Gold only, and cannot
 
 V INDIKECT INFLUENCE ON IMIICES :m 
 
 be raised above the limit thereby deteriniiied by 
 any extension of Credit or of the system of 
 Credit so long as the Gold Standard is main- 
 tained. If we assume that the general scale of 
 Prices in any one of these five countries is raised 
 by means of Credit to such an extent that it no 
 longer bears the due economic relation to the scales 
 of Price in the countries which use Gold only, 
 imports into that country will increase and 
 exports will fall off, the Exchange will fall, and 
 ultimately Gold will be exported from it, if 
 any is in circulation or in the Reserves of 
 the Banks, and this export will continue until 
 the scales of Prices in the different countries 
 assume the due economic relation to each 
 other ; if there is no Gold to export, or if the 
 available Gold becomes exhausted, the country 
 which employs Credit will find its Currency 
 depreciate with reference to Gold, and such 
 depreciation would simply mean that its 
 Standard of Value had ceased to be Gold. 
 
 From what has just been said the conclusion 
 follows that if in any country or countries which 
 maintain the Gold Standard the quantity of Gold 
 in the form of INIoney influences certain prices, 
 that influence is, under economic laws, automati- 
 cally extended to all Prices in that country and in 
 other Gold Standard countries, whether those 
 countries make use of Credit or token coins of 
 full legal tender. The relations which Prices 
 
 D
 
 34 THE GOLD SUPPLY cii. 
 
 bear to each other in all countries having the 
 same Standard of Value being fixed by economic 
 forces, it necessarily follows that if prices are 
 anywhere regulated by Gold they must be 
 regulated by Gold in every place where the 
 Standard of ^''alue is Gold. 
 
 India uses the rupee, which is a token coin of 
 full legal tender, and also makes use of Credit in 
 many transactions, and practically does not use 
 Gold. An increase in the production of Gold, 
 and any consequent increase in the Quantity of 
 Gold Money, cannot directly affect Indian Prices, 
 but such increase can affect Prices in countries 
 which use Gold, and Credit based on Gold, and 
 under the operation of economic laws any conse- 
 quent increase in Prices is automatically extended 
 to India, so long as India contiimes to maintain 
 the Gold Standard. The rise in Prices outside 
 India, due to the increase in the Quantity of 
 Money, destroys the equilibrium ^ in the ex- 
 change of conunodities for connnodities, and 
 creates a balance of trade in India's favour which 
 causes the exchange V^alue of the rupee to rise 
 above the fixed rate of Is. 'id., and brings about, 
 under the system now in force, an addition of 
 rupees to the Indian Currency, which, in its turn, 
 causes Indian Prices to^ise. 
 
 / ' This equilihriuin may also be destroyed by economic changes 
 affecting the International Trade between the two countries, but at 
 present I am only dealing with the effects of an increase in tlie 
 Quantity of Money.
 
 V INDIRECT INFLUENCE ON PRICES 35 
 
 It cannot be doubted that the Quantity of 
 Money does in many countries exercise an 
 influence on at least certain classes of Prices. 
 On any other hypothesis it is impossible to 
 account for the fact that even the countries that 
 use Credit to the greatest extent find it necessary 
 to maintain reserves of Gold, and that the move- 
 ments of Gold into and out of the reserves are 
 most carefully watched by those who are respon- 
 sible for the working of the Banks, and prompt 
 steps taken to check any unusual and excessive 
 drain upon them. 
 
 On the other hand, a Banker will not allow 
 his reserves of Gold to remain permanently 
 higher than he considers necessary for the 
 purposes of his business. To do so would 
 amount to neglecting to take a profit in his 
 business which could safely be secured, and that 
 is a course which the Banker does not adopt. 
 When his reserves are in excess of his require- 
 ments the Banker lowers the rate of discount, 
 issues Credit to a greater extent, and sees his 
 reserves gradually reduced to the amount below 
 which he considers it unsafe to allow them to 
 fall. Leaving out of account temporary oscilla- 
 tion upwards or downwards, the Prices of the 
 articles which are affected by the supply of 
 Money are just as high as that supply can 
 maintain under the conditions prevailing at 
 the time, and all other Prices must conform 
 
 D 2
 
 36 THE GOLD SUPPLY ch. 
 
 thereto so as to preserve the due economic 
 relation. 
 
 We may look at the matter from another 
 point of view. What becomes of an additional 
 supply of Gold ? It certainly does not get 
 absorbed by persons engaged in financial business 
 restricting the use of Credit, and substituting 
 Gold for Credit, since the habit of using Credit 
 instead of coin depends upon considerations of 
 economy, convenience, safety, and custom, and 
 the force of these considerations is not weakened 
 by an increase in the supply of Gold. No 
 Banker will issue less Credit because his reserve 
 of Gold is greater. It cannot be absorbed in 
 ^y\ G^t^Wishing new business," as has been some- 
 times said, for it does not increase the amount of 
 real Capital nor add to the number of workers, 
 and if the man who extracts £1,000,000 from 
 a mine employs it in some new business, he will 
 require for that new business, when it is started, 
 only a very small proportion of the Gold which 
 he had in the first instance. There is practically 
 no way in which an additional supply of Gold 
 whicli is made available as Money can be 
 utilised and absorbed except in raising Prices,^ 
 and if Prices are raised in one place by any 
 
 ' As soon as Prices begin to rise, Gold would be cheaper, and this 
 might lead to a larger (juaiitity of Gold being hoarded and used in 
 the Arts, Imt this influence would only corne into effect when Gold 
 had become cheaper, or, in other words, when Prices had risen to 
 an appreciable extent.
 
 V INDIRECT INFLUENCE ON PRICES 37 
 
 increase in the supply of Money, that increase is 
 automatically extended to all countries having 
 the same Standard of Value, and the Prices of 
 all commodities must have been raised in the 
 same proportion when the adjustment is com- 
 pleted. 
 
 While the increase in the supply of Gold 
 is in this way affecting all Prices, the Price 
 of each particular commodity is being altered 
 relatively to the Prices of other commodities by 
 economic influences, so that we never find that 
 all Prices have either risen or fallen to the same 
 extent. An increase in the supply of Gold 
 exerts an influence in the direction of raising all 
 Prices, but in the case of certain articles economic 
 causes may have, during any particular period of 
 time, a much greater influence in the direction 
 of causing a fall in Prices, and the net result as 
 regards such articles would be a fall in Price 
 and not a rise, though the average scale of Prices 
 would have risen. 
 
 There is, however, an indirect and non-per- 
 manent effect of the rise in Prices due to an 
 increased supply of Gold which is important and 
 requires separate notice. 
 
 The rise in Prices due to an increased supply 
 of Gold does not instantaneously affect all 
 countries or even all Prices in that country in 
 which the increased supply of Gold first affects 
 Prices. 
 
 386378
 
 38 THE GOLD SUPPLY ch. 
 
 It will be obvious that as the rise of Prices 
 caused by the increased supply of Gold is mainly 
 due in the first instance to the issue of a larger 
 amount of Credit by the Banks, the Prices that 
 will feel the effect first are the Wholesale Prices 
 of those important articles of human consumption 
 that make the chief demands on the Banks, such 
 as wheat, maize, cotton, wool, iron, and so forth. 
 This rise in Wholesale Prices, caused by an in- 
 crease in the supply of Gold, tends, under the 
 operation of economic forces, to be diffused over 
 all other Prices, and affects them more or less 
 quickly according to the circumstances of each 
 case. The rise in ^Vholesale Prices, while wages 
 and other items of cost lag behind, causes an 
 increase in the profits of producers, encourages 
 enterprise, stimulates the demand for labour, and 
 brings about higher rates for the use of Capital. 
 The increased demand for labour reduces un- 
 employment, and gradually causes Wages also 
 to rise until they bear the due economic relation 
 to Prices. 
 
 The persons who suffer are those who are en- 
 titled to receive money payments fixed by law, 
 custom, or contract, the amoimts of whicli either 
 do not vary at all or vary very slowly in accord- 
 ance with changing economic conditions. 
 
 It is hardly necessary to point out that a fall in 
 Prices due to a monetary cause has the opposite 
 effect. It lowers profits, and the fall in profits
 
 V INDIRECT INFLUENCE ON PRICES ;30 
 
 brings down the rate of interest and discount, 
 checks enterprise, leads to unemployment, and 
 may even cause a lowering of Wages in time, 
 while it benefits all persons who are entitled to 
 payments fixed for ever or for a long period. 
 
 It is a difficult question to decide, even in 
 theory, what would be the best Standard of \^alue, 
 but we shall probably all agree that great and 
 rapid changes in the average level of Prices due 
 to fluctuations in the Quantity of Money ought 
 to be avoided.
 
 CHAPTER VI 
 
 VALUE OF MONEY DETERMINED BY SAME I-AW AS 
 VALUE OF OTHER ARTICLES 
 
 The Values of commodities, or the ratios in 
 which they will exchange for each other, are 
 expressed by their respective Prices, and, in 
 addition, the price of each commodity, expresses 
 tlie Value of Gold with reference to that com- 
 modity, and is, therefore, the ratio in which that 
 commodity would exchange for Gold if the ex- 
 change were actually made. 
 
 The general law which regulates the Price of 
 each commodity is stated in the following terms 
 by l*r()fessor Cairnes : — 
 
 " It can, at all events, be shown that there is 
 in every market a price at which it is desirable 
 that the commodity, whatever it may be, shall 
 sell at that time and place : desirable ultimately 
 in the interests of consumers, but in a certain 
 sense desirable in the interests of dealers, taking 
 buyers and sellers together, and which the com- 
 bined operations of })oth. so far as they are well 
 informed respecting the conditions of supply and
 
 cii, VI LAW OF V^ALUE 41 
 
 demand, really tend to establish. 'I'o satisfy our- 
 selves, it is only necessary to consider that, in all 
 states of supply and demand, there is always a 
 certain Price beyond which, if the markets rise, 
 consumption is unnecessarily checked, and the 
 stocks in the country pass off more slowly than 
 is needful. 
 
 " In time the error is discovered and a com- 
 petition sets in amongst holders of the commodity 
 w^hich results in a fall of price tending to stimu- 
 late consumption as much as it had previously 
 been checked. On the other hand, supposing 
 the market price to be set too low, stocks become 
 exhausted too soon, and the undue fall will need 
 to be compensated by a corresponding allowance 
 at a later period. Such oscillations are at variance 
 with the interest of the consumer, and the price, 
 therefore, which renders them unnecessary, which 
 is just sufficient, and no more than sufficient, to 
 carry the working supply o\'er, under such a 
 surplus as circumstances may render advisable, 
 to meet the new supplies forthcoming, may, I 
 think, be conveniently designated as the * proper 
 price ' of the market. It is this price which it 
 seems to me the dealers in the market have dimly 
 in view when by implication they refer to a 
 standard by which they pronounce the actual 
 price to be ' too high ' or ' too low ' or ' what it 
 ought to be.' I would define it as the price 
 which suffices to adjust in the most advantageous 
 way the existing supply and the existing demand 
 pending the coming forw^ard of fresh supplies 
 from the sources of production."
 
 42 THE GOLD SUPPLY ch. 
 
 The principle laid down by Professor Cairues 
 is obviously sound though his statement of it is, 
 for my present purpose, less simple than it would 
 have been if his sole object had been to indicate 
 the law by which the market Price is determined, 
 without attempting to show at the same time 
 that the Price so determined is the Price at 
 which it is most advantageous to the whole 
 community that the article should be sold, and 
 without taking into consideration the possibility 
 of a portion of the stock being held over in view 
 of a possible failure of future supplies. Putting 
 aside the two latter considerations, it may be said 
 that the Price, and consequently the Value in 
 relation to other commodities, of any commodity 
 placed on the market tends to be so fixed that 
 the demand at that Price shall just be sufficient 
 to take off the whole stock, there being neither 
 any portion of the stock wasted by being 
 left unsold nor any portion of the demand 
 for the article at that Price remaining unsatis- 
 fied. 
 
 In exactly the same way the general level of 
 I'rices, which constitutes the Value of Gold, rises 
 or falls in such manner as just to absorb and 
 fully utilise the whole quantity of that metal 
 available as Money, there being neither any Gold 
 left unused, nor any such rise in Prices as to 
 make it impossible to carry on business owing to 
 tlie difficulty, or apprehended difficulty, of
 
 VI LAW OF VALUE 43 
 
 obtaining Money for the transactions in which 
 Gold is, or may be, required. 
 
 The same result is produced in the case of 
 Gold and every other commodity by the 
 operation of a very simple law, imiversally 
 applicable : namely, the desire on the part of the 
 holder of any article for the sake of profit to 
 secure the maximum of profit therefrom. The 
 holder of marketable commodities wishes to sell 
 them at the maximum Price he can obtain, 
 subject to the condition that an unnecessary 
 amount of stock is not left on his hands. The 
 Banker in like manner wishes to make what 
 profit he can, and the limit of his operations, 
 so long as he has confidence in the persons 
 with whom he deals, is his fear that his stock 
 of Gold may fall below what he considers 
 safe. 
 
 If a person engaged in business finds that he 
 has more Gold than he requires he must be 
 assumed to deal with it in a reasonable manner. 
 He will either employ it in his business by 
 purchasing something with it, or he will lodge it 
 with his Banker. 
 
 In the former case it is put into circulation at 
 once and will quickly find its way into a Bank : in 
 the latter case the Banker must also be assumed 
 to act on business principles and not to hold a 
 larger reserve than he really needs. In one way 
 or other the Banker extends his operations until
 
 44 THE GOLD SUPPLY ch. 
 
 the amount of Gold which he considers to be in 
 excess of his requirements is absorbed. 
 
 Owing to the ebb and flow of business there 
 may be at times a superfluity of Gold at the 
 Hanks, or the reserves may fall below what the 
 Hankers consider safe, but the guiding law is 
 that the supply of Gold shall just be fully 
 utilised. 
 
 Tlie general law may be stated in the follow- 
 ing terms : — 
 
 The Value of every commodity which is in 
 the market is varied from time to time w^ith 
 reference to every other commodity so as to 
 approximate to a proper or market V^alue, which 
 market Value is such that the total quantity of 
 that commodity shall be taken off" the market at 
 tliat Value ; that there shall be no portion un- 
 used or superfluous and that no portion of the 
 demand at that Value shall remain unsatisfied. 
 
 This law is as applicable in the case of 
 Money as in the case of ordinary commodities 
 and the same result is produced in the same way 
 in both cases, namely by a series of approxima- 
 tions. In the case of Money, as hi the case of 
 ordinary commodities, the demand at one 
 moment threatens to exceed the supply ; at 
 another the supply is in excess of the demand. 
 In the long run the supply just equals the 
 demand. 
 
 The average or general level of Prices cannot
 
 VI 
 
 LAW OF VALUE /.5 
 
 permanently exceed the level which the supply 
 of JMoney is just sufficient to maintain under the 
 market conditions prevailing at the time ; nor 
 can it permanently fall below the same 
 level. 
 
 While the average or general level of Prices 
 is regulated by the principle just stated, the 
 Prices of particular articles may vary to any 
 extent and in any direction, subject to the single 
 condition that the total demand for Money shall 
 be just equal to the supply. This liability to 
 change in the Price of every commodity, due 
 to economic causes, and subject only to a limit 
 based on the demand for Money arising out of 
 the effect of the total changes of Prices in the 
 case of all commodities, is one of the causes 
 which make it so difficult to devise a satisfactory 
 means of measuring changes in the average level 
 of Prices, due to an increase or decrease in the 
 Quantity of Money. 
 
 I am not aware of any means whereby, even 
 in theory, the changes in the Prices of all com- 
 modities in every place can be combined so as to 
 produce a perfect measure of the Purchasing 
 Power of Gold. 
 
 The measure of the Purchasing Power of 
 Gold which will be found of greatest practical 
 value is the average of the AVholesale Prices of 
 the more important articles of human con- 
 sumption, and this average is the measure of
 
 46 THE GOLD SUPPLY ch. vi 
 
 greatest pnietical value simply because it 
 indicates the change in the Purchasing Power 
 of Gold with reference to those commodities 
 alterations in the Price of which have the 
 greatest effect on the welfare of the mass of the 
 population.
 
 CHAPTER VII 
 
 LIMITATIONS TO THE QUANTITY THEORY 
 OF MONEY 
 
 The Quantity Theory may })e put in this 
 form : — " Other things being equal the level of 
 Prices is proportionate to the Quantity of 
 Money." This proposition has been challenged 
 in recent years, but I have never seen any argu- 
 ment against its truth which seemed to me 
 worth considering, and the controversy should be 
 closed. 
 
 It will be instructive to notice the causes 
 which led to attacks in recent years on the 
 Quantity Theory of Money. 
 
 Professor Irving Fisher explains how that 
 Theory came to be attacked in America : — 
 
 " It has seemed to me a scandal that academic 
 economists have, through outside clamour, been 
 led into disagreements over the fundamental 
 proposition concerning Money. This is due to 
 the confusion in which the subject has been 
 
 47
 
 48 THE GOLD SUPPLY ch. 
 
 thrown by reason of the pohtical controversies 
 into which it has become entangled. 
 
 " As someone has said, it would seem that the 
 theorems of Euclid would be challenged and 
 doubted if they should be appealed to by one 
 political party as against another. At any rate, 
 since the ' Quantity Tlieory ' has become the 
 subject of political dispute, it has lost prestige, 
 and has even come to be regarded by many as 
 an exploded fallacy. The attempts by pro- 
 moters of unsound money to make an unsoimd 
 use of the Quantity Theory — as in the first 
 Bryan Campaign — led many sound money men 
 to the utter repudiation of the ' Quantity 
 Theory.' " 
 
 In England the Bimetallic controversy resulted 
 in a similar attack on the " Quantity Theory." ^ 
 The Bimetallists pointed to the general fall in 
 
 ' In The Times of 7th May, 1883, there a[)peared a letter from 
 the late Lord Goschen in which the following passage occurs : — 
 
 "Some writers have appeared to show something approaching to 
 irritation at the view that the situation of gold should have largely 
 influenced prices. I scarcely know why unless through the appre- 
 hension that the Bimetallist may utilize tliu argument." 
 
 Sir Robert Giffen admitted the " Ajjpreciation " of Gold ; ])ut was 
 strongly opposed to Bimetallism. 
 
 Other Monometallists defended the Single Gold Standard on the 
 ground that the Quantity of Gold had practically no effect on 
 prices. 
 
 This amounted to saying that the Quantity of Gold in the 
 markets of the world had no influence on the Value of Gold as 
 comj)ared with connnodities. I urged that if tliis was the case as 
 regards Gold it ought to be eijually true with regard to Silver, but 
 my argument was not favourably received. 
 
 A Deus ex Machina in the form of Credit always appeared at the 
 critical moment and withdrew (iold l)eyond the limits of human 
 observation I
 
 VII LIMITATION 49 
 
 Gold Prices and urged that it was due to the 
 demonetization of silver which had increased the 
 demand for Gold relatively to the supply. Tliis 
 contention was met, among other arguments, by 
 the reply that the Quantity Theory was not 
 applicable to modern conditions, that if it con- 
 tained any truth at all it was subject to so many 
 limitations and qualifications as to be useless for 
 all practical purposes, that the influence of Gold 
 on Prices was quite insignificant and might be 
 neglected, and that Prices really depended upon 
 Credit which was explained to have a degree of 
 influence that appeared to me to be positively 
 magical. 
 
 It is not my intention to repeat the arguments 
 in support of the Quantity Theory, but as I am 
 endeavouring to explain in what degi-ee, as well 
 as in what way, an increase in the supply of 
 Gold affects Prices, I must devote some space to 
 explaining the limitations involved in the use of 
 the term " other things being equal." 
 
 It has been said that the " other things " are so 
 numerous, so powerful, and so subtle in their 
 mode of operation that the Quantity Theory as 
 above stated is of no practical value. Remarks 
 of this nature might be made regarding many 
 scientific truths which are of great value, and 
 even of Newton's First Law of JNIotion,^ that a 
 
 ' Corpus omne perseverare in statu suo quiescendi vel uiovendi 
 uniformiter in directione nisi quatenus illud a viribus impressis 
 cogitur statum suum inutare. 
 
 E
 
 50 THE GOLD SUPPLY ch. 
 
 material body if at rest would remain at rest, 
 and if moving would continue to move in a 
 straight line with uniform velocity unless acted 
 on by some force. No human being has ever 
 seen a body moving in a line which could 
 be called absolutely straight. At most, the 
 body would be moving in a line which was 
 straight with reference to points assumed to 
 be fixed, but which were really moving. Nor 
 has anyone e\'er seen a body wliich was really 
 at rest in space. We are in the habit of saying 
 that a body is at rest when it preserves the 
 same relative position to other bodies, but in 
 reality every body of which we have any experi- 
 ence is always in motion. Every body on the 
 surface of the earth has a motion due to the 
 revolution of the earth on its axis ; has another 
 motion due to the revolution of the earth round 
 the sun, partakes of the drift in space of the 
 whole solar system, and for anything we know 
 to tlie contrary, may be affected as to its position 
 in space by innumerable other causes. 
 
 Nor, so far as our experience goes, has any 
 body ever moved, or even existed, which was 
 not being acted upon by forces from outside. 
 
 It miglit then be said that it was useless to 
 lay down a Law of Motion wliicli only applied 
 to the case of a body at rest since no body 
 ever is at rest, or mo\iiig in a manner in which 
 no body has ever been known to move, or
 
 VII LIMITATION 51 
 
 existing under conditions which never could 
 be reahsed in practice. Nevertheless we know 
 that Newton's First Law of Motion is of the 
 greatest practical value, and 1 shall show here- 
 after that conclusions of some practical value 
 can be drawn from the Quantity Theory of 
 Money. 
 
 For the present, however, I limit myself to 
 indicating the " other things " which are assumed 
 by the Quantity Theory to be equal, but which 
 in practice never are equal. 
 
 The amount of work which Money has to 
 do, in so far as it is employed directly in 
 effecting exchanges, is influenced by the number 
 and quantities of commodities to be exchanged, 
 by the amounts in which the exchanges take 
 place, by the number of the exchanges, and 
 by variation in the times at which, and the 
 localities in which, the exchanges are effected. 
 All these causes affect the amount of Money 
 necessary to carry out the exchanges. As 
 the population of the world is increasing, 
 and also the wealth per head of population, 
 and as the number of exchanges is growing in 
 a still higher degree, owing to the subdivision 
 of labour and the linking together in commerce 
 of countries which are very far apart, the 
 changes I have enumerated tend, for the most 
 part, to increase the work Money has to do, 
 and to lower Prices. It seems to me impossible 
 
 E 2
 
 52 THE GOLD SUPPLY ch. 
 
 to estimate the exact amount of iiifiueiice which 
 each of these causes exercises on the average 
 level of Prices ; at any rate it is beyond my 
 power to do so. 
 
 The exchanges of commodities are effected 
 either by passing Money from hand to hand or, 
 under our system of Credit, by giving promises 
 to pay Money, which are generally set off 
 against eacli otlier so that Money need not in 
 such cases be transferred from one person to 
 another, or l)y passing from hand to hand 
 something which is conventionally, and often 
 legally, held to Ijc of the same Value as Money 
 and which in practice is of the same Value ; of 
 this nature are all Token Coins. The giving of 
 promises to pay which are set off against each 
 other constitutes tlie modern system of Credit 
 and has reduced the demand for Money to an 
 extent which could hardly be exaggerated, and 
 has consequently lowered its Value or raised 
 Prices to an equal extent. 
 
 It will be obvious that if Money passes from 
 hand to hand, the amount of work it can do 
 will depend very greatly on the rapidity with 
 which it changes ha) ids. A sovereign may 
 effect one exchange in a day or it may effect 
 fifty. Under modern conditions, the tendency 
 is for Money to change hands more rapidly 
 than before, the resulting influence enabling 
 exchanges to be eflcctcd with a less Quantity
 
 VII LIMITATION 53 
 
 of Money and thus acting in the direction of 
 raising Prices. 
 
 The system of effecting exchanges by giving 
 promises to pay, and setting off these promises 
 against each other, effects a very great economy 
 of Gold and may be modified in various ways. 
 It may be extended so as to cover exchanges 
 which were formerly effected by passing Money 
 from hand to hand, and it may be said ^Wth 
 confidence that extensions of this nature are 
 always taking place ; that they lead to a great 
 economy of Gold and so tend to raise Prices. 
 The system of Credit may, of course, be con- 
 tracted and exchanges effected by passing Money 
 from hand to hand, which were formerly dealt 
 with by Credit, but such changes only take 
 place to a \'ery limited extent and as a 
 temporary measure. The general tendency is 
 in the opposite direction. 
 
 And just as there may be a more rapid circula- 
 tion of INIoney from hand to hand, so there may 
 be a more rapid circulation of promises to pay 
 or orders to pay. Two men who have each a 
 credit of £10,000 at their respective Banks may 
 issue cheques to any extent in favour of each 
 other provided that each is careftil to see that the 
 amount of money standing to his credit is 
 never exhausted. In this way a great number of 
 exchanges may be effected without the issue of a 
 greater amount of Credit by the Banks.
 
 54 THE GOLD SUPPLY ch. 
 
 Although every Bank which keeps a reserve of 
 Gold regulates the amount of Credit it issues by 
 reference to its stock of Gold, the proportion 
 between Gold and Credit is not invariable. 
 Under varying conditions a greater or less amount 
 of Credit will be issued against the same amount 
 of Gold. But each Bank has its own rule on the 
 subject and the proportion between liabilities and 
 Gold which any specified Bank considers safe 
 does not vary greatly within any definite period 
 of time which may be chosen. The general 
 tendency, no doubt, is towards issuing a larger 
 amount of Credit on Reserves of the same 
 magnitude. 
 
 Some exchanges are effected without any use 
 of Gold or of Credit based on Gold. Such 
 exclianges are those which are effected by passing 
 token coins (silver, copper, or bronze) from hand 
 to hand. A rise in the Prices of commodities 
 causes no additional demand for Gold in so far 
 as commodities are bouglit and sold for token 
 coins and a fall in sucli Prices sets free no Gold 
 for other purposes. 
 
 In India, for example, the production of 
 commodities, as well as general trade and com- 
 merce, might increase to any extent, and internal 
 prices and wages might rise enormously, without 
 any increase in the demand for Gold as INIoney 
 so long as the currency in use was confined to 
 tlie silver rupee. Such changes would lead to an
 
 VII LIMITATION 55 
 
 increased demand for silver from which to manu- 
 facture new rupees, but would not directly 
 increase the demand for Gold. Indirectly there 
 mif^ht be a greater demand for Gold. With 
 higher prices, which means cheaper Gold, the 
 Indians might hoard a larger quantity, and some 
 additional gold might be required to maintain 
 the value of the silver rupee. 
 
 An extension of the use of Paper Notes 
 generally effects an economy of Gold and in this 
 way tends to lower its Value in relation to 
 commodities, or, in other words, to raise Prices. 
 
 If £20,000,000 in notes are issued on a reserve 
 of £10,000,000 in Gold, and if the notes are 
 freely accepted in place of Gold, the result is 
 exactly the same as if the world's supply of Gold 
 had been increased by £10,000,000. 
 
 I have now enumerated the other things which 
 are assumed to be equal in the statement of the 
 Quantity Theory and which affect the average 
 level of Prices, and, putting aside for the time 
 being the question of the Quantity of Money, it 
 will be seen that they fall into two classes. 
 
 (1) Influences affecting the amount of work 
 
 Money has to do, and 
 
 (2) Influences affecting its efficiency in the 
 
 performance of that work. 
 The efficiency of Money for the effecting of 
 exchanges is enormously increased when it is used 
 as a basis for Credit.
 
 of) THE GOLD SUrPLY ch. 
 
 If we denote the work Money has to perform 
 })y JF, its efficiency hy E, and if Q and P 
 represent, respectively, the Quantity of Money 
 and the average level of Prices, we may state the 
 relation hetween them in the following form : — 
 
 1 should be very im willing to attempt to 
 assign a definite numerical value to JE and JV, or 
 even P, at any particular time, but the form of 
 the equation enables us to draw conclusions 
 which are independent of the varying Values of 
 E, W, and P. 
 
 E 
 
 We can see that if ^. ftills to half its former 
 
 value, P (the average level of Prices) will remain 
 the same if, simultaneously, Q is doubled. Or, 
 
 if ^.increases two-fold, P will remain the same 
 
 E 
 
 if Q is halved. If -— hicreases ten-fold and Q 
 IV 
 
 two-fold the resulting increase of P will be 
 
 twenty-fold. The effect of considerable changes 
 
 in the Quantity of Money is, in fact, never 
 
 negligible. Other causes may, or may not, 
 
 produce greater changes in the average le\'el of 
 
 Prices than is brought about during the same 
 
 period by fluctuations in the Quantity of Money, 
 
 but liowever great these changes may be, they 
 
 can always be counteracted by a sullicient change
 
 VII LIMITATION 57 
 
 K 
 
 in the Quantity of Money. The Vahie of ~ 
 
 changes gradually and not per .saltum. 
 
 The conclusion at winch we have just arrived 
 explains how it happens that the issue of in- 
 definite (][uantities of inconvertible Paper Money 
 has always indefinitely increased Prices, wliat- 
 ever precautions and safeguards might be adopted. 
 To those who hold that under modern conditions 
 Prices depend on Credit and that effect of the 
 Quantity of Money is negligible, I would suggest 
 that they should consider the effect on Prices of 
 issuing (say) £300,000,000 of inconvertible 
 Paper Money of full legal tender in the British 
 Isles. The additional Quantity of Money 
 required to make a certain amount of change in 
 Prices in any particular country depends on the 
 Quantity of Money already in use in that country, 
 and is in no way affected by the extent to which 
 Credit is in use. The amount of Credit, stated 
 in terms of Money, increases automatically as the 
 Quantity of Money increases. 
 
 No measures affecting the Currency which 
 have been adopted in violation of the Quantity 
 Theory of iVIoney have ever proved successful, 
 and no measures which depended for their 
 success on the soundness of that Theory have 
 ever failed if given a fair trial. The maintenance 
 of the Gold Standard in India and the other 
 countries that have established a Gold Exchange
 
 58 THE GOLD SUPPLY ch. 
 
 Standard would become impossible if the level 
 of Prices could not be affected by varying the 
 amount of the coins in circulation. The main- 
 tenance at par of Bank Notes, as well as of the 
 silver rupee, by means of a Ciold Reserve is based 
 on the same principle. When the Value of the 
 Rupee tends to fall below l-s*. 4>d. the Gold 
 Reserve affords the means of withdrawing 
 rupees from circulation, and the reduction in 
 number raises their Value and lowers rupee 
 Prices, the raising in Value and the lowering of 
 Prices being one and the same phenomenon. 
 Bank Notes are maintained at par in the same 
 way. If necessity arises, they are exchanged for 
 Gold, and the reduction in their Quantity causes 
 their Value to be maintained. 
 
 Token coins, wlietlier of copper, bronze, nickel, 
 or silver, are maintained at their UJS^eeievel in 
 relation to gold by limiting their Quantity. Not 
 more of such coins can be safely issued than are 
 just sufficient to meet the wants of tlie public at 
 the level of prices existing for the time being. 
 Great evils have been caused in Cliina in the 
 present day by the local authorities issuing token 
 coins, called " cash," in excess of tlie amount 
 necessary to carry on business. In such cases 
 the casli has always depreciated in reference to 
 silver, which is tlie Standard of Value in that 
 country. This depreciation is, of course, accom- 
 panied l)y a rise of Prices when such Prices are
 
 VII LIMITATION 59 
 
 stated in terms of the token coins. Similar 
 difficulties were experienced in this country in 
 former times, and notably in the reigns of 
 James I. and Charles I. Important as are the 
 limitations to the Quantity Theory of Money 
 involved in the assimiption that other things are 
 equal, the man who has to deal with Monetary 
 questions can no more disregard the Quantity 
 Theory in any practical measures he may advo- 
 cate than the astronomer can neglect the law of 
 gravitation in studying the movements of the 
 heavenly bodies.
 
 CHAPTER VIII 
 
 SUMMARY OF CONCLUSIONS 
 
 The following are the principal conclusions 
 at which we have already arrived : — 
 
 1. The ratios which Prices bear to each other 
 are determined by economic considerations and 
 are independent of the Standard of Value which 
 may happen to be in use. 
 
 2. Money is distributed, by a natural process, 
 throughout all countries having the same Standard 
 of Value in proportion to the requirements in 
 each place. 
 
 (If a country uses Gold as the Standard of 
 Value, but not as Currency, special arrange- 
 ments are required to keep its Currency at 
 the same relative value to Gold. If these 
 arrangements break down tlie country 
 ceases — for the time being — to have a 
 Gold Standard). 
 
 3. As the ratios which the Prices of different 
 commodities bear to each other are determined 
 by economic influences, a change in economic
 
 CH. VIII SUMMARY OF CONCLUSIONS 61 
 
 conditions may tend to bring about a rise in 
 Prices in one country as compared with those in 
 others. In each case Money flows to the country 
 where Prices tend to rise and the final change 
 takes the form of a rise in Prices in one country 
 and a fall in the others. 
 
 If two countries do not use the same Standard 
 of Value this flow of Money from one country to 
 the other is impossible and the change in 
 economic conditions produces an alteration in 
 the relative Value of the two Standards. 
 
 4. Changes in Prices and alterations in the 
 Rate of Exchange constitute the means whereby 
 the trade of the world is carried on in accordance 
 with economic influences. 
 
 5. Other things being equal, the general level 
 of Prices is proportional to the Quantity of 
 Money. 
 
 If, in any country, token coins of hmited 
 legal tender are used, the quantity of such coins 
 must be limited to the amount which can be 
 employed at the level of Prices prevailing for the 
 time being. Any considerable excess, which is 
 not of a temporary nature, causes the token 
 coins to fall below their nominal Gold Value, 
 and Prices measured in token coins rise in 
 proportion to the fall in Gold Value. 
 
 6. The relation between Prices and the 
 Quantity of Money may be expressed by the 
 equation,
 
 62 THE GOLD SUPPLY ch. 
 
 P represents average level of Prices ; Q is the 
 Quantity of Money, E represents the Efficiency 
 of Money as the Medium of Exchange and is 
 affected both by extensions of Credit and by 
 altered rapidity of circulation. W is the total 
 work to be performed. 
 
 7. Prices are the expression of the N^alue of 
 Gold in comparison with commodities, and the 
 law which regulates the \^alue of each commodity 
 with reference to other commodities is the same 
 as that which regulates the A^alue of Gold in 
 relation to commodities. The Value of Gold in 
 relation to commodities (in other words, Prices) 
 is fixed at that rate which will just cause the 
 whole available supply of Gold to be utilised, 
 there being neither any surplus nor any deficiency. 
 
 8. Under the modern system of Credit, business 
 is very largely carried on b}^ giving what are in 
 effect Promises to Pay, and these Promises are 
 set off against each other ; in this way a great 
 economy of Gold is secured. 
 
 9. The modern system of Credit, as carried 
 out with the assistance of Banks, exercises an 
 important economic influence, but the economy 
 in the use of Money which it effects is the 
 measure of its influence on the average level of 
 Prices. 
 
 10. Tlie l^riccs of articles wliich are l)ougiitand
 
 VIII SUMMARY OF CONCLUSIONS C3 
 
 sold for Credit and in regard to which no money 
 passes from hand to hand, must preserve the due 
 economic relation to Prices which are limited by 
 the supply of Money, and the influence of Money, 
 direct and indirect, on those portions of the world 
 of trade and commerce where Money is used is 
 automatically extended to all Prices in countries 
 that make use of the Gold Standard, inchiding 
 the Prices of the articles bought and sold 
 with token coins. 
 
 11. New supplies of Gold exercise their chief 
 and primary influence on Prices by the temporary 
 lowering of the rate of discount and of the 
 charge for advances and loans which they 
 produce when they first find their way into 
 the Banks. 
 
 The Wholesale Prices of the main articles of 
 production and consumption, and especially those 
 of them that are dealt with in the international 
 markets, are the first to feel the effects of any 
 increase or decrease in the Quantity of Money. 
 The influence of economic forces tends to cause 
 all others Prices to rise or fall in proportion. 
 
 12. As the rise in Wholesale Prices due to an 
 increase in the Quantity of Money does not 
 extend immediately to allP rices, or to Wages 
 and other money payments fixed by contract or 
 custom, the producers' scale of profit rises, 
 enterprise is stimulated, borrowers desire more 
 credit and are prepared to pay higher rates for it.
 
 64 THE GOT.D SUPPLY ch. viii 
 
 The secondary effect of an increase in the 
 Quantity of Money is, therefore, a rise in the 
 general rate of profit, and a rise in the rates of 
 interest and discount. 
 
 13. Owing to the fact that an increase or 
 decrease in the Quantity of Money does not 
 affect all Prices and AVages simultaneously and 
 affects slowly, if at all. Prices fixed by custom, 
 by law, or by contract, such changes affect 
 different persons and different classes of the com- 
 munity in different ways and are either preju- 
 dicial or beneficial to them as the case may be. 
 
 14. A number of agencies and influences, 
 indefinitely numerous, are unceasingly at work 
 to adjust the scale of Prices to the supply of 
 Money, and there seems to be no more difficulty 
 experienced in doing so when the Quantity of 
 INIoney is falling off than when it is increasing. 
 On the contrary, the stimulus to enterprise and 
 speculation which follows a general rise in Prices, 
 appears more likely to give rise to financial crises 
 and panics when the supply of new Gold is in 
 excess than when it is in defect.
 
 CHAPTER IX 
 
 PRACTICAL VAI.ITE OF THE QUANTITY THEORY 
 
 Having laid down the general laws which 
 regulate the influence of Gold on Prices we may 
 now consider what conclusions can be drawn 
 from them. 
 
 Let us take in the first place the general ex- 
 pression for the Quantity Theory : 
 
 -P = Qx ^ 
 
 From this equation we see that, however great 
 the change may be in y= ' we can always main- 
 tain any average level of Prices we may prefer 
 by suitable alteration of Q, the Quantity of 
 Money. 
 
 It might of course so happen, theoretically, 
 -pp 
 that the changes in j- were so great and rapid 
 
 that it would be very difficult to counteract 
 them by modification of Q. In practice, how-
 
 GO THE GOTJ3 SUPPLY ctt. 
 
 ever, ~ does not vary so much within a hmited 
 
 period of time as as to make it difficult to main- 
 tain P at, approximately, the same figure by 
 acting on Q. So long as we can control Q we 
 are, practically as well as theoretically, in com- 
 mand of the situation. It is this power of con- 
 trolling Q which enables the Indian Gold 
 Standard to be maintained as well as the Gold 
 Standard in other countries which do not make 
 use of a Gold Currency. 
 
 It also makes it possible for the world to sub- 
 stitute for a metallic Standard of Value a system 
 under which the monetary unit would represent 
 a definite amount of Purchasing Power. To do 
 so it would only be necessary to alter Q from 
 time to time so as to preserve the same value of 
 P. AVhether it will ever be desirable to effect 
 this change, and whether the world will ever be 
 sufficiently advanced in civilization to be able to 
 carry it out, are questions which can be left to 
 the future for decision. 
 
 It does not appear to me that there is the 
 slightest room for doubt regarding the soundness 
 of the Quantity Theory of Money as I have 
 stated it. In practical measures dealing with the 
 Currency and the Standard of Value it is as im- 
 possible to neglect it as it would be to assign no 
 influence to tlie law of gravitation in dealing with 
 the bodies that constitute the Solar System.
 
 IX VALUE OF QUANTITY THEORY 67 
 
 But when we pass beyond the general Theory 
 of the influence of the Quantity of Money on 
 Prices to consider to what extent the supply of 
 new Gold has actually affected Prices within any 
 definite period, and what has been the economic 
 effect of such changes of Prices, we enter on more 
 debatable ground. 
 
 The " other things " which we assumed to be 
 equal in the statement of the Quantity Theory 
 never are equal. The population, the wealth, and 
 the trade of the world are always increasing. The 
 commerce of the world tends to be carried on 
 more and more by Credit, and the organization 
 of Credit in places where it previously existed is 
 continually being perfected. The rapidity of 
 circulation tends also to increase from a variety 
 of causes. On the other hand, the increase in the 
 population and wealth of the world tends to a 
 constantly increasing amount of Gold being used 
 otherwise than as Money. 
 
 The Prices of particular commodities and of 
 services are continually rising and falling owing 
 to economic causes , and I know of no means by 
 which an exact measure of the rise or fall in the 
 general Purchasing Power of Money can be de- 
 vised. For practical purposes we must be content 
 to ascertain as accurately as we can the change 
 in the Purchasing Power of Money with reference 
 to those articles changes in the Price of which 
 have the greatest effect on the welfare of 
 
 F 2
 
 68 THE GOLD SUPPLY ch. 
 
 human beings, and in this view of the subject 
 there is no better test of the rise and fall of the 
 Purchasing Power of Money than the average 
 Price of the chief articles of human consumption. 
 As we cannot measure with accuracy the increase 
 or decrease in the general Purchasing Power of 
 Money, and as we have hitherto been unable to 
 ascertain to what extent other causes than an 
 increase or decrease in the Quantity of Money 
 have operated in producing that increase or 
 decrease, it will be obvious that we cannot 
 determine the precise amount of influence which 
 changes in the Quantity of Money may have had 
 on prices within any definite period of time. 
 But of one thing we can be certain, namely, that 
 whatever other causes may have been in opera- 
 tion the influence of changes in the Quantity of 
 Money has been proportional to the magnitude 
 of those changes. 
 
 The best Standard of Value is tlie Standard 
 which gives results which best promote tlie 
 welfare of human beings. It may be that 
 the best results would not be given in every in- 
 stance by the Standard of Value of which the 
 Purchasing Power remained the same with 
 reference to the chief articles of human consump- 
 tion, l)ut it is obviously desirable that there should 
 not be great and rapid fluctuations in the general 
 Purchasing Power of Money, and for practical 
 purposes the best Standard would ])e that under
 
 IX VALUE OF QUANTITY THEORY 69 
 
 which the Purchasing Power of Money with re- 
 ference to the chief commodities remained nearly 
 the same. At any rate it seems impossible to 
 devise a better standard. 
 From the equation 
 
 we see that it is of importance that Q should not 
 be subject to great and sudden fluctuations. If 
 such fluctuations occur there must be corres- 
 ponding changes in the general level of Prices 
 unless, what is highly improbable, simultaneous 
 
 fluctuations in yj^ balance the changes in Q. 
 
 So long as Gold and Silver, used jointly, con- 
 stituted the Money of the world Q was larger 
 than it is at present, and the use of great quan- 
 tities of Silver by certain Eastern Countries, both 
 as Currency and for the purpose of hoarding, acted 
 on the World's Standard of Value as ballast acts 
 on a ship. This safeguard has now been lost, and 
 I foresee the possibility of gi-eat difficulties in 
 the future if Q is indefinitely reduced and the 
 business of the world carried on in an increasing 
 degree by means of Credit. 
 
 In such case sudden and large increases or de- 
 creases in the production of Gold would have a 
 great influence on Prices. It would be a merit 
 in our present Standard of Value if the yearly 
 production of Gold increased as Prices fell (which
 
 70 THE GOLD SUPPLY ch. ix 
 
 would mean that Gold was increasing in Value) 
 and fell off as Prices rose, but it is quite 
 impossible to say at the present time what 
 fluctuations in the yearly production of Gold 
 will be experienced in the future.
 
 CHAPTER X 
 
 CONSEQUENCES OF A GENERAL P^AI.L OR RISE IN 
 
 PRICES 
 
 That gi*eat fluctuations in the average level of 
 Prices are an evil admits of no doubt and I 
 believe that such fluctuations do, in practice, 
 exercise an important influence on human 
 progress and welfare. 
 
 Let us suppose that there are classes of persons 
 who are under an obligation to pay £100,000,000 
 yearly, and that they obtain the Money required 
 to meet their obligations by the sale of articles 
 which they produce. If a certain quantity of the 
 commodities which they produce sell at one time 
 for £100,000,000 and the Price of these commo- 
 dities falls by one-third the sale of the same 
 quantity will only produce £66,666,666|, and 
 the quantity of commodities that must be sold in 
 order to produce £100,000,000 will require to be 
 increased by no less than fifty per cent. In 
 other words, although the amount of the debt 
 measured in pounds sterling remains the same as
 
 72 THE GOLD SUPPLY ch. 
 
 before, the real burden which the debtors have to 
 carry has increased by fifty per cent. They are, 
 in fact, in the same position as if Prices had 
 remained the same and the amount of their 
 yearly payments had been raised by a stroke 
 of the pen from £100,000,000 to £150,000,000. 
 On the other hand, if Prices rise by one-third the 
 sale of the quantity of goods that formerly 
 produced £100,000,000 would, under the new 
 conditions, produce £133, 333, 333 J and the 
 debtors would only have to sell three-fourths as 
 much in order to produce £100,000,000 ; their 
 burden will have been reduced by one-fourth. 
 The difference to the debtor between a rise and a 
 fall in Prices is enormous. If Prices fall one- 
 third he has to part with fifty per cent, more 
 commodities in order to meet his liability ; if 
 Prices rise by one-third lie can meet his 
 obligations by selling one-fourth less. A simple 
 calculation will show that the real burden of the 
 debtor is exactly twice as great in the one case 
 as in the other. Bearing in mind the enormous 
 number of transactions in the present day which 
 invohe the periodical payment of money, or the 
 payment of money at a future time, it will 
 be obvious that a general rise or fall in Prices 
 must exert a very great influence, for better 
 or for worse, on tlie position of many classes of 
 the community. The national debts of the 
 world amount to some 6,000 or 7,000 millions
 
 X FALL OR RISE IN PRICES 73 
 
 sterling. There are in addition the amounts 
 borrowed by MunicipaHties and Local Authori- 
 ties, the money lent on Mortgages, and that 
 due on Bonds and so forth. 
 
 There are also the other fixed money pay- 
 ments which are not affected by changes in 
 the Prices of commodities, so that it is difficult 
 to exaggerate the profound and yet obscure in- 
 fluence that is exercised by changes in the 
 general level of the Prices of commodities. 
 
 Prices are always rising or falling omng 
 to economic causes, and the man of business looks 
 only to such causes, and, for his purpose, need 
 not look beyond them, but theoretical reasoning 
 leads to the conclusion that a general Rise or a 
 general Fall in Prices must be followed, or accom- 
 panied, by consequences of a very important 
 nature, and it seems to me that history confirms 
 this conclusion. 
 
 In the preceding paragraph I have dealt with 
 the effect of a general Rise or Fall of Prices on the 
 creditor and debtor classes, but the rise or fall of 
 Prices is not simultaneous and immediate, and 
 effects of importance from an economic point of 
 view may be produced by the fact that the fall 
 or rise in Prices only affects some transactions in 
 the first instance, and that its extension to others 
 is gradual. 
 
 An additional supply of Money produces its chief 
 effect on Prices in the first instance by increasing
 
 74 THE GOLD SUPPLY ch. 
 
 the supply of, and lowering the cost of, Credit- 
 The Rise in Prices that is thus caused affects the 
 Wholesale Prices of those articles which are 
 bought and sold for Credit, and as all Prices and 
 Wages do not rise simultaneously, and at any rate 
 do not rise immediately to the full extent, the 
 producers of such articles find their profits in- 
 creasing, though such increase is obtained in the 
 first instance at the expense of the other members 
 of the community. The increase in the rate of 
 profit stimulates enterprise, leads to a greater 
 demand for Credit, raises the rate of discount 
 and interest, and makes persons in business 
 willing to pay a higher rate for Credit, If the 
 supply of Gold continues abundant, prices, gener- 
 ally, continue to rise, and production is increased ; 
 times are said to be prosperous and really are 
 prosperous in the sense that a greater quantity 
 of wealth is being produced e\'ery year though 
 certain classes of the community suffer. The 
 persons who suffer most are those whose 
 incomes are fixed either permanently or for a 
 long period, or do not respond, or do not res- 
 pond fully and immediately, to the rise in Prices. 
 The position of the wage-earner requires special 
 notice. The stimulus to enterprise and the 
 higher rates of profit lead to an increased demand 
 for labour, reduce unemployment, and tend to 
 raise Wages. In the first instance there is some 
 loss owing to Wages not kee])ing pace with the
 
 X FALL OR RISE IN PRICES 75 
 
 rise in Prices, but against that may be set, for 
 what it is worth, the compensation arising 
 from fuller and more continuous employment. 
 In the long run the sufferers are those 
 whose incomes do not respond, or do not 
 respond completely, to the rise in Prices. 
 The loss which they incur represents so much 
 additional gain accruing to other members of 
 the community. 
 
 A general Fall in Prices due to a monetary 
 cause would have the opposite effect. It 
 would be attended with a low rate of profit, 
 interest, and discount. Enterprise would be 
 checked, unemployment would follow, and the 
 lack of employment would be a drawback to 
 the gain the wage-earners would derive from 
 Prices falling more quickly than Wages. 
 
 Economic considerations, of course, regulate in 
 the long run the relation between Wages and the 
 Prices of commodities, and it is quite possible for 
 Wages to remain at the same level, or even rise, 
 while the Prices of commodities are falling. 
 
 While the inflvience of Money on Prices seems 
 to me to be beyond question, and while the 
 theoretical results of a general Rise or Fall in 
 Prices are what I have just explained, the ques- 
 tion of the practical effects that have been ex- 
 perienced in the past from a great increase or 
 decrease in the supply of Money must be separ- 
 ately considered.
 
 7(> THE GOLD SUPPLY ch. 
 
 The amount of Money in use in the present 
 day is small in proportion to the wealth of the 
 world and the total quantity of commodities that 
 change hands every year by purchase and sale. 
 Money is the basis of the system by which the 
 business of the world is carried on, but the super- 
 structure of Credit is large, and though there is a 
 relation between the Quantity of Money and 
 Credit it is not a fixed relation for all time and 
 for all places. Each country has its own system 
 of Credit, which differs more or less from that of 
 other countries ; the organization of Credit in 
 every country is always growing and being 
 improved ; and even while the system of Credit 
 remains the same there is some amount of elas- 
 ticity in the relations between Money and Credit. 
 
 It may then be reasonably asked whether, in 
 practice, important increases in the relative 
 Quantity of Money produce the changes we 
 have just indicated in the direction of raising 
 Prices, increasing profits, stimulating enterprise, 
 and affecting injuriously or beneficially the 
 economic welfare of various classes of the 
 connnunity. 
 
 Tiicre can be no (juestion that the large 
 increase in the Quantity of Gold and Silver 
 made available in the Western world by tlie 
 discovery of America caused Prices to rise very 
 largely. I need not do more than quote what 
 Adam Smith lias said on tliis subject : —
 
 FALT. OR RISE IN PRICES 
 
 1 1 
 
 "The discovery of the abundant mines of 
 America reduced, in the sixteenth century, tlie 
 value of gold and siher to about a third of wliat 
 it had been before." 
 
 And again : — 
 
 " The discovery of the abundant mines of 
 America seems to have been the sole cause of 
 this diminution in the value of silver in pro- 
 portion to that of corn. It is accounted for, 
 accordingly, in the same manner by everybody ; 
 and there never has been any dispute either 
 about the fact or about the cause of it." 
 
 I desire to call the special attention of the 
 reader to the fact that in those days the general 
 rise of Prices took place slowly and after the 
 lapse of a considerable time. The Gold and 
 Silver which came from South America was for 
 the most part employed by the Spanish Govern- 
 ment for the promotion of a political and military 
 policy in Europe. It found its way more slowly 
 into the channels of trade than it would do in 
 the present day, and the stream of commerce 
 did not flow with such rapidity nor touch the 
 shores of so many countries as it now does. Adam 
 Smith says with regard to this phenomenon 
 that "the discovery of the mines of America 
 does not seem to have had any very sensible 
 effect upon the price of things in England till 
 after 1570 ; though even the mines of Potosi
 
 78 THE GOLD SUIM^LV ch. 
 
 had been discovered more than twenty years 
 before." 
 
 After the great discoveries of gold in California 
 and Australia the same tendency to a rise in 
 Prices was observed. Jevons wrote as follows 
 in 1863:— 
 
 " Overlooking fluctuations due to variations of 
 supply, and the greater fluctuations due to 
 variations of demand, it may be confidently 
 stated that prices pursued a downward course 
 from 1820, about the time when the Currency 
 was re-established on a gold basis, to 1850. 
 
 " The fall, it is true, w^as most rapid at first. 
 Silver, too, does not share in the fall. We can 
 only explain these facts, so ffir as I am aware, 
 by supposing that the supply of the precious 
 metals did not keep pace with the demand, or 
 tliat while modes of procuring, raising and 
 making other articles more easily and cheaply 
 were constantly being discovered, no such great 
 improvements took place in the case of the 
 precious metals. It should be remembered, 
 too, tliat the supplies of Russian Gold were 
 failing and the Spanish-American colonies were 
 falling into anarchy. 
 
 " Thus while industry, trade, and property 
 were rapidly advancing in Great Britain, 
 America and most other parts of the world, 
 there was no corresponding advance in the 
 production of tlie precious metals. Prices, both 
 in Gold and Silver continually receded. Now 
 if, while the introduction of free trade, railways,
 
 X FALL on RISK IN PUICES 7\) 
 
 telegraphs and innumerable other improxements 
 accelerated the extension of trade, no new 
 discoveries of gold and silver had been made, 
 what must have occurred ? Prices must have 
 continued in the downward coui^se theij had 
 pursued for thirty or forty years befoi^e. But they 
 did not continue in this course — on the contrary 
 they turned upwards in a sudden and decided 
 manner as shown in the body of this tract. 
 And this change was simultaneous with the 
 discovery of the new gold-fields. Half the 
 Prerogative Instances of Bacon are exemplified 
 in this question, and if the philosophy of 
 observation and common sense may be applied 
 to statistical matters, we can draw but one 
 conclusion — that prices have risen in consequence 
 of the gold discoveries." 
 
 The reader will notice that the tendency to 
 a rise in Prices showed itself more quickly after 
 the great Gold discoveries in California and 
 Australia than had been the case after the 
 discovery of great quantities of both Gold and 
 Silver in South America. 
 
 When Germany substituted Gold for Silver 
 as the Standard of Value (1871-73), other 
 nations followed her example, and a greatly 
 increased demand for Gold arose owing to other 
 causes. The special demands for Gold at this 
 time came to at least £200,000,000, being about 
 ten times the a\'erage yearly production of 
 Gold. The production of Gold had also fallen
 
 80 THE GOLD SUPPLY ch. 
 
 off. The late Lord Cioseheii used the following 
 language on this sul)jeet in 1883 : — 
 
 '" Economists will accordingly ask tliemselves 
 what result, if any, is such a phenomenon likely 
 to liave produced ? I think there is scarcely an 
 economist hut would answer at once : ' It is 
 prohable, it is almost necessary, it is according 
 to the laws and principles of currency, that such 
 a phenomenon must be followed by a fall in the 
 prices of commodities generally. Just as a 
 large amount of gold poured into Europe in 1852 
 and subsequent years created a rise in prices, so 
 the counter-phenomenon must produce a fall.' " 
 
 After this increased demand for Gold took 
 effect there was experienced a marked fall in 
 Prices. Low rates of profit, interest, and dis- 
 count prevailed ; there was a good deal of 
 unemployment, but not a general and serious 
 fall in Wages. So great was the depression in 
 trade and industry that in 1885 a Royal Com- 
 mission was appointed in England to examine 
 and report upon the whole subject. That 
 Commission made its final report in 1886, and, 
 while enumerating a number of important 
 considerations having no connection with tlie 
 Standard of Value, which appeared to them to 
 account, to a large extent at any rate, for 
 the fall in Prices and depression in trade 
 and industry, added the following remarks 
 (para. 72): -
 
 X FALL OR RLSE TN l^RTCES 81 
 
 " We expressed in our third report the 
 opinion that the fall in Prices, so far as it lias 
 been caused by an appreciation of tlie Standard 
 of Value, was a matter deserving of the most 
 serious consideration, and we do not therefore 
 think it necessary to investigate at length the 
 causes which have brought it about. But we 
 desire to give it a leading place in the 
 enumeration of the influences which have tended 
 to produce the present depression." 
 
 The Royal Commission which was sub- 
 sequently appointed " to enquire into the recent 
 changes in the relative values of the precious 
 metals, shown by the decrease in the Gold 
 Price of Silver " dealt with the question of tlie 
 suggested " Appreciation of the Standard of 
 Value." 
 
 A minority of the members of that Com- 
 mission (five out of twelve) held that there 
 had been an injurious fall in Prices in the 
 United Kingdom, and recommended a return 
 to the joint use of both Silver and Gold as 
 Money. The majority ^ said : — 
 
 " We think that the fall in the prices of 
 commodities may be, in part, due to an appre- 
 
 1 The majority was composed of seven members and the minority 
 of five. Mr. Leonard Courtney (now Lord Courtney of Penwith) 
 was one of the majority, but on the question of the effect that 
 the special demands for gold had had on prices he might more 
 properly be classed with the minority. If this were done the 
 members of the Committee would be found to have been equally 
 divided. 
 
 G
 
 82 THE GOLD SUPPLY ch. 
 
 ciatioii of Gold, but to what extent that has 
 affected Prices we find it impossible to deter- 
 mine with any accuracy We believe 
 
 the fall to be mainly due, at all events, to 
 circumstances independent of changes in the 
 production of, and demand for, the precious 
 metals." 
 
 Since the date of that report (1888) the yearly 
 production of Gold has largely increased. It 
 may be taken, approximately, at £23,000,000 
 sterhng in 1888, and as about £60,000,000 in 
 1900 while it is little, if anything, under 
 £100,000,000 in the present day (1913). Almost 
 simultaneously with this increase in the produc- 
 tion of Gold we have experienced a general rise 
 in Prices, a rise in the rates of profit, interest and 
 discount, a marked tendency towards a rise in 
 wages, and a remarkable diminution in unem- 
 ployment. I do not assert that all these changes 
 are due solely to the large increase in the pro- 
 duction of Gold for there have been other causes 
 at work, as there always are, but I find it impossi- 
 ble to believe that, to put it at the lowest, the 
 great increase in the production of Gold has not 
 been the chief cause of the rise in Prices and of 
 what are called the prosperous times which we 
 have experienced in recent years. 
 
 To those who hold that the increased pro- 
 duction of Gold has had practically no effect on 
 Prices, 1 would put this (juestion. India is now
 
 X FALL OR RISE IN PRTCRS 83 
 
 taking £20,000,000 of gold yearly ; the Arts are 
 believed to absorb as much more. If the yearly 
 production of Gold had remained at £21,000,000, 
 as it was in 1886, would India and the Arts 
 absorb £40,000,000 yearly as they are now 
 doing ? How long would they conthme to do 
 so ? And what would be the ultimate effect on 
 Prices ? 
 
 The only possible answer is that if the pro- 
 duction of Gold had not increased Gold would 
 have become so valuable that neither could 
 India have afforded to hoard £20,000,000 yearly, 
 nor would an equal amount have been used in 
 the Arts. In other words, the general scale of 
 Prices must have been so low compared with 
 what they now are that India would have been 
 prevented from purchasing £20,000,000 yearly in 
 order to hoard it and that the amount of Gold 
 used in the Arts would have been reduced. 
 
 It would be impossible for £40,000,000 of 
 Gold to be hoarded and used in the Arts every 
 year when the yearly production is about 
 £20,000,000 without caushig a great fall in 
 Prices, and bringing about in a longer or shorter 
 time the total collapse of our Standard of 
 Value. The higher Value of Gold (lower 
 Prices) would no doubt stimulate the search 
 for, and production of, Gold but what effect 
 that cause might have in increasing the yearly 
 production I am unable to say. 
 
 G 2
 
 84 THE GOLD SUPPLY ch. 
 
 In his Essay on " Money," David Hume called 
 attention to the prosperity produced by an 
 unusual increase in the Quantity of Money. 
 Tooke and Newmarch in their History of Prices 
 expressed a similar opinion with regard to the 
 effects both of the influx of Gold and Silver 
 from America in the Fifteenth Century and of 
 the great discoveries of gold in California and 
 Australia in the middle of the Nineteenth 
 Century. In Appendix A will be found the 
 opinion of the late Francis A. Walker, President 
 of the Massachusetts Institute of Technology 
 "wdth quotations from the writings of Hume, 
 Chevalier, McCuUoch and Jevons. Also an 
 extract from an address delivered in 1886 by 
 J. Shield Nicholson, Professor of Political 
 Economy in the University of Edinburgh, on 
 the " Effect of Great Discoveries of the Precious 
 Metals " which the author has been kind enough 
 to permit me to reproduce, and which contains 
 quotations from the writings of Tooke and 
 Newmarch. 
 
 Having regard to the conclusions to which 
 theoretical reasoning leads, to the history of 
 the past, to the opinions of the eminent 
 Economists to whom I have referred, and to the 
 facts of the present day which are forcing 
 themselves on our attention, I cannot doubt 
 that tlie supply of Gold has a great effect on 
 l*rices, and tliat a general Rise or Fall of Prices
 
 X FALL OR RISE IN PRICES 85 
 
 has a marked influence on liuman welfare and 
 progress. 
 
 To any arbitrary or artificial inflation of the 
 Currency by the action of Governments I am 
 strongly opposed. Such measures in the present 
 state of the world would be abused and would 
 produce greater evils than those they were 
 intended to cure. Whether it will ever be 
 possible to make the Monetary Unit the 
 equivalent of a definite amount of Purchasing 
 Power is a question which may be discussed 
 with advantage, but for any such change the 
 world is not prepared at the present time. 
 
 Yet the question of the future Standard of 
 Value is one of great importance. Up to the 
 present date the world has aimed, from time to 
 time, at securing the most convenient Medium of 
 Exchange and the Standard of Value has 
 followed as it were by accident.^ With the 
 linking together of so many countries by the 
 bond of commerce and with so many contracts 
 for the payment of Money into which the element 
 of time enters, the question of the Standard of 
 Value in the future will become one of increasing 
 importance. With a small Gold basis and a vast 
 
 ' The plan of using both Gold and Silver as Money at a fixed 
 ratio was adopted at least 4,000 years ago, but the sole object of 
 doing so was to bring the two Media of Exchange into a definite 
 relation to each other in order to facilitate transactions involving 
 the receipt or payment of Money, and there was no idea of finding 
 in this way a better standard of value than would be secured by 
 using either Gold or Silver separately.
 
 86 THE GOLD SUPPLY ch. 
 
 superstructure of Credit, an increase or diminu- 
 tion in the Quantity of Money is likely to have 
 a greater effect on Prices than it had in the past 
 when the basis was both Gold and Silver, and 
 such changes in Prices will be extended more 
 rapidly over the civilized world owing to the 
 greater magnitude and activity of trade and 
 commerce. 
 
 As to a remedy for the possible difficulties of 
 the future I have no proposals to put forward 
 and can only suggest a careful consideration of the 
 whole subject while the question can be treated 
 as an academic one, and before men have taken 
 sides in accordance with their interests or 
 supposed interests. 
 
 At the present time there is no urgent necessity 
 to make any change in the world's Standard of 
 Value, and even if the difficulties were greater 
 than they are, or are likely to be for some time, I 
 doubt if any remedy could be devised which 
 would be generally accepted, or to which practical 
 effect could be given. The practice which 
 appears to be growing up of attempting to 
 remedy by Legislation the evils tliat are due to 
 a rise or fall in Prices is full of danger. 
 
 In the future there will, no doubt, be impor- 
 tant changes in the yearly supply of Gold as well 
 as in the demand for it for various purposes, and 
 an examination of the effects of such changes in 
 supply or demand when they occiu' will show
 
 X FALL OR RISE IN PRICES 87 
 
 whether the views which I put forward, and 
 which have been previously stated by many 
 others whose names must carry weight, are 
 sound or not. For my part, I can only say 
 that I do not entertain any doubt on the 
 subject.
 
 APPENDIX 
 I 
 
 Extract from " International Bimetallism " 
 Francis A. Walker 
 
 Formerly President of the Massachusetts Institute of Technology 
 THE INFLUENCE OF METALLIC INFLATION 
 
 I HAVE spoken of the general influence of the 
 great production of gold, after 1850, upon trade, 
 industry, and society, as, on the whole, in spite of 
 individual cases of hardship, highly beneficial. 
 The metallic inflation was most welcome, for it 
 occurred at a time when commerce and produc- 
 tion had for a long time been suffering from a 
 money-supply, either positively decreasing, or, at 
 any rate, not keeping up with the world's needs 
 in this respect. The age had been one of falling 
 prices, with loud complaints everywhere of 
 depression in trade and failure of employment. 
 Never did parched ground respond more joyously 
 to the first fall of rain after a long drought, than
 
 90 APPENDIX 
 
 industry and trade responded to the new supplies 
 of gold from California and Australia. The 
 normal effects of an inflation of the money- 
 supply of the world due to natural causes, and 
 not to any purposed action of Government in 
 tampering with the standard of deferred pay- 
 ments, has been studied by some of the soundest 
 and wisest of economists ; and the general 
 weight of their testimony bears strongly on the 
 side of the advantages derived from such a cause. 
 A natural metallic inflation carries with it no 
 sting of injustice and draws no retribution after 
 it, for it is due either to the discovery of new 
 resources in nature or to improvements in human 
 arts. Being, thus, free from the curse which 
 attends an increase of paper money designed to 
 scale down debts and alter the standard of value, 
 such an inflation can be looked at without pre- 
 judice. The subject is one susceptible of great 
 exaggeration. It is also one which may be treated 
 in a small and grudging way, with results as 
 distinctly false to life as any that could be due to 
 extravagance of view and of statement. The 
 truth doubtless lies between the extreme claims 
 of some who have attributed more than a magical 
 and even miraculous virtue to the natural increase 
 of the money-supply and the mean and parsi- 
 monious admissions of certain economists of the 
 (I priori order. But I believe that the truth lies 
 much nearer the former than the latter line. The
 
 APPENDIX 91 
 
 weighty argument of David Hume is the first 
 which should be quoted in any discussion of this 
 subject. 
 
 " It is certain that, since the discovery of the 
 mines in America, industry has increased in all 
 the nations of Europe, except in the possessors 
 of those mines ; and this may be justly ascribed, 
 amongst other reasons, to the increase in gold 
 and silver. Accordingly we find that, in every 
 kingdom into which money begins to flow in 
 greater abundance than formerly, everything 
 takes a new face ; labour and industry gain 
 life ; the merchant becomes more enterprising, 
 the manufacturer more diligent and skilful, and 
 even the farmer follows his plough with greater 
 alacrity and attention. . . . To account, then, 
 for this phenomenon, we must consider that, 
 though the high price of commodities be a 
 necessary consequence of the increase of gold 
 and silver, yet it follows not immediately upon 
 that increase, but some time is required before 
 the money circulates through the whole state 
 and makes its eifects to be felt on all ranks of 
 people. At first no alteration is perceived ; by 
 degrees the price rises, first of one commodity 
 and then of another, till the whole at last reaches 
 a just proportion with the new quantity of specie 
 which is in the kingdom. In my opinion it is 
 only in this interval, or intermediate situation, 
 between the acquisition of money and rise of 
 prices that the increasing quantity of gold and 
 silver is favourable to industry. When any
 
 92 APPENDIX 
 
 quantity of money is imported into a nation, 
 it is not at first dispersed into many hands, but 
 is confined to the coffers of a few persons, who 
 immediately seek to employ it to advantage. . . . 
 It is easy to trace the money in its progress 
 through the whole commonwealth, where we 
 shall find that it must first quicken the diligence 
 of every individual before it increases the price of 
 labour."— (Essay on Money.) 
 
 In the foregoing remarks, Hume understates 
 the advantages of a metallic inflation. In ad- 
 dition to all which he alleges, there is the 
 important consideration of the effect of such a 
 cause upon the burden of existing indebtedness, 
 both public and private. The world is always in 
 bonds to the generations that have preceded. 
 The industry, the activity, the enterprise, of the 
 generation upon the stage are heavily weighted 
 by obligations to the past. These obligations 
 caimot be repudiated, they cannot be inten- 
 tionally lightened by act of go\'ernment under 
 impulse from the debtor class, without social 
 and economic retributions which will produce 
 a mischief far outweighing any benefits which 
 may be in view in such ill-advised measures. 
 But when this effect, in no revolutionary 
 degree, is brought about by natural means, 
 1 believe it to be wholly beneficial. That 
 the great silver discoveries of the sixteenth and 
 seventeenth centuries, diminishing the weight of
 
 APPENDIX 93 
 
 feudal burdens, cutting down the effective 
 revenues of existing dynasties and reducing the 
 weight of obhgations derived from the past, had 
 an influence, wholly in addition to that men- 
 tioned by Hume, not only in extending 
 commercial activity, but in lifting society and 
 industry up to a new and higher plane, seems 
 beyond question. To show that this view is not 
 without the support of recognized economic 
 authority, I quote the language of M. Chevalier, 
 the first of French Economists, and of J. li. 
 McCulloch, one of the most conservative of the 
 English School. 
 
 M. Chevalier says : " Such a change will 
 benefit those who live by current labour ; it will 
 injure those who live upon the fruits of past 
 labour, whether their father's or their own. In 
 this it will work in the same direction with most 
 of the developments which are brought about by 
 that great law of civilization to which we give 
 the noble name of progress." Mr. McCulloch 
 has perhaps taken even stronger ground. He 
 declares that, " while, like a fall of rain after a 
 long course of dry weather, it may be prejudicial to 
 certain classes, it is beneficial to an incomparably 
 greater number, including all who are actively 
 engaged in industrial pursuits, and is, speaking 
 generally, of great public or national advan- 
 tage." With reference to this statement of Mr. 
 McCulloch, Professor Jevons (1863) remarks
 
 94 APPENDIX 
 
 {Investigatioiis in Carre ncif and Finance) : " I 
 cannot but agree with JNIr. McCulloch that 
 putting out of sight individual cases of hardship, 
 if such exist, a fall in the value of gold must 
 have, and, I should say, has had already, a most 
 powerfully beneficial effect. It loosens the 
 country, as nothing else could, from its old bands 
 of debt and habit. It throws increased rewards 
 before all who are making and acquiring wealth, 
 somewhat at the expense of those who are 
 enjoying acquired w^ealth. It excites the active 
 and skilful classes of the community to new 
 exertions. "
 
 II 
 
 Extract from " 2Vie Effects of Great Dhcoveiies 
 of the Precious Metah\'^ 
 
 J. Shield Nicholson, Sc.D., LL.D. 
 
 Professor of Political Economy in the University of EdinJnmjh 
 
 In the sixteenth century, the new suppHes of 
 the precious metals were obtained from Spain, 
 through her discoveries and mihtary successes in 
 America, and were largely squandered in ambi- 
 tious pohtical schemes in Europe ; but in the 
 natural course of things, they soon found their 
 way into the great chamiels of trade. 
 
 At that time, the Netherlands held the com- 
 mercial supremacy of the world, and Antwerp 
 was the Queen of the Netherlands. It was almost 
 entirely by trade that the Dutch amassed their 
 wealth. The celebrated description of Holland, 
 written about the middle of the seventeenth cen- 
 tury, is equally true of the sixteenth. " Never 
 any country traded so much and consumed so 
 little ; they buy infinitely, but it is to sell again. 
 ... In short, they furnish infinite luxury whicli 
 they never practise, and traffic in pleasures they 
 never taste." It was, then, through the great 
 cities of the Netherlands, with their wide-spread - 
 
 ' Reprinted in Money and Mimetary Problems. 
 
 95
 
 96 APPENDIX 
 
 ing trade connections, that the treasures of Mexico 
 and Peru were diffused over the world, and no 
 one is surprised to hear that Antwerp was the 
 dearest City in Europe. 
 
 It would, however, he a great mistake to sup- 
 pose that, even in the sixteenth century, when 
 credit was comparatively, and, according to our 
 notions, quite undeveloped, this distrihution of 
 the new supplies of the precious metals took 
 place, without any other noticeable result than a 
 general rise in prices, accompanied by a natural 
 increase in production. It is easy to speak of a 
 general rise in prices, and of the gradual extension 
 of this rise, but when we descend to details and 
 concrete facts, there is no more difficult problem 
 than to measure such a general rise, and to ac- 
 count for the failure to respond in particular 
 localities and particular commodities. General 
 prices are made up of particular prices, and the 
 relative prices of particular commodities are in- 
 fluenced by a variety of causes which operate on 
 the demand and supply. 
 
 In the sixteenth century we find, at the very 
 time when England was beginning to feel tlie 
 effects of the new treasure, that all the commo- 
 dities of Greece, Syria, Egypt, and India, were 
 obtained much cheaper than formerly — presum- 
 ably owing to tlie fact that, by a direct trade 
 through Turkey, the charges of the Venetian 
 carrier were dispensed with.
 
 APPENDIX 97 
 
 At the same time, too, if we refer to contem- 
 porary writers on the social state of England, 
 and to the statutes passed by paternal gov^ern- 
 ments to remedy disorders by frantic endeavours 
 to suppress the symptoms, we find side by side, 
 complaints of the decay of certain places and in- 
 dustries, and dismay at what seems tlie unnatural 
 and dangerous gi'owth of others. 
 
 We find that careful and prudent monarch. 
 Queen Elizabeth, aided by still more careful and 
 prudent counsellors, issuing regulations, on the 
 one hand, to check the growth of London by 
 actually prohibiting new buildings, and on the 
 other hand, by granting privileges and monopolies 
 to other towns, to restore their former prosperity. 
 As with places and commodities, so it is witli 
 classes — some are prosperous beyond measure, 
 others suffer severely. In the famous dialogue 
 of William Stafford, the knight asks of the 
 doctor, " What sorte is that which yee said 
 should have greater losse hereby, than these men 
 had profit ? " And the reply shows for the time 
 a singular grasp of economic principles. " It is 
 all noblemen, gentlemen or others, that live either 
 by a stinted rent or stypend. . . . Therefore 
 gentleman doe study so much the increase of 
 their lands and enhaunsing of their rents, and to 
 take fearmes and partners to their own use, as 
 yee see they doe ; and all to seeke to maintain 
 their countenances as their predecessors did, and 
 
 H
 
 98 APPENDIX 
 
 yet they came shorte therein. . . . The other 
 sorte he even serving men and men of warre, 
 that having but their olde and stinted wages, can- 
 not finde therewith as they might aforetime with- 
 out rauin or spoile." 
 
 It was pecuharly difficult for the people of 
 that time to estimate the force of discoveries of 
 the precious metals ; for, apart from currency 
 causes, influences were at work which were 
 effecting great changes in relative prices, and, 
 consequently in production. Even before the 
 mines of Potosi were discovered, English wool 
 had begun to rise in value, owing to foreign 
 demands ; and, as a consequence, great sheep- 
 walks were taking the place of tillage, and the 
 outcry against sheep was as loud and bitter as 
 in the present century in Scotland. 
 
 No doubt, however, wool being easily carried, 
 compared with other forms of agricultural pro- 
 duce, felt the influence of the new money most 
 quickly and most effectively. But apart from 
 these and similar causes of variations in value, a 
 general rise in nominal prices had occurred, owing 
 to the debasement of the coinage by Henry VIII. 
 and his son. The effects of this debasement were 
 too obvious to be overlooked, and it was natural 
 for people to expect that, as the abuse was 
 remedied, as it speedily was, by Queen Elizabeth, 
 prices would be restored to their former level. 
 As it happened, however, the new supplies of
 
 APPENDIX 09 
 
 silver reached this country in effective amounts 
 just as the coinage was reformed, and consequently 
 prices did not fall. 
 
 Before passing from the sixteenth century, let 
 me resume in a few words the general effects of 
 the discoveries. 
 
 By a curious coincidence, they were made just 
 at the time when the civilised world was breaking 
 through its mediaeval fetters. The discovery of 
 the new world had given a great stimulus to 
 venturous trading, and the maritime nations were 
 vying with one another in their zeal for appro- 
 priating new lands and new treasures ; the Church 
 of Rome, which had weighed down individual 
 freedom, not merely in matters of speculative 
 theology, or astronomy, but equally in what we 
 are accustomed to consider matters of practical 
 business, which taught that everything in the 
 form of speculative trade partook of the nature 
 of the deadly sin of usury, which, with its swarms 
 of dependent paupers, was the most gigantic 
 embodiment of the unproductive consumer the 
 world has ever seen, was compelled to relax 
 its hold. The old industrial guilds, which had 
 threatened to entail the trade of the nation, as 
 the nobility had entailed the land, in a few 
 families, and had become, in the words of Bacon, 
 fraternities in evil, found, on the one hand, that 
 the craftsmen were fleeing into the country, and 
 to the towns not oppressed with guild regulations,
 
 100 APPENDIX 
 
 and on the other hand that the Government, in 
 the interests of the general piibhc, was deter- 
 mined to curtail their privileges, and, in its own 
 interest, to confiscate their wealth. The guilds, 
 like the church, were discovering that they must 
 yield to industrial freedom and competition ; 
 even Queen Elizabeth, in spite of her strong 
 will, had at last to give way in the matter 
 of monopolies. In the country, no less than 
 in the towns, good old customs, which had 
 long since begun to corrupt the world, such as 
 slovenly cultivation in common of old crops and 
 old weeds by old methods, were beginning to 
 yield to individual enterprise, involving, it is 
 true, much hardship and social discomfort, but 
 preparing the way for giving Britain the lead in 
 agriculture ; in short, from whatever point it is 
 regarded, the sixteenth century showed signs of 
 the breaking up of an old system, which rested 
 on law, custom and superstition, and the appear- 
 ance in its place, of the beginning of our modern 
 world, with its freedom of contracts, and freedom 
 of competitions. The mediaeval edifice was full 
 of cracks and seams, and the new treasure may 
 be compared to villainous saltpetre, which, find- 
 ing its way into these cracks, regardless of all 
 respect to antiquity, tumbled down huge frag- 
 ments and made the whole structure totter. I 
 trust you will not think this metaphor exag- 
 gerated, but we are so nuich accustomed to hear
 
 APPENDIX 101 
 
 money spoken of as so many counters — so many 
 units of measurement, that it seems desirable 
 sometimes to point out that money governs 
 prices, and that great movements in prices 
 operate in a convulsive, partial, spasmodic 
 manner, on the interests of various classes, and 
 the stability of various social institutions ; that 
 all the production, distribution, and exchange 
 of wealth, rests on prices — the price of land, the 
 price of capital, the price of labour — that, 
 whether we like it or not, the great mass of 
 the nation is most intensely interested in the 
 acquisition and consumption of wealth ; and, 
 accordingly, when any great revolution occurs 
 in prices, we are likely to find the most appro- 
 priate illustrations of the effects of money, not 
 in children's games of cards, or in the abstrac- 
 tions of the pure mathematician, but in the great 
 forces of nature or art — in earthquakes, tidal 
 waves or gunpowder. Not that I mean to 
 imply that the effects of the discoveries in the 
 sixteenth century were disastrous. On the 
 contrary, there seems to me no reasonable 
 doubt, that if the stock of the precious metals 
 had not been increased, simultaneously with the 
 opening up of new routes to the East and the 
 West, and the growth of individual enterprise, 
 the progress which took place would have been 
 impossible. The metaphors I suggested were 
 intended only to convey an idea of the enormous
 
 102 APPENDIX 
 
 power of monetary changes ; and that in this 
 case the disturbance was beneficial, we have 
 the authority of the Hhtory of Prices by Tooke 
 and Xewmarch — the most hiborious and judicial 
 work on the historical side of Political Economy 
 ever written. It is there asserted, that "we 
 have tlie fullest warrant for concluding that any 
 partial inconvenience that might arise from the 
 effect of the American supplies of the sixteenth 
 century in raising prices was compensated and 
 repaid a hundredfold by the activity, the ex- 
 pansion and vigour which they impressed for 
 more than one generation upon every enterprise, 
 and every act which dignifies human life, or 
 increases human happiness." 
 
 Coming now to the discoveries of the present 
 century — in California in 1848, and Australia in 
 1851 — it is interesting to observe that, just as 
 was the case three centuries before, this was a 
 period of great industrial and social changes, and 
 I cannot do better than again quote from the 
 authors of the History of Prices, some weighty 
 remarks on the period between 1 848-1 85G. 
 
 " The rapid increase in railways in every part 
 of the world ; the improvements in the naviga- 
 tion and speed of ships: the rapid spread of 
 population into new and fertile regions; the 
 ({uick succession of important discoveries in 
 practical science ; and the ceaseless activity 
 with wliich they are applied to increase the
 
 APPENDIX 103 
 
 efficiency of all mechanical appliances ; and 
 perhaps, more powerful than all, the setting free 
 of the enterprise, the industry, and the ingenuity 
 of some of the leading commercial states, by tlie 
 adoption, more or less completely, of principles 
 of Free Trade ; are all causes which, singly and 
 conjointly, have assisted to accelerate the rate of 
 progress (but with all this), the influence of the 
 new supplies of gold, 3-ear by year, has probably 
 been that particular cause, or train of causes, 
 which has modified in the most powerful degree 
 the economical and commercial history of the 
 last nine years." 
 
 The principle of the influence is precisely the 
 same as in the earlier period, but the initial stages 
 are different. 
 
 In the sixteenth century silver was obtained by 
 the Spaniards through plundering and slaughter- 
 ing the unfortunate natives whose lands they had 
 occupied, with the ostensible purpose of spreading 
 the truths of Christianity ; it was spread over 
 Europe first of all in payment of further 
 ambitious projects, and it was not till in the 
 course of trade it reached the Dutch that its 
 full effects on commerce began to be noticed. 
 
 In the nineteenth century, on the other hand, 
 from the outset, commercial influences alone 
 determined the acquisition and distribution of the 
 precious metals. The whole of the complicated 
 processes by which the new gold was distributed 
 over the world, may be explained by one simple
 
 104 APPENDIX 
 
 principle. The distribution took place in the 
 precise proportion in which the extended demand 
 for commodities, which originally proceeded from 
 the labourers who picked up the gold, set in 
 motion increased immbers of labourers and in- 
 creased amounts of capital to supply first the 
 wants of the gold countries, and, secondly, the 
 wants of those who traded with these countries. 
 
 Time will not permit me to point out in detail 
 tlie way in which the great development which 
 had taken place in banking and credit generally, 
 increased both the rapidity and the degree of the 
 influence of the new gold ; it is enough to insist 
 on the main result, and that is — not that the 
 game of commerce was now played for higher 
 nominal stakes — for more yellow tokens — but 
 that the whole industry of the civilized world was 
 quickened with new life, and that the production 
 and consumption of all kinds of real wealth were 
 stimulated. A rise in prices certainly occurred, 
 but the rise was not in many cases in proportion 
 to the increase in the quantity of the precious 
 metals, and it did not merely mean the profit of 
 debtors at the expense of creaitors. The new 
 gold was used not simply to circulate the same 
 amount of wealth at higher figures, and play the 
 game of trade with more counters, but to circu- 
 late more wealth — at higher prices, it is true, but 
 for all that, a greater (quantity of real wealth. 
 
 R. CtAV AND «ONB. I/lD. I'.RL NRWICK ST. .STAMKOKD ST., S.K., AND BUNOAV. bUFTOLK.
 
 UNIVERSITY OF CALIFORNIA AT LOS ANGELES 
 
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