year gives us an idea of how much wheat on the average during the year in question a dollar would buy, and when we combine the prices of twenty-two commodities for a year we have a result which indicates to us the average amount of those twenty-two commodities which a dollar would command during the year. A knowledge of the purchasing power of the unit is useful for many purposes, but it renders little, if any, assistance in the determination of changes in the actual value of commodities or in the actual value of gold. If we wish to determine whether the ratio between the demand and supply of gold or of any other commodity has changed during a series of years, only a minute and careful investigation into the various circumstances which have entered into the determination of said demand and supply will suffice.

REFERENCES

The nature and history of standards of value are treated in Laughlin, ch. iii; Jevons, ch. iv; Taylor, chs. v and vii; Knies, ch. iv; section V of Menger, article "Geld" in the Handwörterbuch der Staatswissenshaften and in his Grundsätze der Volkswirthshaftslehre, ch. viii. On the importance of stability of value in the standard commodity see Walker, Money, Trade, and Industry, ch. iii, and Money, ch. i; Nicholson, pt. I, ch. ii, §§ 4, 5, and 6; and Ross, The Standard of Deferred Payments, Annals for November, 1892. Price statistics and their interpretation are treated in Laughlin, ch. vi; Nicholson, pt. II, ch. vii; Schoenhof, A History of Money and Prices, ch. i; Walsh, The Measurement of General Exchange-Value, especially chs. v, vi, and xiv; Falkner, introduction to the Aldrich Report on Retail Prices and Wages and his The Theory and Practice of Price Statistics in the Publications of the American Statistical Association, v. III, pp. 119-140.

CHAPTER IV

THE VALUE OF THE STANDARD

THE standard commodity is no exception to the general laws of value. Marginal utility, costs of production and demand and supply operate in this case in precisely the same manner as in others. For a discussion of these laws the student is referred to general treatises on political economy. In this chapter we shall treat only the peculiar influences which lie back of them in the case of this particular commodity.

1. Demand for the primary standard.-It is necessary to treat separately primary and secondary standards. The reason for this, if not obvious at this point, will soon appear. From the standpoint of demand the peculiarity of the standard commodity consists in the fact that a very large, usually the largest, part of it comes from its use as a standard of value and a medium of exchange. It is probable that between 70 and 80 per cent. of the present demand for gold comes from these sources, and from 20 to 30 per cent. from its use for purposes of ordinary consumption, such as jewelry, plate, ornamentation, dentistry, etc. These proportions may and do constantly change. The point to be firmly grasped at this stage in the discussion is the fact that in the case of the standard commodity there are always two main sources of demand, namely, its service for ordinary consumption purposes and its service as a standard of value and a medium of exchange. Neither of these sources should at any time be neglected, since neither of them is ever suspended. To the extent of its magnitude one is just as

potent as the other, and at a given time the total demand which operates together with the total supply in the determination of its value is the sum of the separate demands which come from its various commodity and monetary

uses.

There is nothing in the ordinary consumption uses of gold or of any other standard commodity that calls for special treatment in this chapter, but the elements of demand which come from its monetary uses require further consideration. As a standard of value a commodity performs its chief function by lying in the vaults of banks and certain government treasuries, like those of the United States, as security for the redeemability of the various forms of credit currency that constitute the bulk of the medium of exchange. How large a sum is needed for this purpose it is impossible to say. It depends primarily on the state of confidence. If men generally trust each other and freely accept each other's promises to pay, the amount required is very small. Indeed, it is conceivable that it might be reduced almost, if not quite, to zero. If confidence between man and man becomes impaired in any degree, the amount required is larger and it may become enormous. At any given time it is determined chiefly by the judgment of bankers. Sometimes, as in the case of most of the banking institutions of the United States, the laws fix a minimum, in the form of a percentage of their deposits, below which bankers are not permitted to allow their reserves to fall, but only a part of these reserves can be regarded as an insurance fund of the kind we are describing. A part of them is also required to meet the ordinary demand of the community for a particular form of currency. This fact brings us to the consideration of the second source of the monetary demand for the standard commodity, namely, the demand for it as a medium of exchange.

In a preceding chapter it was shown that coins of different denominations are essential elements of a good medium of exchange. If the standard commodity is used in the manufacture of some of these coins, as it always is, a demand for it results, measured by the amount of such coins needed. The amount depends upon a great variety of circumstances, many of which are subject to purely arbitrary changes. Among the most important of these are: the presence or absence of other forms of currency of the same denominations; the capacity of such other forms of currency to satisfy the needs of commerce; and the aggregate value of the commodities to be exchanged within a given time by means of currency of these particular denominations.

The manner in which the substitution of other forms of currency affects the demand for the standard commodity is well illustrated by the practices of the various countries at the present time. For example, in England there is no form of ordinary hand-to-hand credit currency in circulation below the denomination of five pounds or twenty-five dollars. Consequently the entire demand for money of denominations between the silver crown, worth about one dollar and twenty cents, and the five pound bank-note must be supplied by coins made of the standard commodity, gold. In Scotland a large part of this demand is supplied by means of one pound bank-notes, and in the United States we use for this purpose not only bank-notes of denominations five dollars and above, but various forms of government notes of denominations from one dollar up. If we should cease to use credit currency of these denominations, a demand for gold coins to take its place would appear and the total demand for gold would be to that extent increased. If the Bank of England should be permited to issue one pound notes against securities, and should actually do so,

there would be a decrease in the use of gold coins in England and a corresponding decline in the demand for gold in that country.

It is obvious that no form of credit currency can take the place of coins made of the standard metal in their use as a medium of exchange unless it is capable of performing that service quite as well as or better than such coins. In order to do this, the public must be assured of the ability of the issuer to redeem such currency on demand in the standard commodity, it must be equally as convenient or more convenient than standard coins, and the public must be able to obtain it by means no more onerous than those required for obtaining such coins. Not all forms of credit currency are capable of meeting these requirements, but many are, and the ingenuity of man in inventing such forms has by no means been exhausted.

The composition of the currency and the habits of the people in the use of its various elements being for the time fixed, the magnitude of the demand for the standard metal as a medium of exchange is determined by the total value of all the commodities simultaneously to be exchanged by means of standard coins. Suppose, for example, a thousand commodities worth on the average a dollar a piece are going to be simultaneously exchanged by means of standard coins. It is obvious that coins to the amount of one thou

sand dollars will be required for that purpose. Several points involved in this proposition should be carefully noted. First, the word simultaneously employed in this connection is important. If groups of commodities are exchanged one after the other instead of simultaneously, the same coins may be used again and again. This fact is frequently emphasized by the statement that the rapidity of the circulation of coins is an element in the determination of the demand for them. If in a given time, say a day, a thousand