# The Purchasing Power of Money/chapter 6

CHAPTER VI
INDIRECT INFLUENCES (continued)
§ 1 VI.1 WE have now considered those influences outside the equation of exchange which affect the volume of trade (the Q's), the velocities of circulation of money and deposits (V and V'), and the amount of deposits (M'). We have reserved for separate treatment in this chapter and the following the outside influences that affect the quantity of money (M).
VI.2 The chief of these may be classified as follows:—
1. Influences operating through the exportation and importation of money. 2. Influences operating through the melting or minting of money. 3. Influences operating through the production and consumption of money metals. 4. Influences of monetary and banking systems, to be treated in the next chapter.
VI.3 The first to be considered is the influence of foreign trade. Hitherto we have confined our studies of price levels to an isolated community, having no trade relation with other communities. In the modern world, however, no such community exists, and it is important to observe that international trade gives present-day problems of money and of the price level an international character. If all countries had their irredeemable paper money, and had no money acceptable elsewhere, there could be no international adjustment of monetary matters. Price levels in different countries would have no intimate connection. Indeed, to some extent the connection is actually broken between existing countries which have different metallic standards,—for example, between a gold-basis and a silver-basis country,—although through their nonmonetary uses the two metals are still somewhat bound together. But where two or more nations trading with each other use the same standard, there is a tendency for the price levels of each to influence profoundly the price levels of the other.
VI.4 The price level in a small country like Switzerland depends largely upon the price level in other countries. Gold, which is the primary or full weight money in most civilized nations, is constantly travelling from one country or community to another. When a single small country is under consideration, it is therefore preferable to say that the quantity of money in that country is determined by the universal price level, rather than to say that its level of prices is determined by the quantity of money within its borders. An individual country bears the same relation to the world that a lagoon bears to the ocean. The level of the ocean depends, of course, upon the quantity of water in it. But when we speak of the lagoon, we reverse the statement, and say that the quantity of water in it depends upon the level of the ocean. As the tide in the outside ocean rises and falls, the quantity of water in the lagoon will adjust itself accordingly.
VI.5 To simplify the problem of the distribution of money among different communities, we shall, for the time being, ignore the fact that money consists ordinarily of a material capable of nonmonetary uses and may be melted or minted.
VI.6 Let us, then, consider the causes that determine the quantity of money in a state like Connecticut. If the level of prices in Connecticut temporarily falls below that of the surrounding states, Rhode Island, Massachusetts, and New York, the effect is to cause an export of money from these states to Connecticut, because people will buy goods wherever they are cheapest and sell them wherever they are dearest. With its low prices, Connecticut becomes a good place to buy from, but a poor place to sell in. But if outsiders buy of Connecticut, they will have to bring money to buy with. There will, therefore, be a tendency for money to flow to Connecticut until the level of prices there rises to a level which will arrest the influx. If, on the other hand, prices in Connecticut are higher than in surrounding states, it becomes a good place to sell to and a poor place to buy from. But if outsiders sell to Connecticut, they will receive money in exchange. There is then a tendency for money to flow out of Connecticut until the level of prices in Connecticut is lower.
VI.7 But it must not be inferred that the prices of various articles or even the general level of prices will become precisely the same in different countries. Distance, ignorance as to where the best markets are to be found, tariffs, and costs of transportation help to maintain price differences. The native products of each region tend to be cheaper in that region. They are exported as long as the excess of prices abroad is enough to more than cover the cost of transportation. Practically, a commodity will not be exported at a price which would not at least be equal to the price in the country of origin, plus the freight. Many commodities are shipped only one way. Thus, wheat is shipped from the United States to England, but not from England to the United States. It tends to be cheaper in the United States. Large exportations raise its price in America toward the price in England, but it will usually keep below that price by the cost of transportation. Other commodities that are cheap to transport will be sent in either direction, according to market conditions.
VI.8 But, although international and interlocal trade will never bring about exact uniformity of price levels, it will, to the extent that it exists, produce an adjustment of these levels toward uniformity by regulating in the manner already described the distribution of money. If one commodity enters into international trade, it alone will suffice, though slowly, to act as a regulator of money distribution; for in return for that commodity, money may flow and, as the price level rises or falls, the quantity of that commodity sold may be correspondingly adjusted. In ordinary intercourse between nations, even when a deliberate attempt is made to interfere with it by protective tariffs, there will always be a large number of commodities thus acting as outlets and inlets. And since the quantity of money itself affects prices for all sorts of commodities, the regulative effect of international trade applies, not simply to the commodities which enter into that trade, but to all others as well. It follows that nowadays international and interlocal trade is constantly regulating price levels throughout the world.
VI.9 We must not leave this subject without emphasizing the effects of a tariff on the purchasing power of money. When a country adopts a tariff, the tendency is for the level of prices to rise. A tariff obviously raises the prices of the "protected" goods. But it does more than that,—it tends also to raise the prices of goods in general. Thus, the tariff first causes a decrease in imports. Though in the long run this decrease in imports will lead to a corresponding decrease in exports, yet at first there will be no such adjustment. The foreigner will, for a time, continue to buy from the protected country almost as much as before. This will result temporarily in an excess of that country's exports over its imports, or a so-called "favorable" balance of trade, and a consequent inflow of money. This inflow will eventually raise the prices, not alone of protected goods, but of other goods as well. The rise will continue till it reaches a point high enough to put a stop to the "favorable" balance of trade.
VI.10 Although the "favorable balance" of trade created by a tariff is temporary, it leaves behind a permanent increase of money and of prices. The tariff wall is a sort of dam, causing an elevation in the prices of the goods impounded behind it.
VI.11 This fact is sometimes overlooked in the theory of international trade as commonly set forth. Emphasis is laid instead on the fact that in the last analysis the trade is of goods for goods, not of money for goods, and that a tariff on imports reduces, not only imports, but exports also,—that it merely interrupts temporarily the virtual barter between nations. The effect of a tax on imports is likened to that of a tax on exports. But in respect to effects on price levels a tax on imports and a tax on exports are diametrically opposed. If we place our tax on exports, we first interfere with exports. The imports are not checked until money has flowed out and has reduced the general price level enough to destroy the "unfavorable" balance of trade first created. We conclude that the general purchasing power of money is reduced by a tariff and that it would be increased by a tax on exports.
VI.12 This is, perhaps, the chief reason why a protective tariff seems to many a cause of prosperity. It furnishes a temporary stimulus, not only to protected industries, but to trade in general, which is really simply the stimulus of money inflation.
VI.13 Our present interest in international trade, however, is mainly directed to its effects on international price levels. Except for the export or import of money to adjust the price levels, international trade is at bottom merely an interchange of goods. Where the price level is not concerned, the money value of the goods sold by a country will exactly equal the value of those bought. Only when there is a difference in these values, or a "balance of trade," will there be any flow of money and consequently any tendency to modify the price level.*62
VI.14 We have shown how the international and interlocal equilibrium of prices may be disturbed by differential changes in the quantity of money alone. It may also be disturbed by differential changes in the volume of bank deposits; or in the velocity of circulation of money; or in the velocity of circulation of bank deposits; or in the volume of trade. But whatever may be the source of the difference in price levels, equilibrium will eventually be restored through an international or interlocal redistribution of money and goods brought about by international and interlocal trade. Other elements in the equation of exchange than money and commodities cannot be transported from one place to another.
VI.15 Except for transitional effects, then, international differences of price levels produce changes only in one of the elements in the equation of exchange,—the volume of money. Practically, of course, transition periods may be incessant or chronic. It seldom happens that a nation has no balance of trade. For decades Oriental nations took silver from Occidental nations even when silver was, under the bimetallic régime, at a stable ratio with gold. In Europe there was a consequent long-continued tendency for prices to fall, and in Asia a tendency to rise, with all the other transitional effects involved.
§ 2 VI.16 We have seen how M in the equation of exchange is affected by the import or export of money. Considered with reference to the M in any one of the countries concerned, the M's in all the others are "outside influences."
VI.17 Proceeding now one step farther, we must consider those influences on M that are not only outside of the equation of exchange for a particular country, but outside those for the whole world. Besides the monetary inflow and outflow through import and export, there is an inflow and outflow through minting and melting. In other words, not only do the stocks of money in the world connect with each other like interconnecting bodies of water, but they connect in the same way with the outside stock of bullion. In the modern world one of the precious metals, such as gold, usually plays the part of primary money, and this metal has two uses,—a monetary use and a commodity use. That is to say, gold is not only a money material, but a commodity as well. In their character of commodities, the precious metals are raw materials for jewelry, works of art, and other products into which they may be wrought. It is in this unmanufactured or raw state that they are called bullion.
VI.18 Gold money may be changed into gold bullion, and vice versa. In fact, both changes are going on constantly, for if the value of gold as compared with other commodities is greater in the one use than in the other, gold will immediately flow toward whichever use is more profitable, and the market price of gold bullion will determine the direction of the flow. Since 100 ounces of gold, 9/10 fine, can be transformed into $1860, the market value of so much gold bullion, 9/10 fine, must tend to be $1860. If it costs nothing to have bullion coined into money, and nothing to melt money into bullion, there will be an automatic flux and reflux from money to bullion and from bullion to money that will prevent the price of bullion from varying greatly. On the one hand, if the price of gold bullion is greater than the money which could be minted from it, no matter how slight the difference may be, the users of gold who require bullion—notably jewelers—will save this difference by melting gold coin into bullion. Contrariwise, if the price of bullion is less than the value of gold coin, the owners of bullion will save the difference by taking bullion to the mint and having it coined into gold dollars, instead of selling it in the bullion market. The effect of melting coin, on the one hand, is to decrease the amount of gold money and increase the amount of gold bullion, thereby lowering the value of gold as bullion and raising the value of gold as money; thereby lowering the price level and restoring the equality between bullion and money. The effect of minting bullion into coin is, by the opposite process, to bring the value of gold as coin and the value of gold as bullion again into equilibrium. In practice, the balance is probably*63 maintained chiefly by turning newly mined gold into the one or the other use according to the market. By thus feeding the two reservoirs according to their respective needs there is saved the necessity of any great amount of interflow between money and the arts.
VI.19 Where a charge—called "seigniorage"—is made for changing bullion into coin, or where the process involves expense or delay, the flow of bullion into currency will be to that extent impeded. But under a modern system of free coinage and with modern methods of metallurgy, both melting and minting may be performed so inexpensively and so quickly that there is practically no cost or delay involved. In fact, there are few instances of more exact price adjustment than the adjustment between gold bullion and gold coin. It follows that the quantity of money, and therefore its purchasing power, is directly dependent on that of gold bullion.
VI.20 The stability of the price of gold bullion expressed in gold coin causes confusion in the minds of many people, giving them the erroneous impression that there is no change in the value of money. Indeed, this stability has often been cited to show that gold is a stable standard of value. Dealers in objects made of gold seem to misunderstand the significance of the fact that an ounce of gold always costs about $18.60 in the United States or £3 17s. 10½d. in England. This means nothing more than the fact that gold in one form and measured in one way will always bear a constant ratio to gold in another form and measured in another way. An ounce of gold bullion is worth a fixed number of gold dollars, for the same reason that a pound sterling of gold is worth a fixed number of gold dollars, or that a gold eagle is worth a fixed number of gold dollars.
VI.21 Except, then, for extremely slight and temporary fluctuations, gold bullion and gold money must always have the same value. Therefore, in the following discussion respecting the more considerable fluctuations affecting both, we shall speak of these values interchangeably as "the value of gold."
§ 3 VI.22 The stock of bullion is not the ultimate outside influence on the quantity of money. As the stock of bullion and the stock of money influence each other, so the total stock of both is influenced by production and consumption. The production of gold consists of the output of the mines, which constantly tends to add to the existing stocks both of bullion and coin. The consumption of gold consists of the use of bullion in the arts by being wrought up into jewelry, gilding, etc., and of losses by abrasion, shipwreck, etc. If we consider the amount of gold coin and bullion as contained in a reservoir, production would be the inflow from the mines, and consumption the outflow to the arts and by destruction and loss. To the inflow from the mines should be added the reinflow from forms of art into which gold had previously been wrought, but which have grown obsolete. This is illustrated by the business of producing gold bullion by burning gold picture frames.
VI.23 We shall consider first the inflow or production, and afterward the outflow or consumption. The regulator of the inflow (which practically means the production of gold from the mines) is its estimated "marginal cost of production."
VI.24 Mining is a hazardous business and estimates are subject to great error. But however erroneous the estimated cost, it exerts a regulatory power over production. Wherever the estimated cost of producing a dollar of gold is less than the existing value of a dollar in gold, it will normally be produced. Wherever the cost of production exceeds the existing value of a dollar, gold will normally not be produced. In the former case the production of gold is profitable; in the latter it is unprofitable. There will be an intermediate or neutral point at which normally profitable production ceases and unprofitable production begins, a point at which the cost of producing $100 will be exactly $100. The cost at this point is called the marginal cost of production. At the richest mines, the cost of production is extremely small. From this low standard the cost gradually rises at other mines, until the marginal mine is reached, at which the cost will normally be equal to the value of the product. In fact, there exists a marginal point of production, not only as among different mines, but for each mine individually. The fact that cost tends in general to increase with increased product is due to the fact that gold is an extractive industry. It is subject to the law of increasing cost, or, as it is often expressed, "the law of decreasing returns." If a mine is only moderately worked, the cost of production per ounce of gold will be less than if it is worked at more nearly its full capacity, and there will always be a rate of working such that the cost per ounce of any extension in that rate of working will make the extension barely profitable. It will pay to extend production to the point where the additional return is just equal to the consequent additional cost, but no further. The mine operator may unintentionally or temporarily overshoot the mark or fall within it, but such errors will only stimulate him to correct them; and gold production will always tend toward an equilibrium in which the marginal cost of production will (when interest is added) be equal to the value of the product.
VI.25 This holds true in whatever way cost of production is measured, whether in terms of gold itself, or in terms of some other commodity such as wheat, or of commodities in general, or of any supposed "absolute" standard of value. In gold-standard countries gold miners do actually reckon the cost of producing gold in terms of gold. From their standpoint it is a needless complication to translate the cost of production and the value of the product into some other standard than gold. They are interested in the relation between the two, and this relation will not be affected by the standard.
VI.26 To translate the cost and value from gold money into wheat, it is only necessary to divide both cost and value by the price of wheat in gold money. Such a change in the method of expressing both cost and value will not affect their relation to each other.
VI.27 To illustrate how the producer of gold measures everything in terms of gold, suppose that the price level rises. Assuming that the rise of prices applies to wages, machinery, fuel, and the other expenses of producing gold, he will then have to pay more dollars for wages, machinery, fuel, etc., while the prices obtained for his product (expressed in those same dollars) will, as always, remain unchanged. Conversely, a fall in the level will lower his cost of production (measured in dollars), while the price of his product will still remain the same.*64 Thus we have a constant number expressing the price of gold product and a variable number expressing its cost of production.
VI.28 If we express the same phenomena, not in terms of gold, but in terms of wheat, or rather, let us say, in terms of goods in general, we shall have the opposite conditions. When prices rise, the purchasing power of money falls, and this purchasing power is the value of the product expressed in terms of goods in general. If the mining costs change with the general price movement, there will not occur any change in the cost of producing gold relatively to goods. There will, however, be a change in the value of the gold product. That is, we shall then have a variable number expressing the price of the gold product and a constant number expressing its cost of production.
VI.29 Thus the comparison between price and cost of production is the same, whether we use gold or other commodities as our criterion. In the one view—i.e. when prices are measured in gold—a rise of prices means a rise in the gold miner's cost of production; in the other view—i.e. when prices are measured in other goods—the same rise in prices means a fall in the price (purchasing power) of his product. In either view he will be discouraged. He will look at his troubles in the former light, i.e. as a rise in the cost of production; but we shall find it more useful to look at them in the latter, i.e. as a fall in the purchasing power of the product. In either case the comparison is between the cost of the production of gold and the purchasing power of gold. If this purchasing power is above the cost of production in any particular mine, it will pay to work that mine. If the purchasing power of gold is lower than the cost of production of any particular mine, it will not pay to work that mine. Thus the production of gold increases or decreases with an increase or decrease in the purchasing power of gold.
VI.30 So much for the inflow of gold and the conditions regulating it. We turn next to outflow or consumption of gold. This has two forms, viz. consumption in the arts and consumption for monetary purposes.
VI.31 First we consider its consumption in the arts. If objects made of gold are cheap—that is, if the prices of other objects are relatively high—then the relative cheapness of the gold objects will lead to an increase in their use and consumption. Expressing the matter in terms of money prices, when prices of everything else are higher and people's incomes are likewise higher, while gold watches and gold ornaments generally remain at their old prices, people will use and consume more gold watches and ornaments.
VI.32 These are instances of the consumption of gold in the form of commodities. The consumption and loss of gold as coin is a matter of abrasion, of loss by shipwreck and other accidents. It changes with the changes in the amount of gold in use and in its rapidity of exchange. The outlets from this reservoir represent the consumption of gold coins by loss. Just as production is regulated by marginal cost of what is produced, so is consumption regulated by marginal utility of what is consumed. This is not the place to enter into a discussion of the essential symmetry between these two marginal magnitudes, a symmetry often lost sight of because cost is usually measured objectively and utility subjectively. Both are measurable in either way. The subjective method is the more fundamental, but takes us farther away from our present discussion than is necessary or profitable.
VI.33 We see then that the consumption of gold is stimulated by a fall in the value (purchasing power) of gold, while the production of gold is decreased. The purchasing power of money, being thus played upon by the opposing forces of production and consumption, is driven up or down as the case may be.*65
§ 4 VI.34 In any complete picture of the forces determining the purchasing power of money we need to keep prominently in view three groups of factors: (1) the production or the "inflow" of gold (i.e. from the mines); (2) the consumption or "outflow" (into the arts and by destruction and loss); and (3) the "stock" or reservoir of gold (whether coin or bullion) which receives the inflow and suffers the outflow. The relations among these three sets of magnitudes can be set forth by means of a mechanical illustration, given in Figure 5. This represents two connected reservoirs of liquid, Gb and Gm. The contents of the first reservoir represent the stock of gold bullion, and the contents of the second the stock of gold money. Since purchasing power increases with scarcity, the distance from the top of the cisterns, OO, to the surface of the liquid, is taken to represent the purchasing power of gold over other goods.
A lowering of the level of the liquid indicates an increase in the purchasing power of money, since we measure this purchasing power downward from the line OO to the surface of the liquid. We shall not attempt to represent other forms of currency explicitly in the diagram. We have seen that normally the quantities of other currency are proportional to the quantity of primary money, which we are supposing to be gold. Therefore, the variation in the purchasing power of this primary money may be taken as representative of the variation of all the currency. We shall now explain the shapes of these cisterns. The shape of the cistern Gm must be such as will make the distance of the liquid surface below OO decrease with an increase of the liquid, in exactly the same way as the purchasing power of gold decreases with an increase in its quantity. That is, as the quantity of liquid in Gm doubles, the distance of the surface from the line OO should decrease by one half. In a similar manner the shape of the gold bullion cistern must be such as will make the distance of the liquid surface below OO decrease with an increase of the liquid in the same way as the value of gold bullion decreases with an increase of the stock of gold bullion. The shapes of the two cisterns need not, and ordinarily will not, be the same, for we can scarcely suppose that halving the purchasing power of gold will always exactly double the amount of bullion in existence.
VI.35 Both reservoirs have inlets and outlets. Let us consider these in connection with the bullion reservoir (Gb). Here each inlet represents a particular mine supplying bullion, and each outlet represents a particular use in the arts consuming gold bullion. Each mine and each use has its own distance from OO. There are, therefore, three sets of distances from OO: the inlet distances, the outlet distances, and the liquidsurface distance. Each inlet distance represents the cost of production for each mine, measured in goods; each outlet distance represents the value of gold in some particular use, likewise measured in goods. The surface distance, as we have already explained, represents the value of bullion, likewise measured in goods,—in other words, its purchasing power.
VI.36 It is evident that among these three sets of levels there will be discrepancies. These discrepancies serve to interpret the relative state of things as between bullion and the various flows—in and out. If an inlet at a given moment be above the surface level, i.e. at a less distance from OO, the interpretation is that the cost of production is less than the purchasing power of the bullion. Hence the mine owner will turn on his spigot and keep it on until, perchance, the surface level rises to the level of his mine,—i.e. until the surface distance from OO is as small as the inlet distance,—i.e. until the purchasing power of bullion is as small as the cost of production. At this point there is no longer any profit in mining. So much for inlets; now let us consider the outlets. If an outlet at a given moment be below the surface level,—i.e. at a greater distance from OO,—the interpretation is that the value of gold in that particular use is greater than the purchasing power of bullion. Hence gold bullion will flow into these uses where its worth is greater than as bullion. That is, it will flow out of all outlets below the surface in the reservoir.
VI.37 It is evident, therefore, that at any given moment, only the inlets above the surface level, and only the outlets below it, will be called into operation. As the surface rises, therefore, more outlets will be brought into use, but fewer inlets. That is to say, the less the purchasing power of gold as bullion, the more it will be used in the arts, but the less profitable it will be for the mines to produce it, and the smaller will be the output of the mines. As the surface falls, more inlets will come into use and fewer outlets.
VI.38 We turn now to the money reservoir (Gm). The fact that gold has the same value either as bullion or as coin, because of the interflow between them, is interpreted in the diagram by connecting the bullion and coin reservoirs, in consequence of which both will (like water) have the same level. The surface of the liquid in both reservoirs will be the same distance below the line OO, and this distance represents the value of gold or its purchasing power. Should the inflow at any time exceed the outflow, the result will necessarily be an increase in the stock of gold in existence. This will tend to decrease the purchasing power or value of gold. But as soon as the surface rises, fewer inlets and more outlets will operate. That is, the excessive inflow or production on the one hand will decrease, and the deficient outflow or consumption on the other hand will increase, checking the inequality between the outflow and inflow. If, on the other hand, the outflow should temporarily be greater than the inflow, the reservoir will tend to subside. The purchasing power will increase; thus the excessive outflow will be checked, and the deficient inflow stimulated,—restoring equilibrium. The exact point of equilibrium may seldom or never be realized, but as in the case of a pendulum swinging back and forth through a position of equilibrium, there will always be a tendency to seek it.
VI.39 It need scarcely be said that our mechanical diagram is intended merely to give a picture of some of the chief variables involved in the problem under discussion. It does not of itself constitute an argument, or add any new element; nor should one pretend that it includes explicitly all the factors which need to be considered. But it does enable us to grasp the chief factors involved in determining the purchasing power of money. It enables us to observe and trace the following important variations and their effects:—
VI.40 First, if there be an increased production of gold—due, let us suppose, to the discovery of new mines or improved methods of working old ones—this may be represented by an increase in the number or size of the inlets into the Gb reservoir. The result will evidently be an increase of "inflow" into the bullion reservoir, and from that into the currency reservoir, a consequent gradual filling up of both, and therefore a decrease in the purchasing power of money. This process will be checked finally by the increase in consumption. And when production and consumption become equal, an equilibrium will be established. An exhaustion of gold mines obviously operates in exactly the reverse manner.
VI.41 Secondly, if there be an increase in the consumption of gold—as through some change of fashion—it may be represented by an increase in the number or size of the outlets of Gb. The result will be a draining out of the bullion reservoir, and consequently a decreased amount in the currency reservoir: hence an increase in the purchasing power of gold, which increase will be checked finally by an increase in the output of the mines as well as by a decrease in consumption. When the increased production and the decreased consumption become equal, equilibrium will again be reached.
VI.42 If the connection between the currency reservoir and the bullion reservoir is closed by a valve, that is, if the mints are closed so that gold cannot flow from bullion into money (although it can flow in the reverse direction), then the purchasing power of the gold as money may become greater than its value as bullion. Any increase in the production of gold will then tend only to fill the bullion reservoir and decrease the distance of the surface from the line OO, i.e. lower the value of gold bullion. The surface of the liquid in the money reservoir will not be brought nearer OO. It may even by gradual loss be lowered farther away. In other words, the purchasing power of money will by such a valve be made entirely independent of the value of the bullion out of which it was first made.
VI.43 An illustration of this principle is found in the history of the silver currency in India. After long discussion the mints of India were closed to silver in 1893. Previous to that time the value of coined silver had followed closely the value of silver bullion, but the closure produced an immediate divergence between the two. The rupee has remained independent of silver ever since; and during the first six years—until 1899—it was independent of gold also. Its present relation to the latter metal will be discussed in the next chapter.
VI.44 We have now discussed all but one of the outside influences upon the equation of exchange. That one is the character of the monetary and banking system which affects the quantity of money and deposits. This we reserve for special discussion in the following chapter. Meanwhile, it is also noteworthy that almost all of the influences affecting either the quantity or the velocities of circulation have been and are predominantly in the direction of higher prices. Almost the only opposing influence is the increased volume of trade; but this is partly neutralized by increased velocities due to the increased trade itself. We may here point out that some of those influences discussed in this and the preceding chapter operate in more than one way. Consider, for instance, technical knowledge and invention, which affect the equation of exchange by increasing trade. So far as these increase trade, the tendency is to decrease prices; but so far as they develop metallurgy and the other arts which increase the production and easy transportation of the precious metals, they tend to increase prices. So far as they make the transportation and transfer of money and deposits quicker, they also tend to increase prices. So far as they lead to the development of the art of banking, they likewise tend to increase prices, both by increasing deposit currency (M') and by increasing the velocity of circulation both of money and deposits. So far as they lead to the concentration of population in cities, they tend to increase prices by accelerating circulation.
VI.45 Finally, so far as per capita trade is increased through this or any other cause, there is a tendency to decrease prices. What the net effect of the development of the arts may be during any given period will depend on the predominant direction in which the arts are developed.

## Endnotes

62. For mathematical statement, see § 1 of Appendix to (this) Chapter VI.
63. Cf. De Launay, The World's Gold, New York (Putnam), 1908, pp. 179-183.
64. Cf. Mill, Principles of Political Economy, Book III, Chapter IX, § 2.
65. The theory here presented, that the value of gold bullion and the cost of production of gold affect prices by way of the quantity of money, is the one which economists have generally held. A different view is represented by Laughlin, who says, "the quantity of money used as the actual media of exchange no more determines price than the entries of deeds and conveyances in the county records determine the prices of the land whose sale is stated in the papers recorded," and that "price is an exchange relation between goods and the standard money commodity, whether that money commodity be used as a medium of exchange or not." See The Principles of Money, New York (Scribner), 1903, pp. 317 and 318.