§ 3. This law, how related to the principle laid down in the preceding chapter.

Since, however, the value of money really conforms, like that of other things, though more slowly, to its cost of production, some political economists have objected altogether to the statement that the value of money depends on its quantity combined with the rapidity of circulation, which, they think, is assuming a law for money that does not exist for any other commodity, when the truth is that it is governed by the very same laws. To this we may answer, in the first place, that the statement in question assumes no peculiar law. It is simply the law of demand and supply, which is acknowledged to be applicable to all commodities, and which, in the case of money, as of most other things, is controlled, but not set aside, by the law of cost of production, since cost of production would have no effect on value if it could have none on supply. But, secondly, there really is, in one respect, a closer connection between the value of money and its quantity than between the values of other things and their quantity. The value of other things conforms to the changes in the cost of production, without requiring, as a condition, that there should be any actual alteration of the supply: the potential alteration is sufficient; and, if there even be an actual alteration, it is but a temporary one, except in so far as the altered value may make a difference in the demand, and so require an increase or diminution of supply, as a consequence, not a cause, of the alteration in value. Now, this is also true of gold and silver, considered as articles of expenditure for ornament and luxury; but it is not true of money. If the permanent cost of production of gold were reduced one fourth, it might happen that there would not be more of it bought for plate, gilding, or jewelry, than before; and if so, though the value would fall, the quantity extracted from the mines for these [pg 310] purposes would be no greater than previously. Not so with the portion used as money: that portion could not fall in value one fourth unless actually increased one fourth; for, at prices one fourth higher, one fourth more money would be required to make the accustomed purchases; and, if this were not forthcoming, some of the commodities would be without purchasers, and prices could not be kept up. Alterations, therefore, in the cost of production of the precious metals do not act upon the value of money except just in proportion as they increase or diminish its quantity; which can not be said of any other commodity. It would, therefore, I conceive, be an error, both scientifically and practically, to discard the proposition which asserts a connection between the value of money and its quantity.

There are cases, however, in which the potential change of the precious metals affects their value as money in the same way that it affects the value of other things. Such a case was the change in the value of silver in 1876. The usual causes assigned for that serious fall in value were the greatly increased production from the mines of Nevada; the demonetization of silver by Germany; and the decreased demand for export to India. It is true that the exports of silver from England to India fell off from about $32,000,000 in 1871-1872 to about $23,000,000 in 1874-1875; but none of the increased Nevada silver was exported from the United States to London, nor had Germany put more than $30,000,000 of her silver on the market;233and yet the price of silver so fell that the depreciation amounted to 20-¼ per cent as compared with the average price between 1867 and 1872. The change in value, however, took place without any corresponding change in the actual quantity in circulation. The relation between prices and the quantities of the precious metals is, therefore, not so exact, certainly as regards silver, as Mr. Mill would have us believe; and thus their values conform more nearly to the general law of Demand and Supply in the same way that it affects things other than money.

It is evident, however, that the cost of production, in the long run, regulates the quantity; and that every country (temporary fluctuation excepted) will possess, and have in [pg 311] circulation, just that quantity of money which will perform all the exchanges required of it, consistently with maintaining a value conformable to its cost of production. The prices of things will, on the average, be such that money will exchange for its own cost in all other goods: and, precisely because the quantity can not be prevented from affecting the value, the quantity itself will (by a sort of self-acting machinery) be kept at the amount consistent with that standard of prices—at the amount necessary for performing, at those prices, all the business required of it.

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