were much easier to operate, and gold began
to be produced at a much more rapid rate than formerly? The amount
of gold as compared with other forms of wealth evidently would be
increased. What if all the increase went into the industrial arts? The
value of gold in its industrial uses would fall. Then a part of the
increase must be diverted to monetary uses. When any man, by reason of
the increasing gold supplies, gets a larger stock of money than he had
before, the proportion formerly existing between his use for money
and his monetary stock is altered. He has more money than meets his
monetary demand at the existing prices. As he seeks to reduce his
stock of money to due proportions by buying more goods, he thereby
distributes a part of the excess of money to others. This bids up the
prices of goods further until the total value of goods exchanged again
bears the same ratio as before to the average monetary demand of each
individual.
Take an extreme case: if twice as many dollars get into circulation
in a community, either some few men may have far more dollars than
before, while others have nearly the same number; or every man may
have his due proportion of the new supplies, just twice as many as
before in proportion to his income. The latter result, "other things
being equal," is the logical one after equilibrium has been restored.
If prices of goods remained the same as before, there would be twice
as many pieces of money available to effect the same number of trades
at the same prices. There is no reason why each person should tie up
twice as large a proportion of his income in the form of money. If,
however, there is a concerted movement to spend the surplus money,
there results a general bidding down of the value of money, a general
bidding up of the prices of goods. At what point will this movement
stop? The rational conclusion must be that, other things being equal,
the new equilibrium will be established when the ratio between the
value of money and the price of the goods which each individual is
purchasing becomes the same as before. The money being doubled, prices
must be doubled, and likewise for any other change in quantity.
Sec. 10. #The quantity theory of money.# This explanation of the effect
of changes in the quantity of money in a country upon prices (the
general scale of prices) is known as the quantity theory of money.
This theory has, for a century, been very generally accepted by
competent st
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