Since price is the expression of value in terms of money, we can measure and record the values of all vendible commodities by means of their prices, but in the case of money we are met with the difficulty that, being itself the measure and standard of value, there is no medium in which to express its price. The value of money is expressed by the general level of the price of all other commodities. If the reader will always bear in mind the fact that value always implies a relation to something else, he will be saved from confusion of thought on this head. The values of all commodities are measured by their relation to money; the higher their price the greater their value. But you cannot have a relation between money and money, and the value of a sovereign therefore is measured by its relation to other commodities; the higher the price of these articles, the lower the value of the sovereign. The value of money is its purchasing power; if prices generally rise, the purchasing power of money has become less, because the same amount of money will buy less than when prices were lower. The value of money and the value of commodities therefore vary inversely; they are each the opposing scale in a balance, if one rises the other falls, and vice versa.

Beware of the expression "Mint price of gold." It is an awkward phrase, and one in which the word "price" is very misleading to the unwary. The Mint price of gold is the price paid by the Mint in sovereigns for gold bullion. It is the value of the rough metal in finished coin.

In England the Mint price of gold is £3 17s. 10 1/2d. an ounce, that is to say, an ounce of gold is coined into 3. 89 sovereigns, or, in other words, a sovereign weighs 123'27447 grains of standard gold.

Continuing our simile of the pair of scales, we can easily see that the value of money is affected by two different sets of causes, operating on either of the two scales of the balance; on the one hand we have a set of causes intimately connected with the supply of vendible commodities, on the other hand we have to consider the amount of money and the economies in its use.

As an illustration of what is meant by this, let us take the supposed case of a general all-round cheapening in the processes of production, due to increased knowledge and greater skill in the invention and use of labour-saving appliances. If the amount of money remains the same and the same economies in its use are in force, we shall get an all-round reduction in prices; in other words, the value or purchasing power of money will rise.

Look at the other scale of the balance. Suppose in this case that the cost of production of vendible commodities remains the same, but that the amount of money in circulation is less, due, let us say, to the exhaustion of some of the principal gold fields; prices will be affected in the same way. Money, obeying the general law of supply and demand, will rise in value owing to the reduction in supply.

It is the action of this double set of causes which renders so difficult the problem of keeping the value of money stable. As we saw in the last chapter, stability is the essential quality for our standard of value, and any changes are an evil to be avoided. Rising prices may give a stimulus to the producing classes for a time, although this stimulus is partly at the expense of the consuming classes, but prices cannot continually rise, and the inevitable reaction is one of the chief causes of those periods of commercial depression and stagnation which characterise our modern industrialism.

If we could artificially regulate the supply and economy of money we should not have attained our object, because the value of money would still be open to the influence of the other set of causes.

We will, however, for the present confine our attention to the value of money as dependent on its supply and use. The general rule is, that this value depends on the quantity of money in circulation together with the economy in its use, or, in other words, the "rapidity of its circulation." The greater the quantity of money in circulation the less will be its value, and the higher will be the level of prices, and conversely.

In the same way the more work that each piece of money will do the less will be its value and the higher will be the level of prices. In John Stuart Mill's words (a), "the amount of goods and of transactions being the same, the value of money is inversely as its quantity multiplied by what is called the rapidity of circulation."

But we shall do well to remember that the quantity of money does not depend absolutely upon the supplies of the precious metals from the mines. By far the larger proportion of the money of most industrial nations consists of paper money, obligations to pay gold or silver either on demand or at a fixed period. A very small proportion of these promises is ever liquidated in coin. The supply of the precious metals is far too small to liquidate the obligations existing at any one moment, and most of them are cancelled by a transfer of indebtedness. This superstructure of credit is based upon the quantity of the precious metals in circulation, and its quantity is, roughly, proportionate to that of its basis; there is no exact proportion, however, and so the paper circulation possesses the useful attribute of "elasticity."

At certain periods, when trade is more than usually prosperous and transactions are multiplied, the work which the money of a country has to perform is correspondingly greater, and a demand for an increase in the quantity of the currency often occurs; this demand is met by an increase in the superstructure of credit, which, in a proper system, expands and contracts automatically. This power of expansion is called "elasticity," and is, up to a certain point, beneficial, since it tends to steady prices. It will be seen that this power of automatic expansion is a modification of the general rule that, other things being equal, the value of money depends upon the quantity in circulation, for a rise in the value of money may, under certain conditions, result in an increase in that quantity.

(a) Mill: Political Economy, bk. iii., chap. 8, § 3.