§ 4. Increasing importance of the standard. Until the use of money develops, the use of credit is difficult and limited; it becomes easy when the value of all things is expressed in terms of a common circulating medium. It therefore generally is true that the importance of money as the standard of deferred payments increases with the use of money as a medium of trade. The volume of outstanding debts expressed in terms of money now very greatly exceeds the total value of the circulating medium. Changes in the general level of prices have, therefore, great effect upon all existing debts. The value of all debts changes in the same proportion as does that of the standard unit of money; when this rises or falls in value, it means increase or reduction, in the same ratio, of the purchasing power of every creditor. It is as if he had in his possession metal dollars equal in amount to the face of the debt, and they had changed by so much in purchasing power. The debtor's interests in such changes are, of course, just the reverse of the creditor's interests.

Outstanding contract debts may be roughly divided into two classes: short-time loans, running less than a year; and long-time loans, running for a year or more.4 Fluctuations are rarely rapid and great enough to affect appreciably the debtors and creditors in the case of short-time loans. The results are appreciable in the case of loans running from one to five years, and may be very great in the case of loans made for still longer periods, such as the bonded indebtedness of nations, states, municipalities, and business corporations, and as mortgages given by farmers on their land or by owners of city real estate. A multitude of interests are thus affected by a change in the value of money. "When money rises in purchasing power, receivers of fixed incomes are gainers. When it falls in purchasing power, they lose. Receivers of fixed incomes from loans include not merely private investors, but also many educational and charitable institutions which dispense their incomes for public purposes. "Wages and salaries of many kinds go up and down less rapidly than do other prices, and thus to some extent wage-earners are in the position of passive capitalists5 as regards changes in the monetary standard. In a capitalistic age, therefore, almost every individual is affected in some way by a change in the value of money.

§ 5. Defectiveness of the gold standard. Money is, in general, for both borrowers and lenders the most convenient standard of deferred payments. But from the usage of speaking of all things in terms of gold arises the popular notion that the value of gold is always the same, while the value of other things changes. In truth, a fixed objective standard of value is not possible of attainment. Although the value of gold is stable as compared with most things, it rests on the estimates made by men and is constantly changing with conditions. The current new supplies of gold are comparatively regular. For centuries at a time there was little change in the methods of mining gold and there were no radical changes in its output. The nature of the use of gold, likewise, is such as to make changes in the amount of it needed, under ordinary conditions, more stable than is that of most other goods. Moreover, the stock of gold in monetary uses is but slowly worn out; it is, therefore, a large reservoir into which flows a comparatively small stream of annual production ; the existing stock is twenty or thirty times the annual output. The existing stock of precious metals, gold and silver, more than other products of mine and field, is at any time the accumulation of many years' production, and is changed very little, proportionally, by a large change of output in any year or short period. It changes in volume as does a glacier fed by the snows of many years, not as does a river, filled by a single rainfall.

5 See Vol. I, p. 319.

Yet the value of gold expressed in other things is never quite stable, and sometimes several influences combine to affect it greatly. At various times the discovery of gold deposits, and recently the invention of chemical and mechanical processes, have suddenly altered the conditions of gold production, causing revolutionary results in the field of prices and. deferred payments. A brief survey of these changes will be helpful to an understanding of the problem involved.

§ 6. Relative values of gold and silver. Both gold and silver were used as moneys in Greece and Rome, and continued to be used in Europe in the Middle Ages, though silver was much the more common. The two metals continued in the seventeenth and eighteenth centuries to be used side by side in Europe and in the new settlements in America, silver for the smaller and gold for many of the larger transactions. Both were legal forms of money in units of specified weights and fineness, the weights bearing a certain ratio to each other. Thus it was possible for a debtor to discharge his obligations with that one of the two metals which at the moment was the cheaper at the legal ratio. Fluctuations in the prices of gold in terms of silver were at times such as to cause a large part of the full-weight coins of one or the other metal to leave circulation (in accordance with Gresham's law). So from time to time the ratio was slightly changed by law in the various countries to permit the circulation or to bring back the kind of money that had been undervalued in terms of the other.

Fig. 2. Gold Production of the World, 1493-1914. The changes in gold production here shown have bearings not only upon problems of money, but in some respects upon nearly every modern economic problem. Compare in the present connection this figure with Figure 1 in this Chapter showing changes in index numbers of prices.

Table - Gold production of the World. By decades and years, in $1,000,000 coinage value

It is a remarkable fact that from the time of Xenophon until the discovery of America (a period of nearly two thousand years) the market ratio of silver to gold bullion in Europe had remained pretty close to ten to one, being only temporarily altered by sudden and unusual occurrences. From 1492 to 1660 the ratio changed to fifteen to one, where it remained with remarkable stability until about the year 1800. At the establishment of the mint of the United States in 1792 that ratio was found to exist. Men had come to look upon the ratio of fifteen to one as the natural order, determined (it was sometimes said) providentially by the deposit of the two metals in due proportion in the earth's surface. But, as we now see it, this in part was mere chance and in part was due to the equalizing effect of the wide use of both metals, so that the one could be easily substituted for the other in case of a divergence of the market ratio from the legal ratio as money. From the year 1500 until 1800 the western hemisphere was the main source of the precious metals, the alluvial deposits were widely scattered, were gradually discovered, were usually found in small quantities, and were extracted in primitive ways. For a short time after the discovery of America (from 1493 to about 1544) the average coining value6 of the world's production of gold, nearly all found in America, was about one and one-half times as great as that of silver; but thereafter for three centuries from about 1545, the annual value of silver produced was between one and one-half to four times as great as that of gold, averaging about twice as great. Silver was the money chiefly in use in the ordinary transactions in all of the principal countries of the world.