The question whether the supply of money directly influences prices, and if so to what extent, has figured prominently in economic discussions for many years. The so-called classical economists early evolved what was called the quantity theory of money. This, roughly stated, was to the effect that, as the supply of money increased, the money value of commodities tended to increase. As thus stated the doctrine was little but a truism, but it was a direct and natural inference that in order to raise prices it was only necessary to increase the supply of money, while in order to reduce them or to hold them in check it was only necessary to curtail the supply of money.

The theory was not very important in its direct bearings so long as the term "money" was limited to the strict and original meaning of the term - standard money, or, in a country on a specie basis, the standard money metal. As there was no artificial way of increasing the supply of money metal except by producing it, the basis of prices was thus given a kind of "natural" foundation.

Closely connected with this view of the price situation was the theory of international trade, which was worked out by classical economists in complete form. This trade theory held to the view that exports and imports over a sufficiently long period were equal, and that since "visible" exports and imports consisted of (a) goods and (b) money, a favorable balance of trade (excess of exports over imports) meant a larger incoming supply of money in order to equalize the "balance." From this, working in conjunction with the price theory already evolved, the economists deduced the view that when a country exported heavily, money came to it in large quantities, and as a result commodi-ties tended to become higher in price. This made it a less desirable country in which to buy goods, so that there was an automatic check upon the exportations, which promptly fell off. In this way through the backward and forward movement of specie, international supplies of metal were equalized or "adjusted" to the "volume of business" developing in the various countries.

The theory began to assume a much more difficult aspect when the definition of the term "money" was broadened. J. S. Mill, a strong adherent of the quantitative theory of money, defined the term money as meaning volume of money, a term which, according to him, could be analyzed into two factors or elements- (1) the quantity of money in existence or available and (2) the rapidity of circulation. This thought he expressed in the well-known formula V = QxR. Of course, from this it was fairly to be inferred that if methods of economizing the supply of money, or of making it more efficient in circulation, could be devised, the tendency would be to raise prices. Conversely, of course, changes in method which rendered money less efficient, as well as withdrawals for the purpose of hoarding or uneconomic bank reserve methods, tended to reduce the efficiency of money - that is, the supply of it or volume - and so tended to reduce prices.

A further complexity came into the theory when it was admitted that there were other factors which tended to alter the relationship between money and goods. Evidently if all commodities could be conceived as to be divided into two groups, one of which was actually bought and sold by the use of money, while the other was bought and sold by the use of book credits or money substitutes of some kind, it was a fair question whether the relation of money to goods had not been seriously altered. Some economists developed the thought that in these circumstances prices were determined in that range of trading where goods were actually exchanged against money or the equivalent of money, while other goods were regarded as outside the general exchange field. Thus, for example, if farmer A sold eggs to the local dealer, at forty cents per dozen, such an exchange was one of the factors tending to fix the price of eggs; but if farmer A, on reaching the store, merely looked into a newspaper where he saw eggs quoted at forty cents and then purchased from the dealer tea or coffee to an amount of forty cents, there was a kind of barter, eggs being really exchanged against tea or coffee on a basis which had been determined in that range of trade where the goods were actually sold for money. Still other economists favored a much more highly refined view of the situation in which they held that all means of exchange, including money itself, paper currency, credit media of various kinds - in short, everything constituting demand for goods were to be looked upon as making up the demand side of a price equation, while all goods which were being offered for sale, whether actually sold for money or not, constituted the supply side. The price level was determined by a balancing of money against goods, and the question whether an actual net addition to the amount of metal in circulation would or would not increase the level of prices depended upon whether there were or were not offsetting factors that came into play. About all that could be definitely said of this theory was that it held that additions to the actual supply of money tended, "so long as other things were equal," to raise prices, while a subtraction from the supply of money tended to reduce them.