The value of money is determined, like that of other commodities, by the principle of demand and supply. In the case of money, however, the conditions affecting supply and demand are somewhat complex and call for some detailed analysis. Demand may be denned as need or desire coupled with ability to pay for the thing desired. The demand for money is measured by the amount of commodities or services which will be given in exchange for it. Now the demand for money is limited, more so than the demand for other commodities. Iron or wheat may be put to many different uses, but money is used primarily for exchange purposes. Men seek to acquire money in order that they may exchange it for other commodities. It has aptly been said that money has no use except to be spent.

The demand for gold arises from two principal uses to 6 which it is put - its use in industry and the arts, the "arts demand," and its use as a medium of exchange, the "monetary demand." It is generally believed that between one-fourth and one-third of the world's annual production of gold goes into the arts. This industrial demand comes from many sources, from manufacturers of jewelry, watches, plate, ornaments, and the like; from dentists and surgeons; and from users of gold leaf in bookbinding and decoration. Our mints and assay offices refine practically all the gold metal produced in or brought to this country, allowing the depositors of the metal to take the proceeds either in money or in gold bars for industrial use.

The monetary demand includes not only the demand for money as a medium of exchange, but also as a reserve basis for credit, and as a store of value for future exchanges. Let us consider these in inverse order. The amount of money required by individuals and merchants for pocket and till money depends upon the habits of the peop|e, density of population, volume of retail transactions and many other considerations. The pay rolls of manufacturing concerns and corporations call for the use of considerable sums of money, and a very large volume of retail and small store business is done on a "cash" basis. This demand for hand-to-hand money is reduced, however, by the increasing use of the check even in retail transactions. In normal times people keep on hand or stored away only as much money as they expect to use in the near future. When panic comes many people try to convert other forms of property, including bank deposits, into money because this is the one commodity which can always be exchanged.

The monetary demand is affected also by the requirements of governments which must maintain reserves of gold to redeem token and credit money, and by the needs of banks which must always be ready to meet their note and deposit obligations in money. The large stores of money in banks are not really hoarded or idle; they supply the foundations of credit which does several times as much work as the money itself would if in actual circulation. In the last few decades many countries have adopted the gold standard, which has necessitated the creation of gold reserves sufficient to insure the convertibility of other forms of money in circulation. In the United States, for example, over $346,000,000 of greenbacks are supported by a gold reserve of $150,000,000 held in the Treasury. It is estimated that more than one-third of the entire stock of gold is required to satisfy the reserve demand. Changes in seasonal requirements and fluctuations in international trade affect the reserves and so influence the demand for and the value of money.

In a general way it may be said that the demand for money as a medium of exchange depends upon the volume of exchanges to be affected by it, though it must constantly be borne in mind that credit is the great exchange medium.1 The volume of exchanges is subject to many influences and fluctuations. Generally speaking an increase in population increases the volume of business. But the per capita test is a poor criterion of the real demand for money; business may be bad with a larger population and brisk with a smaller one. Again, it may be said that the demand for money increases with increase in the volume of goods produced and actually exchanged, though this may be offset by an expansion of credit and by an increase in the supply. Improved business organization and consolidations which dispense with middlemen and lessen the number of exchanges between producer and final consumer tend to lessen the need for money, while increasing division of labor which makes a larger number of people dependent upon others for their supplies tends to increase the need for a medium of exchange.

Another important influence affecting the volume of exchanges and the demand for money is the so-called "rapidity of circulation," that is, the number of times money is exchanged for goods in a year or any given period. Assuming for the moment that the volume of business and the price level remain the same, an increase in the rapidity of circulation of money will lessen the quantity of money required to effect the business exchanges, while a slower rate or velocity of circulation will increase the quantity of money needed. If the velocity of circulation be doubled and the volume of exchanges remain unchanged, prices will be doubled. But of course the volume of exchanges does not remain unchanged. Trade, also, has its rapidity of circulation or rate of turn-over, depending upon general business conditions, the habits of the people, legislation, and many other factors. If, therefore, the number of business exchanges be doubled while money remains unchanged, prices will fall by one-half.

1 But see Laughlin: Principles of Money, p. 325.