Conditions which govern the supply of money are less complex than those affecting the demand. In the first place we must distinguish between the supply of money and the supply of the precious metals. As already noted, a considerable proportion of the world's production of gold and silver is used for non-monetary purposes. The industrial consumption varies not only with changes in the value of gold, that is, in the general price level, but also with changes in people's habits and tastes. The absorption of gold by the arts is in general lost to the monetary supply. Another important drain upon the world's supply of specie that otherwise would be available as money is the steady flow of gold and silver to Oriental (countries, notably India, where vast amounts have been absorbed by hoarding and for ornaments.

It is sometimes said that the value of gold depends upon its cost of production at the poorest mine, or, as the economists express it, upon the marginal cost of production. But, as Professor Taussig and other writers have pointed out, there seems to be but little correspondence between the cost of gold and its value.1 This is due to the durability and comparative steadiness of the total stock of gold and to the irregularity in the discovery of new supplies. It is estimated that the world's total stock of gold in 1850 was between $2,000,000,000 and $3,000,000,000 and that the present stock is over $14,000,000,000, In the decade 1841 to 1850 the annual production averaged $36,000,000, which was three times the average annual production for the preceding half of the century. In the decade 1851 to 1860 the annual average rose to $133,000,000. Since then the annual production has increased steadily but with great periodic fluctuations, as, for example, with the discovery of gold in South Africa.

1 Taussig: Principles of Economics, Vol. I, Ch. 19.

It should be remembered that gold, unlike other commodities such as iron or wheat which when once prepared for use or consumption are withdrawn from the market, remains indefinitely as a part of the monetary supply. The annual additions of new gold, therefore, affect but slightly the world's total stock of money and its value is but slowly affected. But in time, changes in the rate of annual increase make themselves felt. A lower cost of producing money in so far as it increases the quantity of money tends to raise the general level of prices.

The supply of money should be distinguished from the supply of money utility or value. The usefulness of money, that is, its power of serving, increases as its value increases. This characteristic is peculiar to money. Wheat gets its value from its food utility and this would not be changed in the least if the value of wheat were doubled. A bushel of wheat when worth a dollar will feed no more people than when worth fifty cents. But the more money is worth the more commodities it will exchange. As Professor Johnson says, "The desired amount of money utility will always be in existence, for it is created by the need for it. If the supply of money is $1,000,000, the need for value in a form immediately exchangeable will give to that million dollars a purchasing power sufficient to render it capable of transacting all the business of the community. As the population increases, the community may be obliged to send out to get more flour or wheat, but it will be under no such necessity of increasing its supply of money, for the value of the existing supply will increase as the demand increases; in other words, the purchasing power of each money unit will increase and the prices of goods fall."1