Periods of rising prices are generally periods of business prosperity and of "good times" to the community as a whole. With a rise in prices business profits tend to increase and a general feeling of confidence spreads among all classes. Confidence in the safety and profit of business ventures extends from group to group, resulting in a larger production of wealth and an increase in the purchasing power of the entire community. At such times there is grave danger that business confidence may lead to production beyond the normal needs of consumption, and to an era of speculation that may result in a business crisis.

On the other hand, when prices are falling, that is, when.

the value of money is rising, business is depressed and sluggish. The. effect of falling prices generally follows the same order of progression from one economic group to another as was noted in the case of rising prices. If the supply of money does not keep pace with the demand, bank reserves are reduced, loans are called and interest rates, especially on call loans, tend to stiffen. Dealers in stocks and bonds and speculative commodities begin to sell their holdings at a sacrifice. Lack of confidence and uncertainty spread to general business, sales of manufactured products begin to fall, buying of raw materials slackens, profits decline, and people begin to talk of the "hard times." In periods of falling prices the wage-earner and the salaried man seem to be benefited because their wages are the last to fall. This benefit, however, is more apparent than real, for when industry slackens great numbers of laborers are laid off entirely or find employment only on part time. In such case any gain to them through lower prices is more than offset by a decline in money income. Falling prices benefit only those in receipt of fixed incomes, as, for example, bondholders and annuitants.

The foregoing summary of the effects of a change in the value of the standard serves to show the general tendency of a depreciating standard, that is, of rising prices, to stimulate production to the point possibly where over-confidence may lead to an unwise use of capital and labor; and of an appreciating standard to discourage the production of wealth and so to bring hardship upon all. As Professor Johnson well says, "It is this effect upon production which makes the question of price an all-important one. Money is much more than a mere go-between or messenger, and cannot be left out of account when considering the forces that direct the productive efforts of men, for changes in its value are universal in their effect."1

Changes in the purchasing power of money affect all economic classes: wage-earners, capitalists and enterprisers; producers and consumers; speculators and investors. The most marked effect of such changes can be seen as between the debtor and creditor classes. It is generally understood that a fall in prices or a rise in the purchasing power of money benefits the creditor, while a rise in prices benefits the debtor. When prices fall between the time of incurring a debt and the time for paying it, the debtor upon returning the amount of money borrowed has to return a larger amount of goods; when prices rise the debtor returns less in the way of goods. For short periods of time changes in prices are generally slight and have but little effect upon the relations between debtor and creditor. As Professor Taussig says, "A change of five per cent or ten per cent, as registered in an index number, would probably be little noticed by most debtors and creditors. Each would be concerned only with the particular articles bought or sold by him; and these articles might remain unchanged in price, or move in a different direction from the index numbers, or in a different degree. It is only abrupt and marked changes in prices that disturb the usual approximate equity of debt payments. Under a specie standard such changes do not take place; this much is brought about by the durability of specie and the consequent slowness of changes in the total stock."1

1 Johnson: Money and Currency, p. 171.

But though exchanges that are settled at once are unaffected by changes in the value of money, the situation is quite different in the case of debts having a considerable time to run. The great majority of business transactions to-day are done on a credit basis. In the interval between the creation of a debt and its payment months or years later, a change may occur in the standard by which the amount of money given in settlement of the debt may have a considerably greater or less purchasing power than it had when the debt was contracted.