In order to avoid confusion in the interpretation of prices it is necessary to distinguish a special class of value standards to which the adjective secondary may be applied. The commodity standards, the function of which we have described in the preceding pages, may be called primary. Secondary standards are based upon the primary in the sense that their value is derived from them and that their independent existence is impossible. In other words, a community may have a primary standard of value without a secondary, but cannot have a secondary standard without a primary.

Secondary standards usually consist of government notes which have been made legal-tender, that is, of promises to pay, put into circulation by the government, and by law made receivable for all debts public and private. The effect of a legal-tender law of this sort is to compel creditors to accept government notes for the sums due them and to permit debtors to pay their debts by presenting or tendering these notes. In a succeeding chapter we shall explain how such notes may take the place of all other forms of money, and why people, though compelled to accept them for payments due, ordinarily discount them, that is, receive them at less than their face value. It is discounted or depreciated notes of this sort that become secondary standards and in the following manner: -

Suppose our government were to issue notes of the various denominations, one dollar, two dollars, five dollars, ten dollars, fifty cents, twenty-five cents, ten cents, etc., and by law compel us to receive them in all payments, the notes containing upon their face a printed statement to the effect that the government promises at some not specified future date to pay to the bearer the sum indicated. Suppose further that, fearing lest the government might not keep its promise or that it would be slow in paying, or for some other reason, we should be unwilling to accept a dollar note for more than fifty cents, a two-dollar note for more than one dollar, a ten-dollar note for more than five dollars, etc. The result would be that prices would be doubled and these notes would become a secondary standard. A farmer whose wheat is worth one dollar per bushel would now demand a two-dollar note for it, and, if these notes constituted the only available money, he would henceforth quote his wheat at two dollars per bushel instead of one, knowing that he must receive these depreciated government notes in payment. When everybody had acquired the habit of quoting prices in terms of this depreciated paper, all prices would have doubled and the government notes would have acquired the quality of a secondary standard of value.

It should never be forgotten, however, that under such circumstances the use of the primary standard would not be discontinued. It would needs be constantly used to test the depreciation of the notes and in foreign exchanges. The expressions one dollar, five dollars, fifty cents, etc., printed on the notes would mean nothing until they were referred to the unit of value defined by statute as a certain amount of the primary standard. The community would have two sets of prices, one quoted in terms of the primary and the other in terms of the secondary standard, the difference between the two measuring the extent of the depreciation of the notes.

When a community possesses a secondary standard of value it is subject to fluctuations in prices from three instead of two sets of causes, namely, from changes in the value of commodities, from changes in the value of the primary standard, and from changes in the degree of depreciation of the secondary standard. In such a community, even though commodities and gold were relatively stable in value, great fluctuations in prices might result from changes in the degree of depreciation of the government notes.