The chief fallacy of the quantity theorists, however, consists in the fact that they entirely overlook the necessity for a commodity standard. For example, in his book on Money and Monetary Problems, Mr. Nicholson assumes a group of exchangers who begin operations by agreeing to use as their medium of exchange dodo bones, which he describes as the most useless things he can think of, and proceeds to explain how prices would rise and fall with the increase and decrease in the number of these bones. He completely overlooks the fact that, before the first dodo bone could have been used for monetary purposes, the ratios of exchange between the various commodities must have been established, and expressed by some commodity standard the value of which might then be assigned to the single bone. Suppose, for example, that sugar, wheat, wood, and stoves are the commodities to be exchanged. Before dodo bones or any other medium could be used, it would be necessary to determine at what rates these goods will exchange. If it be decided that the value of a bushel of wheat is related to that of a unit of each of these commodities in the proportions 1 to 10, 1 to 50, and 1 to 100, then wheat is the real standard of value, and it would be necessary to agree to assign to the dodo bone for the purposes of trade some fraction or multiple of the value of the standard. If the number of bones were small, it might be necessary to call a single one worth a bushel of wheat; if it were large, it might be possible to assign to it only the value of a half-bushel or a peck, but some value, well understood and capable of measurement and identification by every member of the community, would needs be assigned to the dodo bone before any one could use it. What could the producer of wheat do with a basketful of bones except assign to each one the value of the wheat which he gave for it, and what could the wood-cutter do with his supply unless he call each one worth a certain amount of wheat, wood, or some other commodity? It is obvious that whatever was generally used in the community as the means of measuring the value of the dodo bones for purposes of trade would be the real standard and not the dodo bones themselves.

In attempting to use experience with inconvertible government notes as an argument in support of their doctrine the quantity theorists commit the same fallacy. They regard the government's promise to pay as a real standard of value and proceed to explain changes in prices as a result of fluctuations in the quantity of notes. They fail to see that the figures on the faces of the notes must be given some definite meaning before they can be used for monetary purposes. Thus the government might proclaim that "I" should mean one bushel of wheat, or one ton of hay, or one cord of wood, or one sheep, or one dollar, or some combination of these things, but it could not leave the people in the dark regarding what it did mean. As a matter of fact, the figure "1" on a government note always means the unit of value, whatever at the time and in the nation in question that may be. The figure "2" means twice that unit, etc. In other words, a standard of value suitably denominated must exist in advance, and, in consequence, a level of prices be established at the beginning which is quite independent of the quantity of the notes. Whatever effects changes in that quantity may have, they are purely secondary in character, and, as we shall show in Chapter VI (Government Paper Money), are due to the depreciation of the notes. That this phenomenon cannot be explained by the quantity theory is evident from our own experience between the years 1861 and 1879. This period was characterized by the circulation of inconvertible government notes, the value of which, as measured by gold, depreciated rapidly until 1864, and then gradually rose* until it reached par in 1879. Statistics show that the price movements of this period followed the depreciation and the appreciation of the notes very closely,+ but that the value of the notes did not fluctuate in accordance with their quantity, but in response to a variety of other circumstances, notable among which were the fortunes of the war and the action of Congress relative to the resumption of specie payments. Thus between 1863 and 1864 the premium on gold rose 40 per cent, while the volume of the currency increased only 12 1/2 per cent, the chief cause of the depreciation of the notes being the uncertainty of the outcome of the war during that year. This is clearly shown by the fact that on July 1, 1863, when the battle of Gettysburg was raging, the premium on gold rose to 45 per cent, but gradually fell on the 6th to 38 per cent, on the 8th to 33 3/8 per cent, and on the 20th to 23 1/4 per cent, as a result of the victory of the Union armies both in this battle and at Vicksburg and the withdrawal of Lee's army from Northern territory. Between 1875 and 1879 the premium on gold completely disappeared and prices fell about 30 per cent, the reason being not a lack of currency, the volume of which increased during the period about 16 per cent, but the passage of an act in 1875 providing for the resumption of specie payments, and their actual resumption January 1, 1879.

* Many fluctuations up and down occurred during this period, but the general tendency was upwards. + See Miss Hardy's paper, Chart 1.

The late President Walker was confused by this same fallacy when, in his text-book and elsewhere, he attempted to defend the proposition that what was needed as the basis for monetary operations was not a standard of values, but simply a denominator or namer of values. He overlooked the fact that it is impossible to denominate or name what does not exist. In the case of values or prices the thing to be named is the very standard the existence of which President Walker neglected, and the numerical expression of the ratio between its value and that of the various commodities with which it is exchanged.

As soon as it is conceded that the existence of a commodity standard is a necessity, the quantity theory and the imposing structure of reasoning based upon it falls to the ground, because that concession makes it necessary to explain prices not as the function of the quantity of money and of commodities, combined with the rapidity of their circulation, but as the numerical expression of the ratio of exchange between the value of the standard and that of commodities. That these two methods of explaining prices are not only not identical, as some have claimed, but in many cases contradictory may now be shown.