Finally, it should be added, the theory holds that in the long run, the value of money is influenced by the cost of production of the precious metals. Dear money and cheap goods, it is said, will make mining cheaper and more profitable, and hence will tend to increase the output of the precious metals. Conversely, cheap money and dear goods will lessen the incentive to mining, and hence will tend to lessen the supply of money metal or diminish its rate of increase.

Qualifications. Certain qualifications of the theory call for special comment. Not all transactions are effected by the agency of money. Barter still plays a small part in the work of exchange, and if the amount of money should become very small, barter would increase. Credit is coming to play a larger and larger part in exchanges, and must, therefore, be taken into account in estimating the demand for money. When these facts are taken into account, and when it is further remembered that the theory itself involves so many considerations bearing not only upon the quantity of money and the rapidity of its circulation, but also upon the utility of other goods and the cost of their production, it will be seen that any conclusions based upon the theory must be accepted with the greatest caution, if at all.

General Prices and Prices of Individual Commodities. It is to be particularly noticed that we have spoken of general prices. There is nothing in the theory that would be inconsistent with an increased demand for money coinciding with a rise in the value of some other commodity or group of commodities. It is always happening that while general prices are rising or falling, the value of some commodities is moving in the opposite direction. Even though the quantity of money were very greatly and very rapidly decreased, the difficulties of producing some other commodity might increase more than in proportion, with the result that the value of that commodity, measured in terms of money, would rise instead of falling.

Paper Money. Hitherto we have been speaking especially of coin money. Another form of money which has been used extensively in modern times is paper money, which usually consists of written promises to pay on demand, given by banks or by the government. People take these promises to pay and use them as money, because they believe that the promise will be kept; or because they think that others will accept them without question; or because they know that the notes, having been made legal tender, must be accepted for debt unless otherwise expressly stipulated by contract; or because, as is the case with most kinds of paper money, such bills or notes are receivable for taxes. Where confidence in paper money is complete, such money is often preferred to metal money, because more convenient.

If the student will read carefully what is engraved on the different kinds of paper money circulating in the United States, he will readily learn its nature, and will discover that it is of two general kinds : notes of national banks, and notes of the Federal government. The notes issued by the government are of many different kinds. Gold certificates and silver certificates are simply certificates entitling the holder to demand and receive from the government the number of dollars, in gold or silver, printed on the face of the notes. The government always keeps the amount called for by these certificates, dollar for dollar, in its vaults. The so-called "greenbacks," or United States Notes, on the other hand, and the so-called Sherman Notes, or Treasury Notes of 1890, are simply government promises to pay on demand the amounts named on the face of the notes. These are not backed up dollar for dollar by hard money in the Treasury, but are protected by a reserve fund which is supposed to be sufficient to meet all demands as they are made.

Inflation and Contraction. When the supply of money is increased to such an extent that prices are generally affected, there is said to be an inflation of the currency. On the other hand, when the supply of money, relatively to the demand, decreases to such an extent that prices in general fall, there is said to be a contraction of the currency. Inflation and contraction of metal money have both occurred on a large scale in the world's history, and there is nothing to prevent a recurrence of the same trouble in the future. Such contraction or inflation is said to be natural, because it depends upon the natural conditions surrounding the supply of the precious metals. But the government may also create the evil of inflation by issuing paper money in excessive amounts. In such a case the inflation is artificial.

Inflation of the currency, whether natural or artificial, works an injury to large classes of persons. All persons in receipt of fixed and slowly changing money incomes and all persons having money due them on long time contracts, find their purchasing power lessened beyond what they could reasonably have expected. In a word, we may say that inflation works an undeserved injury to the creditor class in the community. On the other hand, contraction works a similar injury to the debtor class. During periods of falling prices, due to contraction, men who have entered into business engagements on borrowed capital find that the goods which they have to sell, and on the profits from which they must depend for the repayment of the borrowed capital, are constantly falling in price, so that if they return the amount of their debt in money they will really be repaying a much greater amount of general purchasing power.

If inflation is harmful to creditors, and contraction is harmful to debtors, it is equally true that inflation confers an advantage upon debtors and that contraction confers a similar advantage upon creditors. Such being the case, it is perhaps not to be wondered at that there should at times be many who ask the intervention of government to change the level of prices by a change in the amount of money. If artificial contraction could be produced as easily as artificial inflation, it is possible that the creditor classes in the community would occasionally appeal to the government for the advantage which would accrue to them from such a policy. As it is, such appeals come rather from the debtor class.

The Evils of Artificial Inflation. Some of the dangers resulting from artificial inflation call for further comment. It is easy to set printing-presses to work, and to issue money in unlimited amounts. This is apparently much easier than taxation as a means of paying the expenses of the government, and the temptation to pursue such a policy has often promoted waste and extravagant expenditure. Moreover, only a limited amount of such money can be kept in circulation at its nominal or par value. The depreciation which results from issuing paper money beyond this limit produces great inconvenience and suffering, since, according to a law known as Gresham's Law, inferior money regularly drives better money out of circulation. As a result, prices rise. The rise of prices diminishes the value of all fixed incomes, of interest payments on all debts, and of wages. Inflation of this sort is also a great inconvenience in international trade, because one nation does not recognize the legal tender quality of another nation's paper money, and foreigners lose faith in a paper money which is not kept at a par with the precious metals. Governments can keep their paper money at par by redeeming it in gold whenever gold is demanded. In such cases paper money is said to be redeemable. Redeemable paper money cannot be overissued, and since it has many clear advantages over metal money, it is in many respects good money. Irredeemable paper money is irredeemably bad. Under these circumstances it is evident that governments should issue no paper money at all unless they are sure that such issues will not lead to dishonest inflation.