DISCOVERY 



159 



accepted only to a limited extent, and may, therefore, 

 be ignored for the purposes of the present article. 



Having now discussed the elements which go to 

 make up the currency supply of the country, we may 

 jjass on to the relation between this supply and prices 

 in the country. In most transactions money forms 

 one side of the bargain — when an article is sold for 

 money it is just as logical to say that the money has been 

 sold for the article. The most obvious and generally 

 applicable way of making a commodity cheap is to 

 increase the amount available for e.xchange. This 

 applies equally to money, and if the quantity of money 

 available be increased, then its value will tend to fall, 

 or, we shall say prices are rising — for we shall be 

 compelled to give more of the less valuable pounds 

 to obtain a commodity than before the change took 

 place. If, however, the amount of work to be done 

 by the money (the amount of goods and services to 

 be purchased) be also increased, then a neutralising 

 influence would come into force and the result of the 

 two opposing tendencies would depend upon the 

 quantities concerned on either side. On the other 

 hand, by decreasing the amount of money available, 

 the purchasing power of the mone}^ would tend to be 

 increased and prices tend to fall. 



There is also another way in which monetary con- 

 ditions may affect prices. Money is used over and over 

 again — every recipient again paying it away in a greater 

 or lesser time. It can easily be seen that by a general 

 increase in the rate at which people " turn their money 

 over," a smaller amount of money may be made to do 

 the same work as was done by a larger amount when the 

 circulation was sluggish — or, if the rapidity of circula- 

 tion be increased without any reduction in the amount 

 of money, the effect will be the same as if the amount of 

 money had been increased and a rise in prices will result. 



In actual fact, the assumption above made that the 

 amount of goods for sale shall remain unchanged 

 cannot, of course, be made. General prices are thus 

 determined by the quantit}- of goods and services to be 

 sold on the one hand and the amount of money and the 

 rapidity with which it is being turned over on the other. 

 We have already seen above that money must be 

 understood to include not only gold, but cheques and 

 bills and all instruments used for making money pay- 

 ments and which pass freely as currency. We have 

 also seen that the amount of the cheque circulation 

 (or, in its more general name, the volume of credit) is 

 determined by bankers, as they decide from day to day 

 how much of their customers' funds they will relend. 

 If bankers choose to allow very large overdrafts to 

 their customers, the customers would be given great 

 power to purchase and would drive up prices. If, 

 however, the bankers did this, they would not only 

 cause prices to rise, but they would also, when the time 



came to honour the cheques, have to face heavy 

 demands upon themselves, and would ultimateh' find 

 that only a very small portion of the funds originally 

 lent to them by their customers was in a form in which 

 it could be used to pay back these customers, should 

 they require their money. Thus while the bankers 

 can and do, by increasing and decreasing the amount 

 of purchasing power available, cause increases and 

 decreases in prices, they are always held back by the 

 fact that they must keep a reasonable and safe pro- 

 portion of their funds in a " liquid " condition, as we 

 explained above. 



An increase in the amount of gold available in- 

 creases purchasing power in the same way as an 

 increase of credit, but such an increase has also a further 

 and secondary tendency to increase purchasing power, 

 owing to the fact that credit is based ultimately upon 

 gold and the increased reserve of gold acts also as a basis 

 for further credit. 



The price of any individual commodity, however, 

 may be influenced by a great number of factors, which 

 may affect either the supply of that commodity or the 

 demand for it. The price of wheat may well be affected 

 by weather conditions in the wheat-producing areas, or 

 changes in the habits of the people involving a greater 

 or less consumption of wheat. All prices are, however, 

 expressed in the terms of currency, but sellers accept 

 currency for their goods or services only because they 

 know that they can obtain the goods or services of which 

 they are themselves in need in exchange for the currency. 

 The real price which they get is, therefore, the goods or 

 services which they can obtain by spending their 

 currency. This is determined, however, not only by 

 the factors which decide at what price they can sell 

 their product, but also by what they can obtain in ex- 

 change for the currency in which they are paid. In 

 dealing with any one commodity, it may often be diffi- 

 cult to decide whether changes in price have been due 

 to changes in the conditions of the supply of or demand 

 for the commodity, or changes in the purchasing 

 power of the currency. If this purchasing power 

 falls, i.e. if general prices rise, sellers will find that, 

 unless they raise their prices expressed in currency, the 

 real prices they are getting are falling and they " can- 

 not live." A rise in the purchasing power of the 

 currency will raise their real prices and competition 

 will tend to force them to reduce their monej- prices. 



Until comparatively recently there has been no 

 satisfactory method of ascertaining whether changes in 

 prices have been due to changes with regard to each 

 commodity or changes due to currency conditions. A 

 convenient method of doing this is now to hand in the 

 familiar " index number." The principle upon which 

 the index number depends is that, if we find that the 

 prices of a number of commodities, all affected by 



