Money Demand and Supply.
Mill affirms that: "The supply of money is all the money in circulation at the time."
Money that is hoarded has no more effect on prices than if it did not exist. Money lying in banks or in the hands of merchants or others to the extent necessary for the safe conduct of their business may be considered money in circulation, but beyond the amount needed for conducting any business the excess may be considered as hoarded. The supply of money in any country depends directly and primarily on the legislation of that country; and secondarily, in most, but not in all cases, on the legislation of other countries, and the production of precious metals available for coinage, etc., all of which can be better analyzed in explaining the different systems.
The demand for money is most complicated, since it is affected by a great variety of forces. It varies directly with the activity of commerce, and universally with the activity of money,—a less amount of money doing a greater work when active than when sluggish. It is affected by changes in the customs and habits of the people, by changes in transportation facilities, in diversity of employment, in concentration of population, and, more than all other, it is affected by the extent of credit, the use of banking facilities, etc.
Credit in its various forms takes the place of money, and does its work in this respect to an enormous and continually increasing extent. Through the medium of banks,—which are really institutions for the exchange of credit,—and by means of checks, drafts, notes, bills of exchange, letters of credit, post-office and express money orders, etc., the great bulk of the world's business is transacted.
Statistics gathered from national banks in this country in 1881, showed that of the total deposits, ninety-five (95) per cent were in forms of credit to five (5) per cent in actual money, the percentage of credit paper rising in New York City to as high as 98.7.
While these percentages may not show accurately, on the whole, the relative work done by money and by forms of credit, they do show the enormous extent to which credit takes the place of money, and the greatly increased demand for money that arises, when, from lack of confidence or other causes, the extent of the credit is lessened. Unless the volume of money immediately adapts itself to such demand, the value of money must inevitably increase, or the demand be lessened by a checking of all business transactions, and a partial paralysis of the industries of the country. Generally both of these results follow.
With these facts in mind, it is evidently futile to attempt to fix any definite amount of money, per capita, as the proper one. Not only does the amount necessary to meet the demand vary with different countries, per capita, even among the most civilized nations, but it varies with the seasons in each country, as crops have to be moved or not, and with the state of credit and enterprise from day to day. France, where the habits and customs of the people have prevented their making so large a use of credit and banking facilities as in England, requires a larger amount of money, per capita, than does England.
Since the value of money depends on these two factors, supply and demand, if we are to have a money of invariable value, we must evidently control one or both of these. It would be hopeless to attempt to control all the various conditions and forces which, we have seen, affect the demand for money. Fortunately it is not necessary. We cannot control the demand, but we have, or can have, complete control over the supply, and we can by this means maintain that constant relation between the supply of, and the demand for, money which is essential to its stability of value.