Not only is the value of money as a whole, in any country, governed by the law of supply and demand; but each of these three kinds of money, and each of the substances of which they are made, is individually subject to the same great law.
The Gold Standard.
The wide and long-continued use of gold as money has led to a popular impression, current even among well-informed men, that somehow, or in some mysterious way, gold has stability of value and is independent of those fluctuations which they recognize in the values of all other substances. That this is wholly erroneous is admitted by every writer on finance, and quotations are hardly necessary to support the statement that gold varies in value in the same way and is subject to the same law of supply and demand which regulates all other values.
Along with this conception of stability in the value of gold, has grown up a very natural belief that where paper or silver circulated concurrently with gold, so long as they were mutually convertible, gold was the medium which regulated the value of all; and that no matter what the quantities of the others might be, they did not affect the value of the gold or of the money as a whole. This is another popular misconception.
In one sense the gold regulates the value of the money, but only to the extent that it limits, under the existing laws, the volume of the whole by its scarcity. In another and wider sense the value of the gold is itself fixed and controlled by the value of the money in its entirety. The use of gold for money is so enormously greater than its uses for all other purposes, that its value as money fixes its value as a whole, since its money use is by far the largest factor affecting the demand for it.
The demand for money is generally an indiscriminate demand, satisfied with paper money or silver as well as with gold where they circulate together. Hence, every issue of paper or increased coinage of silver in any such country, demand remaining the same, lowers the value of the money as a whole by increasing the supply, and since the value of gold is determined by its value as money, that is lowered with the rest.
The value of gold varies, therefore, with that of the money as a whole of which it forms a part.
In gold standard countries the coinage of gold is unlimited, and—not to speak of the small mint charges—generally free. Under these conditions the value of gold coin and gold bullion are the same, weight for weight. The silver coin, which is used to some extent in gold standard countries, does not have either free or unlimited coinage at present. Its bullion value is less than its nominal and actual value, which is maintained at a par with that of gold by the limitation of its issue,—just as in the case of paper money,—and by the fact that within the country of issue it does the same work as the gold, just as paper money does. Men will give just as much of any commodity for the silver coin or the paper as they will for the gold, because, their utility being the same, their exchange value must also be the same.
With these facts explained, we can proceed to consider a very important law affecting the value of money and its distribution among different nations.