THE RELATION OF MONEY AND PRICES
The general relation between the amount of money in circulation and the course of prices is shown by the two statistical diagrams on the other side of this page.
It will be noticed that per capita circulation began to decline in 1921. Prices also commenced to fall during that year, and if the table of prices were extended to cover the last year or two it would show the price-lines moving downward. The data for continuing the lines of the lower diagram may be found in the publications of the United States Bureau of Labor Statistics.
MONEY IN CIRCULATION PER CAPITA (Figures for first day of month)
COURSE OF WHOLESALE AND RETAIL PRICES[[207]] IN THE UNITED STATES
JANUARY, 1913, TO MAY, 1920
[Average Prices, 1913 = 100]
The Relation of Credit to Money.—A large part of the world’s business is done on credit. If all debts had to be paid tomorrow, there would not be enough money in the world to pay one cent on the dollar. But all debts do not fall due at once, and a huge credit system is able to stand with comparative safety upon a relatively small amount of gold. |There is a limit to the expansion of credit.| There is a limit, however, to the expansion of credit and this limit is roughly determined by the amount of gold available to be held as a reserve. Hence it is that when the volume of gold increases, credit usually expands also. With their reserves full to overflowing the banks are more ready to lend money on notes, and the rate of discount goes down. Conversely, as the volume of gold declines, credit usually contracts. The rate of discount then goes up and business men find it harder to borrow money upon commercial paper. In the one case we speak of an inflation or expansion in money and credit; in the other we speak of a contraction or deflation.
Credit and Prices.—The general level of prices depends upon the value of money. The price of a thing is merely its value expressed in terms of money. To say that prices have gone up is to say exactly the same thing as that the value of money has gone down.[[208]] The general level of prices, to put the matter in another way, is determined by the demand for goods on the one hand and the supply of goods on the other. The demand for goods, however, is represented by the amount of gold currency available plus the amount of credit which is built upon this gold. The credit, as has been seen, bears a definite relation to the gold. |How the general level of prices is determined.| Hence it can fairly be said that the amount of gold is an index of demand for goods or services. So, if the supply of goods remains approximately the same, any large increase in the available amount of gold would send prices up; and conversely, if the supply of goods is greatly increased, while the available amount of gold remains approximately the same, prices would go down.