14. Do you or does your family keep a budget? If not, on what basis is the income apportioned? Do you think the largest possible amount of satisfaction is obtained from the use of such income?

15. Is it necessary for charitable and endowed institutions, clubs, societies, etc., to make a budget? Is it necessary for governments to make budgets?

16. The commissioner of internal revenue recently said that 2,000 certified public accountants were necessary for the successful collection of the federal taxes for 1919. Why?

17. Can you think of any form of public control over industry that can be effectively administered without the use of financial accounts?

18. What profession or occupation are you going to follow as a lifework? To what extent are financial considerations involved in your decision?

19. Do the decisions that are rendered on the basis of pecuniary calculations always tend to promote social welfare? Illustrate. 20. The "profits' guide" is not a satisfactory guide to what is good for society. Granting the truth of this statement, what can you suggest as a better guide?

21. Under a socialistic organization of society what would be the means of arriving at business and social decisions?

REFERENCES FOR FURTHER READING

Holdsworth, John Thom: Money and Banking, pp. 14-16.
Laughlin, J. Laurence: Principles of Money, chap. i.

Moulton, Harold G.: Money and Banking, Part I, Selections

Nos. 26-31, pp. 31-44.

Phillips, Chester A.: Readings in Money and Banking, chaps. i, ii. Scott, William A.: Money and Banking, pp. 2–6.

CHAPTER III

THE STANDARD FOR DEFERRED

PAYMENTS

It was the purpose of chapter ii to show the relation of the pecuniary unit to financial accounting, and thereby to the organization of both business and household economics. It is of note that the discussion related mainly to the rendering of decisions at a given moment; it was not concerned with transactions where the time element was a factor. The present chapter will consider the function of the pecuniary unit in connection with credit operations or deferred payments.

Wherever an individual or corporation sells goods on time, that is, on agreement that they are to be paid for at some date in the future, it is highly important that both buyer and seller be protected, so far as possible, from the risks that inhere in the mere lapse of time. Because of the interdependency of economic institutions and their great sensitiveness to shock, economic changes of serious import may occur during relatively short periods. As one means of minimizing the effects of such changes, society has come to use the pecuniary unit, gold, as the standard in which deferred obligations are paid.

The standard of deferred payments is of importance not merely in the purchase and sale of actual commodities. It is quite as important in connection with the lending of funds. Business is largely conducted in the modern industrial world by means of borrowed capital, represented by credit instruments in the form of stocks, bonds, notes, and bills of exchange. All these financial borrowing operations involve risks of loss incident to economic changes during the life of the loans; and it is accordingly necessary that the standard for deferred payments be a commodity which possesses a high degree of value stability.

I. WHY GOLD IS USED AS THE STANDARD

Aside from its important qualities of durability, homogeneity, divisibility, and cognizibility, gold is especially superior to other commodities as a standard for deferred payments for the reason that it fluctuates less widely than does the value of wheat, iron, and other commodities which might be used for the purpose. The reasons for this relative stability of value may be readily indicated.

Gold, as a commodity, is subject to the forces of supply and demand just as is any other commodity. The supply of gold is influenced directly by the conditions of production at the mines. The discovery of a "bonanza" mine tends to depress the value of gold as a standard, by greatly increasing its supply; and the exhaustion of a rich vein of ore conversely tends to raise the value of gold by preventing an increase in supply.

Changes in the cost of producing gold, however, have not in the past had very much effect upon the quantity produced, owing to the speculative character of gold mining. It has been stated that the cost of producing gold has probably on the whole exceeded its value, that the losses sustained by the many who have searched in vain have outweighed the gains made by the fortunate few. But in recent years, with the rapid disappearance of placer mining and the development of machine production of gold, the cost of production has come to be very carefully considered. There are marginal mines where it barely pays to take out the gold, just as there are marginal farms and marginal factories. The increased cost of producing gold during the war, for instance, resulted in the closing of many mines where production had formerly been profitable.

Gold differs from most other commodities in that the supply at any given time is not merely the output of a previous year's mining operations; it is a stock that has been accumulated through centuries of production. Gold is a highly durable commodity, and as a result the world's supply becomes larger

The reasons why gold rather than silver came to be used as the standard are considered in chap. vi below.

Pour

each year, even though the annual production may be rapidly decreasing. The greater part of all the gold mined in modern times is still in existence and performing service quite as though it were fresh from the mines of the Klondike. The result of this accumulated world's supply is to render any yearly change in output less and less effective in influencing the value. ing a cup of water into a large tank has but a slight effect upon the level of the water in the tank. Similarly, the discharging of a $100,000,000 increased annual output of gold into a total world's supply of twelve or fourteen billions can have but little effect upon the value of the entire mass. A great increase in gold production continued over many years would, however, obviously have a substantial effect upon the value of the mass.

The demand for gold is twofold: (a) for use as a commodity in the manufacturing and industrial arts; and (b) for employment as a medium of exchange and as the basis of monetary systems. The demand for gold as a commodity is, of course, subject to the same general conditions as the demand for any other commodity. It has utility in the satisfaction of human desires, and this utility is affected by degree of scarcity, change of custom, possibility of substituting other commodities, etc., in the same way that the utility of other commodities is affected. For monetary uses, however, the demand for money, where free coinage exists, is sometimes said to be unlimited; since all the gold produced may be taken to the mints and converted into dollars or sovereigns, it would seem that there is a limitless demand. This view, however, overlooks the matter of intensity of demand. It is true that monetary systems will absorb the entire quantity of gold offered. But if the supply of the metal is greatly increased, the purchasing power of gold may nevertheless be lessened. Nearly any quantity of wheat would be demanded, at some price, but a doubling of the total supply would substantially lessen the exchange value of each bushel. It is the same with gold.

An increase in the monetary demand for gold would be caused by the giving up of silver as a standard metal in leading countries; by an increased use of gold as a medium of exchange;

by an increase in the quantity of gold required as reserve for substitute forms of money; by an expansion of commerce and trade; or by a less effective use of gold through poor organization of credit. A decrease in the monetary demand for gold would result from opposite causes.

In the foregoing discussion of the value of gold we have been saying, not that gold is absolutely stable in value, but merely that it is more nearly stable than any other commodity that might be chosen. As a matter of fact, gold is subject to wide variations in value and hence leaves much to be desired as a standard for deferred payments. Great fluctuations in the production of gold may cause considerable variations in value, despite the factor of durability. And the use of credit instruments may serve greatly to reduce the demand for gold in the channels of circulation. The relation of credit instruments to the value of gold is one of the most complex problems in economics. It cannot be taken up at this place, for it can be understood only in the light of a thorough analysis of banking operations.

II. RELATION OF MONEY AND PRICES

We have thus far been speaking of the value of gold and of its relative stability for the purposes of deferred payments. To appreciate fully the significance of the standard of deferred payments, however, it is necessary to understand the relation of money to prices.

As already stated, the quantity of money that has been chosen in the United States as the standard, or dollar, is 25.8 grains of metal, nine-tenths gold and one-tenth copper alloy. To express the value of another commodity in terms of money, therefore, we always compare a certain quantity of it, as a pound, bushel, or yard, with 25.8 grains of standard gold. If a bushel exchanges for a dollar, we say the price is one dollar a bushel, while if it requires two bushels to equal a dollar in value, then we say the price is fifty cents a bushel. The value of each particular commodity expressed in dollars gives us the price of that commodity.