Sec. 8. #The general level of prices#.  We come now to a more peculiar aspect of the monetary value problem.  In performing its function as general medium of trade, money determines the general level of monetary prices.  We have the idea of a general level of prices whenever we contrast the price ratio of money to other commodities at one time with its ratio at another time.  Now the monetary prices of the various commodities are constantly changing, and in somewhat different degrees, but on the average there may be a general trend upward or downward, and this is called a change in the general scale (or level) of prices, as contrasted with changes in the values of any two commodities in terms of each other.  The general price level will be more fully discussed below (Chapter 6, section 3) in connection with the method of measuring by index numbers its changes.  This brief explanation may, perhaps, be enough for our present purpose.  Our question now is:  What is the effect of changes in the quantity of money (considered apart from chance accompanying changes) upon the general level of prices?

Sec. 9. #Effect of increasing gold production#.  Let us take a case where gold is in general use as money, and where for some time there has been no noticeable change in the amount of business, the methods of trade, and the general scale of prices.  What would happen when new gold mines were found that were much easier to operate, and gold began to be produced at a much more rapid rate than formerly?  The amount of gold as compared with other forms of wealth evidently would be increased.  What if all the increase went into the industrial arts?  The value of gold in its industrial uses would fall.  Then a part of the increase must be diverted to monetary uses.  When any man, by reason of the increasing gold supplies, gets a larger stock of money than he had before, the proportion formerly existing between his use for money and his monetary stock is altered.  He has more money than meets his monetary demand at the existing prices.  As he seeks to reduce his stock of money to due proportions by buying more goods, he thereby distributes a part of the excess of money to others.  This bids up the prices of goods further until the total value of goods exchanged again bears the same ratio as before to the average monetary demand of each individual.

Take an extreme case:  if twice as many dollars get into circulation in a community, either some few men may have far more dollars than before, while others have nearly the same number; or every man may have his due proportion of the new supplies, just twice as many as before in proportion to his income.  The latter result, “other things being equal,” is the logical one after equilibrium has been restored.  If prices of goods remained the same as before, there would be twice as many pieces of money available to effect the same number of trades at the same prices.  There is no reason why each person should tie up twice