worth 10 francs was found to be worth only 5; and it was at length discovered that what is true of each is not always true of all."

QUESTIONS ON CHAPTER II. On Money.

I. What are the functions of money?

2.

Describe what is meant by a measure of value; and give an illustration.

3.

Describe what is meant by a medium of exchange; and give an illustration.

4. Is the substance selected as money necessarily gold or silver?

5. What substances have been used at different times and in different countries as money?

6. Enumerate the three qualities which the substance selected as money should possess.

7. Explain and illustrate the importance of each of these qualities.

8. What substances possess these qualities in an eminent degree?

9. What are the special disadvantages of using labour as the standard of value?

IO. What is meant by a "double standard of value "? II. What are the disadvantages of a double standard? Is there a double standard in this country? 13. Repeat the excellent example by means of which M. Bastiat has illustrated the true nature of money.

12.

I. In India there is no gold coinage. What should you say was the effect of this on the mode of paying small debts? If you had £10 to pay away in about ten different shops, should you like to start out for the purpose with 100 florins in your pocket?

2. Does a man who discovers a gold mine add to the wealth of the country?

3. What would be the effect on the general wealth if every one suddenly found that the quantity of money in his possession was doubled?

4. Would buying and selling come to an end if all the gold, silver, and copper in the world were destroyed?

CHAPTER III. The Value of Commodities.

Commodities, when considered in relation to their Value, may be divided into Three Classes.

Ist. Those which possess a monopoly value, and whose supply cannot be increased; such as the pictures of a deceased artist.

2nd. Those whose cost of production increases as an additional supply is produced; such as agricultural and mineral produce.

3rd. Those whose supply can be increased without increasing their cost of production, such as manufactured commodities.

Cost of Production. In enumerating these three classes of commodities the expression "Cost of Production" has been employed. Mr Mill has defined "cost of production," as consisting mainly of wages and profits. Prof. Cairnes, however, has adopted a different definition, and one which seems more in harmony with the actual facts of the case : he has shown that the ultimate elements of cost of production are toil, abstinence and risk, the first of which is endured by the labourer, the second by the capitalist, and the third in varying proportions, by both the labourer and the capitalist. The reward of the toil and risk of the labourer is wages; the reward of the abstinence and risk of the capitalist is profits. It is evident that where the

competition of labour and capital is such as to ensure that the amount of wages and profits in all trades shall be strictly proportionate to the toil, risk and abstinence endured, that profits and wages are the pecuniary measure of the real cost of production; and in such cases it is a matter of indifference whether in economic reasoning cost of production is defined as consisting of wages and profits, or of toil, abstinence and risk.

Before particularising the causes which regulate the value of the three classes of commodities above mentioned, it will be necessary to enter into an explanation of demand and supply in their relation to value. It may, perhaps, simplify the investigation if we use the word price instead of value. There is no inaccuracy in doing this, because, as previously explained, price is a particular case of value: the supposition must, however, be made that any change in the price of a commodity is produced by some change in the value of the commodity itself, and not by any change in the value of gold. Thus, if it is said that the price of tea has risen, it must be supposed that this rise is produced by an increase in the value of tea, and not by a decrease in the value of gold.

The effect of Demand and Supply upon Prices. It is often said that the price of a commodity depends on demand and supply; this is perfectly true, but the expression is sometimes used by those who could not clearly define its signification. The real relation between prices and demand and supply may be briefly expressed thus :— The price of commodities must be such as to equalise the demand with the supply. As a general rule the demand increases with a diminution of the price, and as the price increases the demand diminishes. Suppose, for instance, that a house is going to be sold by auction, and that there are six persons who wish to buy it; they will compete

against each other for the purchase of the house. The price of the house will be gradually raised, until at length five out of the six competitors retire from the contest, and the house becomes the property of him who offers the highest price for it; this price must be such as to cause the other competitors to withdraw their demand. For, if this be not the case, and if the other competitors offer the same or a higher price for the house, the contest will be unconcluded. When, therefore, there is free competition between the buyers and sellers of commodities, the market price of any article must be such as to equalise the supply to the demand. In the example just given six persons, A, B, C, D, E, and F, desire to purchase a house; the price, therefore, of the house is raised to such a point as to oblige B, C, D, E and F to withdraw their demand; the only demand which remains is that of A; the demand is therefore made equal to the supply.

It is however evident that in such a case as that just described, the price which the house fetches may be such as to provide a greater reward for the capital and labour engaged in building the house, than is current in the trade. If this is so the supply of houses will be increased as quickly as the circumstances of the case permit. But this increased supply will tend to reduce the price of houses to such a point that the reward obtained by the labour and capital engaged in the trade returns to its ordinary level. In a similar way if the price which the house fetches, yields less than the ordinary reward to capital and labour, the master builders and labourers will employ their capital and labour in other industries: the supply of houses will fall off, until prices return to such a point as to pay the capitalist and labourer the current profits and wages of the trade.

This continual variation of market price, on either side of the normal price, or that regulated by cost of production,

has been compared by Mr Mill to the perpetual fluctuation of the waves of the sea. "The sea everywhere tends to a level, its surface is always ruffled by waves, and often agitated by storms. It is enough that no point, at least in the open sea, is permanently higher than another. Each place is alternately elevated and depressed ; but the ocean preserves its level."

The circumstances which regulate the Price of the first of the three classes of Commodities. It has just been stated that when exceptionally high profits are realised by the sale of any particular commodity the supply of it is stimulated, and that an effect is thus produced which reduces profits and prices to their natural rate.

There are, however, some commodities the supply of which cannot be increased, however high a price they realise. The prices, therefore, of such articles as the pictures of the old masters, ancient sculptures, the wine of any particular vintage, rare prints and books, never permanently approximate to the original cost of producing them. What, then, it may be asked, regulates the price of such commodities? As previously explained, the price of these articles must be such as to equalise the demand with the supply. To some this may seen impossible, for it may be said that every one would like to possess one of Raphael's pictures; the demand, therefore, is indefinitely large, whilst the supply is small and stationary. It now becomes necessary to define what is meant by demand; it cannot be merely the desire to possess the commodity, for nearly every one would desire to possess a Raphael. Desire for a commodity does not constitute demand unless it is combined with the power of purchasing; this combination of a wish to possess with a power to purchase has been aptly called “effectual demand." It is this effectual demand only that exercises an influence on prices. Here, then, we see two things,