The evil consequences of instability in the standard of value have now been sufficiently described. In this chapter we must lay the theoretical foundations for the practical suggestions of the concluding chapters. Most academic treatises on monetary theory have been based, until lately, on so firm a presumption of a gold standard régime that they need to be adapted to the existing régime of mutually inconvertible paper standards.

The quantity theory of money

This theory is fundamental. Its correspondence with fact is not open to question. Nevertheless it is often misstated and misrepresented. Goschen's saying of sixty years ago, that ‘there are many persons who cannot hear the relation of the level of prices to the volume of currency affirmed without a feeling akin to irritation’, still holds good.

The theory flows from the fact that money as such has no utility except what is derived from its exchange value, that is to say from the utility of the things which it can buy. Valuable articles other than money have a utility in themselves. Provided that they are divisible and transferable, the total amount of this utility increases with their quantity—it will not increase in full proportion to the quantity, but, up to the point of satiety, it does increase.

If an article is used for money, such as gold, which has a utility in itself for other purposes, aside from its use as money, the strict statement of the theory, though fundamentally unchanged, is a little complicated.