ABSTRACT
Although, except for international purposes, the proper function of paper money is the same as gold and silver coin and bullion, it is taken after credit money in order the better to explain its nature in relation to the latter. Before examining these three classes of money, it must be pointed out that variations in the rapidity with which money is made to function or circulate are equivalent to contractions and expansions in the total supply of cash and credit money. Money may be used, either by the cash itself changing hands every time a transaction takes place, or by means of the cheque system, which amounts to leaving the actual cash in a bank which pays, or guarantees payment, to whomsoever the fi nal payment is due; but in either case, the same money may be used more or less frequently during a given time. There is, however, a limit to the quantity and value of commodities and services that can be traded by the same money in a given time. In the fi rst place, in any one transaction the value of the money must be as great as the value of the commodities and services traded; and, in the second place, the limit is determined by the maximum rapidity with which it is possible for cash to change hands or cheques to be cleared. These variations in the rapidity of circulation of money do not necessarily take place harmoniously with variations in the quantities of commodities and services produced for sale. An increase in the rapidity of circulation of money only takes place because of an increase in the effective demand for commodities and services; but an increase in the production of commodities and services, whether due to an actual increase in the effective demand or to the expectation of such an increase, may be followed by buyers subsequently waiting for a fall in prices or refusing to buy at all. Therefore, the rapidity of circulation of money
may even diminish after an increase in the production of commodities and services for sale. We can therefore state that: The rapidity of circulation of money varies as the effective demand for commodities and services and not as their production.5 [. . .]
