The Online Library of Liberty

A project of Liberty Fund, Inc.

• Political Economy
• Part I.: Character and Logical Method of Political Economy.
• Part II.: Production.
• Chapter I.: Land and Natural Agents.
• Chapter II.: Labor.
• Chapter III.: Capital: Its Origin and Office.
• Chapter IV.: The Productive Capability of a Community.
• Part III.: Exchange.
• Chapter I.: The Theory of Value.
• Chapter II.: The Theory of International Exchanges.
• Chapter III.: Money and Its Value.
• Chapter IV.: Money and Its Value—continued—debased Coin: Seigniorage.
• Chapter V.: Inconvertible Paper Money.
• Chapter VI.: Bank Money.
• Chapter VII.: The Reaction of Exchange Upon Production.
• Part IV.: Distribution.
• Chapter I.: The Parties to the Distribution of Wealth.
• Chapter II.: Rent.
• Chapter III.: Interest.
• Chapter IV.: Profits.
• Chapter V.: Wages.
• Chapter VI.: Wages.—continued.
• Chapter VII.: Two Other Shares In Distribution.
• Chapter VIII.: The Reaction of Distribution Upon Production.
• Part V.: Consumption.
• Chapter I.: Subsistence: Population.
• Chapter II.: The Appearance of New Economic Wants.
• Chapter III.: Consumption: the Dynamics of Wealth.
• Part VI.: Some Applications of Economic Principles.
• I.: Usury Laws.
• II.: Industrial Co-operation.
• III.: Political Money.
• IV.: Pauperism.
• V.: The Doctrine of the Wage-fund.
• VI.: The Multiple Or Tabular Standard of Deferred Payments.
• VII.: Trade Unions and Strikes.
• VIII.: The Knights of Labor.
• IX.: Attacks On the Doctrine of Rent.
• X.: The Nationalization of the Land.
• XI.: The Banking Functions.
• XII.: The Present Banking System of the United States.
• XIII.: Foreign Exchanges.
• XIV.: Bi-metallism.
• XV.: The Revenue of the State.
• XVI.: The Principles of Taxation.
• XVII.: Protection Vs. Freedom of Production.
• XVIII.: Socialism.

CHAPTER III.

MONEY AND ITS VALUE.

159. Exchange Arises out of the Division of Labor.—Men become the producers of that which they expect to consume but in part, if at all. Their choice as to what they shall produce, ceases to be determined by considerations affecting their personal wants, and comes to be determined mainly, if not wholly, by considerations affecting their abilities and aptitudes. They no longer produce that which they desire to eat, drink or wear. They produce that one among many things known to the market which they can produce to the best advantage, let who will, in time, eat, drink or wear it. Their own wants they look to see, in turn, satisfied by the labor of others.

To the market all producers bring their several products, or such part thereof as they do not care individually to consume. From the market each late producer, now become a consumer, carries away that which he is to eat, drink, or wear, or otherwise enjoy. In the market is done that which we call exchange.

The economic function of exchange is to bring producers and consumers together, and thus allow the division of labor to be carried as far as it will increase production. The division of labor has no economic virtue except so far as it increases production. When that point has been reached, a further subdivision of occupations and employments would be useless, or of merely curious interest. Exchange, in turn, has no virtue except as it allows the division of labor to be carried out. Its sole function, economically, is to enable each species of wealth, each article known to the market, to be produced in the place and by the person where and by whom it can be produced to the greatest advantage.

160. The Economic Function of Money.—In its function of bringing producers and consumers together, exchange discovers the need of the great agent of which we are about to speak—Money. Just as the occasion for exchange arises out of the fact of the division of labor, and as the economic efficiency of exchange is limited to that occasion, so the need of money arises solely out of the fact of exchange, and the economic efficiency of money is limited strictly to the occasion for exchange. The interests of a community require as much exchanging as will secure that division of labor which will achieve the highest productiveness of land, labor and capital; and they require no more exchanging than this. They require as much money as will enable that amount of exchanging to be effected with the least effort and with the greatest assurance of a transfer of real equivalents; and they require no more money than this. No economic efficiency other than or beyond that indicated, can justly be attributed to money.

But how does money facilitate those exchanges which it is for the interest of society to have effected? Just what is the function of money?

161. Double Coincidence in Barter.—Money facilitates exchanges by dispensing with that double coincidence, of wants and of possessions, which barter, i., e. exchange without the use of money, involves. We have seen that, so far as the division of labor is carried out, men cease to produce all or even the greater part of what they wish to consume. Producing that which they can produce to the best advantage, they look to others for those particular articles which are required for the supply of their individual wants. The producer and the would-be consumer of each article, therefore, must get together, somehow, or else the wants of the community will remain unsatisfied.

But that each producer for himself should find some person who has what he wants and at the same time wants what he has, would involve very roundabout exchanges, occupying a great deal of time, and occasioning much delay and frequent disappointments. The bootmaker who wanted a hat for his own use might find many persons who would be glad to get pairs of boots, but had no hats to give in exchange, and several persons who had hats, indeed, to sell, but were already supplied with boots, before he found one person who both had hats and lacked boots. And, moreover, when that person were found, a further difficulty would probably arise from the failure of an exact equivalency between the two articles to be exchanged. A pair of boots might be worth more than a hat; perhaps three pairs of boots might be worth four hats. Yet the bookmaker wants but one hat; the hatter wants but one pair of boots. Things would soon get into a fearful muddle, this way.

But if, by general consent, formal or implied, the producers of the community should hit upon one article which they would all agree to take in exchange for whatever they wished to sell, a vast saving of time and labor, of annoyance and disappointment, would be effected, especially if the article so taken should be one, say, wheat, susceptible of minute division, without loss of utility.

162. Money, the Medium of Exchange.—What shall we call the function which the wheat would in this case perform? Clearly it is something altogether beyond and in addition to its ordinary natural function, as wheat, which is simply to be made into flour, to be, in turn, made into bread. In the use proposed, the wheat would serve another purpose. What shall we call that purpose?

The function performed by the wheat, in the instance given, is that of a Medium of Exchange. The significance of the word medium, in this connection, is found in the fact that the wheat becomes an intermediate thing in the commerce between the producers and the consumers of any and of every article. The wheat is no longer an end, as when used for food, but a means to an end, which end may be boots, or hats, or groceries, or what not. The person who takes wheat for what he has produced may already have more wheat than he could eat in a year. He does not take it with a view to eating it, but because with it he can obtain, in kinds and quantities and at times to suit his wants and convenience, whatever he may wish to eat, drink, or wear, or to warm or house himself withal.

Now, the function which has been described is the Money function. Money is the medium of exchange. Whatever performs this function, does this work, is money, no matter what it is made of, and no matter how it came to be a medium at first, or why it continues to be such. So long as, in any community, there is an article which all producers take freely and as a matter of course, in exchange for whatever they have to sell, instead of looking about, at the time, for the particular things they themselves wish to consume, that article is money, be it white, yellow, or black, hard or soft, animal, vegetable, or mineral. There is no other test of money than this. That which does the money-work is the money-thing. It may do this well; it may do this ill. It may be good money; it may be bad money—but it is money all the same.

163. Universal Acceptability of Money.—We said, all producers, since it is not enough that an article is extensively used in exchange, to constitute it money. Bank checks are used in numerous and important transactions of exchange, yet are not money. It is essential to money that its acceptability should be so nearly universal that practically every person in the community who has any product or service to dispose of will freely, gladly, and of preference, take this thing, money, instead of the particular products or services which he may individually require from others, being well assured that with money he will unfailingly obtain whatever he shall desire, in form and amount and at times to suit his wants.

When any article, no matter what its substance or form, acquires this degree of acceptability, no matter how obtained or how retained, so that each person, in his place in the industrial order, without the expectation of consuming this article, and without reference to the character or credit of the person offering it, takes it freely from any man whenever he has anything to sell, because he knows that any other man will freely take it from him whenever he may wish in his turn to buy, that article becomes money, and remains money while that condition continues. To serve as the medium of exchange is the money-function, and whatever does this is money.

164. Money and Civilization.—It is evident that the introduction of money, even in a primitive state, vastly facilitates exchanges, and renders it easy to carry out the division of labor. It is further evident that the use of money is a condition precedent to an advanced state of industrial society. The division of labor could not without it be carried so far as is involved in complicated manufactures and extended commerce.

“It has been wisely said,” remarks M. Chevalier, “that no machine economizes labor like money, and its adoption has been likened to the discovery of letters.”

The allusion is probably to the noble sentence of Gibbon: “The value of money has been settled by general consent to express our wants and our property, as letters were invented to express our ideas; and both these institutions, by giving a more active energy to the powers and passions of human nature, have contributed to multiply the objects they were designed to express.”

165. Historical Forms of Money.—We have said that any article which acquires a certain degree of acceptability throughout the community, would thereby become money, whatever its material or form. Yet material and even form may have much to do with securing to any given article, at any given time, the requisite degree of acceptability. The industrial habits and the tastes of a people and their social conditions may make that money which among another people would be an impossible money. Rock salt long served the Abyssinians as money; rice, the dwellers on the Coromandel shore; cacoa, the aboriginal Mexicans; olive oil, the inhabitants of the Ionian islands; wampum, the early New Englanders; tobacco, the early Virginians and Marylanders; tea, compressed into small cakes, the Russians; dates, the savages of the African oases; beaver and seal skins, the peoples of many northern lands. Cattle and sheep were employed as money, alike by the early Greeks, by the Romans who conquered the Greeks, and by the Teutons who conquered the Romans.

166. The Metals as Money.—But, of all substances, the metals have enjoyed the widest use as money, from a remote period. Iron, lead, tin and copper, one or another, have been thus employed in nearly every country whose history is known.

From its numerous and important uses in the domestic arts, in the chase, and in warfare, the first-named metal was the subject of such wide and constant demand as to make its further use as the general medium of exchange, i. e., as money, very simple and natural. The art of mining being in early times very crude, small quantities of iron represented a large amount of labor, and thus contained a high purchasing power. Moreover, in comparison with wheat, cattle, and many other primitive forms of money, iron cost little or nothing to keep and was but little subject to waste, while a given mass could easily be divided into pieces of any required dimensions, which could again be reunited, by fusion, or by welding when heated. The money of Lacedæmon was of iron; the Swedes used money of this metal during and after the exhausting wars of Charles XII.; and iron is still reported to be so used by the inhabitants of Senegambia.

Lead was extensively employed as money by the early Romans and the early English, and is still used in the same way by the Burmese. Tin was used by the Mexicans as money; was long so employed in Sweden, in long, flat blocks; and is even now a medium of exchange among the Chinese and Malays and in Prince of Wales Island.

But more than iron, tin or lead, has copper, in the later centuries, been used as money. Having, from its cost of production, a high value for its bulk, it came to supersede iron in this use, when the latter metal became too cheap to form a convenient money. During the silver famine of the middle ages, copper returned to be the chief money of circulation in Europe. And though, after the revival of silver production through the discovery of Mexico and Peru, it fell out of use as a principal money of wealthy and prosperous countries, it has remained a considerable element in the monetary circulation of the world, even to this day.

Platinum was for a brief period, between 1828 and 1845, used as money in Russia, where that metal is produced; but the great difficulty of rendering platinum, now from ingots into coin, and again from coin into ingots, prevented the success of this experiment, notwithstanding that platinum is justly regarded as one of the noblest of the metals.

167. The Precious Metals.—All the other metals, however, pale before the light of two transcendent substances, the Precious Metals, so-called, silver and gold. Having numerous important uses in the industrial arts; possessing the highest adaptation for the purposes of ornament and decoration, these metals have always and everywhere exerted, beyond all other objects of human desire, a strange, a mysterious fascination upon the minds of men.

168. Coinage.—Under the title, coinage, we may take account of all methods of determining, for easy popular recognition, the quantity and quality of individual portions of that which is used as money. It is in their adaptations to the art of the coiner that the metals, and especially the precious metals, exhibit their most marked qualifications for use as money. With some kinds of money, indeed, no such mode of determination is required, the divisions being natural, as in the case of the red feathers and shells used as money, or of cattle and sheep, which only need to be counted.

With other, and indeed, most, forms of money, it is necessary to give a customary shape to the pieces to be so used. The Abyssinians, who used rock salt as money, cut it into bricks of uniform dimensions, so that each person taking a brick in exchange might know how much salt he was receiving. Here, the problem was merely mechanical; no chemical tests were required. The salt being of reasonably uniform quality, the receiver was only interested to know its quantity.

With money of gold and silver, and even of copper or iron, however, both the quantity and the quality of each piece offered may be brought into question, unless some means be adopted by which the piece shall be made to exhibit unmistakably the amount of pure metal it contains. The problem is thus both a mechanical and a chemical one, and is solved by what we call, in the limited sense, Coinage. The metal is melted, and in that state is brought to the required degree of purity, or “fineness.” It is then cast into ingots, and by successive mechanical processes, with machinery of great delicacy and power, drawn out to the required thickness, cut into planchets, “milled” around the edges, and stamped on both sides∗ with devices expressive both of the sovereignty of the nation under whose authority the coins are struck, and of the quality and quantity of the metal contained.

Coinage has generally been regarded as an act of sovereignty, and the counterfeiting of the coin has been widely punished as treason. In England, the King's sovereignty only extended to the coinage of gold and silver, the private coinage of copper not having been prohibited until the present century. So important is the money-function, so strong is the tendency to abuse the privilege of coining, so helpless are the mass of the community, especially the poor and economically weak, under a corrupted coinage, that, even in popular governments, where prerogative is not known, the private minting of money is punished by grave penalties. That coins shall fully perform their office as money, they must be taken readily, without suspicion, or at most, after a brief inspection such as even the ignorant and inexpert can give.

169. What Determines the Value of Money?—It is only the present inquiry which brings the topic of money into the department of exchange. Otherwise, money belongs to the department of production, as clearly as does any other agency of trade or transportation, cattle, carts, railways or banks. The mining of the precious metals is governed by the laws which regulate the production of other kinds of wealth. The minting of gold and silver is equally a branch of production. Assayers, refiners and coiners are as much producers of wealth as the laborers employed in a pig-iron furnace.

But under the title, Exchange, we may properly inquire why any one article, produced as we find it to be produced, under existing conditions, exchanges for so much of any other article, and not for more or for less. Pre-eminently in respect to iron or copper, silver or gold, when cut into planchets and stamped as coin, do we need to raise this question and discuss it in all simplicity and severity of reasoning, because the subject has been allowed to become involved in a thousand difficulties, from the lack of clear definitions and from the failure rigorously to exclude every thing alien or adventitious. The discussion of the laws of money has engendered so much passion and prejudice as to make it hard to secure a respectful attention, or even a rational attitude of mind towards any statement of monetary doctrine which differs in the minutest particular from that of the hearer. Men who are candid and even liberal in politics and religion become furiously or stupidly fanatical as soon as their views on money are controverted. When Sir Walter Scott made a surly critic say to the author of certain Letters on the Currency, “In your ill-advised tract you have shown yourself as irritable as Balaam and as obstinate as his ass,” he evidently intended to characterize the whole race of writers on this theme.

The value of money, like the value of any thing else, is purely a question of demand and supply. The cost of producing money is only important as affecting the supply. Limit the supply,∗ and it does not matter whether there be any cost of production or not. The advantage of taking that for use as money which has an appreciable, definite, and, as far as may be, constant cost of production, is found in the fact that the supply of such money will be limited by natural causes, instead of being left to law, convention or accident.

170. What is the Demand for Money?—The demand for money is the occasion for the use of money in effecting exchanges. In other words, it is the amount of money-work to be done.

This is not determined by the gross volume of the wealth of the community, since all that wealth is not to be, in fact, exchanged. For a similar reason, it is not determined by the amount of the annual production of the community.

It is not determined even by the volume of products to be exchanged, inasmuch as some classes of these may require to be exchanged several times, and some but once. Moreover, in spite of the difficulties of barter, many products are, through a fortunate coincidence of wants and of possessions, especially in agricultural communities, exchanged against each other. More important still, the modern organization of commerce, especially through the agency of banks, provides for the creation, and subsequent cancellation, of indebtedness∗ on account of products given and taken in exchange, to an extent which vastly diminishes the actual use of money in effecting transfers.

171. The Money-Demand a Reality.—Not the less, is the demand for money a reality. Banks and clearing-houses, checks and book credits reduce the occasion for the use of money, but they do not supersede its use altogether, nor are there any signs that they will do so in any future, near or remote. In every community, though in some more than others, goods are offered for money. Men seek money, having in their hands wherewithal to pay for it. Some of them must have money, whatever it cost. With others any appreciable increase in the difficulty of getting money, or any appreciable doubt as to the “goodness” of that which is circulating in the community, does away with the disposition to obtain it, drives them to barter, and thus destroys a portion of the demand for money.

Some part of the exchangers of every community may be regarded as always on the verge of barter. They could exchange their products for the products of others which they wish to consume, without unreasonable trouble. Others, again, would exchange their products for money in the face of very great difficulties and embarrassments; yet for each of these is a point at which difficulties and embarrassments will give rise to an effort, which will thereafter increase rapidly in force, to resort to barter or to credit, as the means of escaping the use of money. Should the matter proceed far enough, production will even be limited or modified to meet the exigency.

172. Effect of Discredit on the Money-Demand.—Thus, if the money of a country be openly discredited, as in France prior to and during the Hundred Years' War, and, again, during the Revolution; in England, under Henry VIII. and the Protector Somerset; in the United States, during the circulation of the so-called Continental currency; and in Italy, through many dreary periods of her history, men will not only resort increasingly to barter or to credit, but such discredit of the coin or other circulating medium may become a force which will operate powerfully to modify and even to limit production. Men will produce fewer things and those different from what they would have done under conditions more favorable to the division of labor and the consequent exchange of products.

This, however, can never be carried so far as totally to dispense with the use of money. In any society above the barbarous state, something must be used, to some extent, as money, so long as production goes on at all.

We see, thus, that the demand for money has no definite relation to the total wealth, or the annual product of a community, or even to the volume of products to be exchanged. The demand for money varies with the amount of money-work to be done, which, in turn, varies with the industrial organization of communities, with seasons, and with circumstances innumerable. Not the less, however, as we said, is the demand for money a real thing. Goods are offered for money; and, with a given supply, the more goods are so offered, the higher will be the value of money—that is, prices will fall. The fewer goods are offered, the lower will be the value of money—that is, prices will rise.

173. Value and Price.—It will have been noticed that, in the foregoing paragraph, I have used the word price as signifying the money-value of goods. As we stated in a previous chapter, value is the generic term which expresses power-in-exchange. Price is power-in-exchange-for-some-one-article. Where money is used, price commonly expresses power-in exchange-for-money. Where nothing to the contrary is intimated, the price of an article is understood to be the value of that article in terms of money—the amount of money it will command in exchange.

174. What is the Supply of Money?—If such is the demand for money, what is the supply? It is the money-force available to do the money-work required to be done, in the given community, at the given time. The money-force, or the supply of money, is not measured by what is usually called the amount of money, that is, the number of gold dollars or bits of paper used as money, but is composed of two factors—the amount of money and the rapidity of circulation. “The nimble sixpence does the work of the slow shilling.” There may be as much money-force in 1000 dollars, each of which passes from hand to hand four times a week, as in 4000 dollars which change owners but once from Monday morning to Saturday night. The rapidity of circulation varies widely among different communities, according to the density of settlement, the prevailing occupations of the people, the facilities for the transportation of freight and passengers. And the rapidity of circulation not only varies according to such general conditions, but it varies from day to day, with the state of trade and the temper of the public mind.

175. The Money Supply a Reality.—But while the money-supply varies thus incessantly, it is none the less a real thing; so real that, at any given time a decrease of the supply of money will enhance its value—that is, will lower prices; and an increase of that supply will reduce its value—that is, will raise prices.

We have spoken of reducing the value of money as equivalent to raising prices; and of enhancing the value of money as equivalent to lowering prices. This is manifest enough to anyone who thinks of the matter; but the student of political economy needs to become so familiar with this equivalency that he will not have to think consciously about it; but the one mode of expression will always and instantly suggest its equivalent. To enhance the value of money is, of course, to give a larger purchasing power to each integral part of the circulating money—that is, to each piece or coin, and to any given number of pieces or coins. But if money purchases more of other things, other things, conversely, purchase less of money—that is, bear lower prices.

On the other hand, to say that the value of money is lowered, is to say that money purchases less of other things; but if money purchases less of other things, other things, conversely, purchase more of money—that is, bear higher prices.

176. International Distribution of Money.—We have seen that it is impossible to say what, at any time, in any community, is the demand for money, or the supply of money. We have now to see that, with money having a natural cost of production, no one has any need to know, either how much money there is, or how much is needed, inasmuch as the demand for money will, under such a system, easily and surely, because automatically, bring in the due supply required to enable all the exchanges of the community to be transacted with the minimum of effort and delay, and with the highest assurance of the exchange of real equivalents.

The territorial distribution of money is effected through the agency of Price.

Let us suppose that, of two trading countries having the same kind of money, the amount in each, i. e., the number of pieces or coins, is such that, the rate of circulation being what it is, and the demand for money what it is, the scale of prices in the two countries precisely corresponds, cost of transportation of goods being, for the purposes of the illustration, left out of account. Now let us suppose that, all other elements of the case remaining unchanged, the amount of money in one of these countries, A, is suddenly and largely increased, say, by the discovery of treasure or by the opening of new mines. The supply of money having thus been increased, the value of money, as we have seen, must decline, that is, prices must rise. A given amount of money will purchase less of other things than before, which is equivalent to saying that other things will purchase more of money.

Now, if goods will purchase more money in that country, the owners of goods in the other trading country, B, will at once feel themselves impelled by self-interest to send their stock thither, to secure the benefit of the higher prices. Having exchanged goods for money in A, they will bring the money back to their own country, B. Why not invest the money in the country where they sold the goods? Because, by the conditions assumed, though A is, as they have found, an excellent market to sell in, since prices are high, it is, from that very fact, a bad market to buy in.

177. And while all owners of goods in B are hurrying to get their goods to A, in order to take advantage of the higher prices prevailing there, every holder of money in A is equally impelled to get his money as soon as possible to B, in order to take advantage of the lower prices there. Where all parties are so fully agreed, the thing is likely to be done quickly. Money flows from A to B until the equilibrium which was disturbed has been restored, that is, until the general scale of prices is the same in both countries. After this, the two countries will continue to trade as before; but each will keep its own money. A will pay for the cotton, rice and sugar of B with its own wheat, lumber, coal and ice.

178. The Money Movement Automatic.—It will be observed that the movement of money which has been described was not due to any one discovering that A had more money than it needed, or than its proportional share. No statistician or banker announced this result after computing the demand for money and the supply of money in that country. The exchanges which restored the equilibrium of prices were due wholly to the action of individuals, moved by a view of their own interest. Not one of them cared, perhaps not one of them knew, whether money was in excess in A, or not, but each, finding that by sending goods from B to A, or money from A to B, he could secure a profit, contributed to the result.

We have seen, in speaking of retail exchanges (par. 149), that a great amount of resistance is experienced in the operation of what are called “the laws of trade,” and we shall have occasion to note, when we come to speak of wages, that the laborer's inertia, ignorance and poverty defer greatly, and even sometimes defeat altogether, the movements from place to place, or from occupation to occupation, which is required to secure his interests.

While the actual freedom and fullness of movement can, in no department of economic activity, reach the theoretical maximum, the result is more nearly obtained in the department under consideration than in any other. The persons who ship goods or money, in consequence of excess or deficiency in the money supply, being merchants of large experience and ample means, kept fully advised of the state of the markets by weekly letters and price-currents, and in later years, by information received daily, and now, even by hourly reports, through land telegraphs and ocean cables, the actual here closely approximates the theoretical readiness and completeness of movement. At the same time, it is easy to exaggerate even that readiness and completeness.

179. Picking or Selecting the Coin.—We have seen that any local excess of money, as between one country and another, immediately sets in motion forces which tend to restore the equilibrium. The local excess of money also promotes the use of the precious metals in the industrial and decorative arts. This application of the metals, always considerable, may be readily increased through a reduction in their value. As less and less of other things, wheat, iron or cotton, or of labor which produces all these things, will purchase a given amount of gold and silver, more gold and silver go to the melting pot.

In the case of exportation, or the melting of coined money, due to local excess, what determines the selection of the coins to be exported or melted? Is it purely a matter of chance, or is it controlled by the comparative proximity of coins to the place of exportation or the seat of the manufacture of jewelry, or of dental goods, or of photographers' supplies; or does some distinct economic force enter to decide that certain coins shall go and others stay? Let us inquire.

180. Irregularities in the Coin.—In the process of coining, it is inevitable, notwithstanding the truly admirable science and skill applied to this art, that differences should exist between coins. The mints of some countries do their work much more exactly than others;∗ but the best mints can not turn out pieces absolutely uniform in fineness and weight. A certain range of variation must be allowed, and this is generally formulated by law, and is known as the “tolerance” of the mint.

Even were all coins issued of exact uniformity, the wide difference in usage would soon make an appreciable difference in their weight. Some go early into hordes or deposits; others are worn down by almost continuous circulation; others still are dealt with illegitimately by clipping, punching, and “sweatting,” till a considerable portion of their substance disappears.†

If, now, with a body of coin of unequal value, a demand for the money-metal arises, for export or for use in the arts, the process of picking or selecting coin will at once begin. All merchants and bankers dealing largely in coin will lay by those of full or nearly full weight, and throw the lighter specimens back into circulation.

This process of picking or selecting coin, begins early in the history of such a demand as has been indicated, and proceeds steadily as long as that demand lasts. The operation costs practically nothing, and the profit, where great numbers of coins are daily handled, is large and certain. Clerks and cashiers become so expert that they can tell light coins by the touch, while, if doubt exists, a pair of adjusted scales will in an instant decide the question.

181. Gresham's Law.—The observation of this process of picking or selecting coin has led to the statement of the economic theorem, known as Gresham's Law,∗ viz., that “bad money always drives out good money.”

Thus baldly stated, as in most treatises it is, the theorem is false. That effect will not be produced unless the body of money thus composed of heavy and of light coins, is itself in excess of the needs of the community, as determined by the law of the territorial distribution of money, which has been stated. In a country in which money is, according to this standard, deficient, a light coin may have, by reason of that deficiency, a nigher purchasing power than a heavy coin in a country in which money is in excess.†

182. The Value Denominator, usually called the Measure of value.—Thus far we have spoken of but one function of money, that of the Medium of Exchange, and we have written as if there were but one. This has been for the purpose of fixing the reader's attention strongly on the work of money, as the medium of exchange.

In addition to this function of money, however, nearly all economists are agreed in recognizing another independent and co-ordinate function of money, viz., as a “Measure of Value.” “A second difficulty,” says Professor Jevons, “arises in barter. At what rate is any exchange to be made? If a certain quantity of beef be given for a certain quantity of corn, and, in a like manner corn be exchanged for cheese, and cheese for eggs, and eggs for flax, and so on, still the question will arise—how much beef for how much flax, or how much of any one commodity for a given quantity of another? In a state of barter, the price current list would be a most complicated document, for each commodity would have to be quoted in terms of every other commodity, or else complicated rule-of-three sums would be necessary. Between 100 articles there must exist no less than 4950 possible ratios of exchange. All such trouble is avoided if any one commodity be chosen, and its ratio of exchange with each commodity be quoted. Knowing how much corn is to be bought for a pound of silver, and, also, how much flax for the same quantity of silver, we learn without further trouble how much corn exchanges for so much flax. The chosen commodity becomes a common denominator or common measure of value, in terms of which we estimate the value of all other goods, so that their values become capable of the most easy comparison.”

183.—An Incidental and Subordinate Function.—Admitting the importance of having a value-denominator, in which the prices of all articles shall be expressed, we can not admit that this constitutes a separate and independent function of money, since it is evident that gold or silver, or any other article, can only serve as a value-denominator by and through being used as the medium of exchange.∗ It is only because silver, for instance, is, in fact successively exchanged against all the articles in the market that the respective values of these articles, in terms of silver, become known, and that it, hence, becomes possible to make up the price-current with 100 specifications, e. g., and not with 4950. Instead of this being an independent and co-ordinate function of money, therefore, it is merely an advantage resulting from the use of money as the medium of exchange. It is, at most, an incidental and subordinate function. The better statement, still, would be that money serves as

I. The Medium of Exchange:

• (a)Dispensing with the double coincidence required in barter.
• (b)Furnishing a value-denominator.

184.—II. The Standard of Deferred Payments, usually Called the Standard of Value.—We have seen that it is of the essence of a sale for money, that the producer, or whoever at the time stands in the place of the producer, parts with his product, receiving therefor something which he does not expect personally to consume. His reason for receiving this article in exchange for his product is that with it he expects to obtain, in time and place and amount most suitable to his convenience, that which he shall desire to consume. In other words, he, by the act of exchange, defers his own consumption of the equivalent of his product, taking a piece or pieces of money, as a sort of certificate or pledge that he shall receive such an equivalent whenever he gets ready to enjoy it. It was in this view of money that Adam Smith said: “A guinea may be considered as a bill for a certain quantity of necessaries or conveniences upon all the tradesmen of the neighborhood.”∗

It will appear that, looking toward the satisfaction of the producer's wants, a sale for money is only half a transaction. He sells his product for money, and must, in turn, sell, so to speak, his money for the product of others, such as he may desire personally to consume. To do this, however, though a two-fold transaction, requires far less of time and labor, and involves far less liability to ultimate disappointment, than the attempt to secure the “double coincidence of wants and of possessions,” spoken of in par. 161.

185. Money a Pledge of Future Enjoyment.—But while, in the very act of a sale for money, the producer defers his acquisition of the products of others, the question, when that acquisition shall be realized, remains for himself alone to answer. He has the money, and whenever he chooses to step into a shop and lay it down upon the counter, he may take his equivalent then and there, whether in meat or flour or groceries or clothes or tools for his trade.

186. Sales on Credit.—We are now to contemplate transactions of a different character, which give rise to a new function of money, viz., exchanges where the equivalent is not, at the time, received by the seller of goods; but where future payment is promised. These transactions are known as Sales on Credit, because the willingness of the producer to part with his goods, without at the time receiving an equivalent, depends upon the credit of the purchaser, or the degree of confidence attaching to his word or his bond. In such a case, the purchaser's character for honesty, his responsibility, as measured by the amount of his possessions, and the efficiency of the law in enforcing payments, all must be taken into account.

187. The vast extension of credit-sales under the modern organization of trade, makes a new and very important requirement upon that article which is to be used as money, viz., that, in addition to being conveniently portable, not liable to deterioration or accidental injury, easily subdivided, etc., it shall be reasonably stable in value. Where a man takes money in his hand as the equivalent of the product sold, which we call a sale for cash, he has no anxiety on this account. He may exchange his money for goods the same day. If not, it is because he does not choose to do so. The matter rests with him. But if a man is to forbear payment for a considerable time, it becomes of great importance that he should know what that which he is to receive at a distant date will be worth to him when he gets it. On the day of the sale, the money which is stipulated is worth the goods; otherwise, the sale would not have taken place. On the day of payment, the money may be conceivably worth twice the goods, or only half the goods. The risk of some undeserved loss, the chances of some unearned gain, are inherent in the nature of sales on credit. Whether that risk of loss or chance of gain shall be great or small, will depend on the degree of stability which attaches to the value of the article used in that community, during that period, as money.

It is evident that articles which might be equally well fitted for use as money in sales for cash, that is, which might be otherwise equally well fitted to serve as the medium of exchange, may be very differently qualified to serve as what we call the Standard of Deferred Payments.

188. The Grains and the Metals.—Thus, if we compare the grains and the metals, we note that the former are quickly consumed, the greater part in the first year, all within the second year; while the latter last, even in active use, many years. The average “life” of iron may perhaps be stated at fifteen to twenty years; the life of copper is much longer, and that of gold and silver covers several human generations.

From these facts it results that, if the production of any grain, e. g., corn or wheat, falls off considerably, in any year, through excess or deficiency of moisture or heat, the value of that grain will rise rapidly, it may be to an inordinate height. The production of gold or silver, and, in a lower degree, of copper or iron, might be sensibly diminished for years without greatly affecting the quantity and, by consequence, the value of the existing stock.

Now, if wheat were to be used as money, it would not infrequently happen that, in the irregular alternation of good and bad harvests, a producer selling his goods on one or two years' credit, would, when the payment came to be made, receive one-half as much more, or even twice as much in value, as he would have received had the payment been made at the time of the sale; or he might receive only two-thirds or even only one-half what his goods were then worth. Nor could the injuries which the producer might suffer by receiving less than the value of the goods he parted with, be trusted to be compensated by the unearned gains he might make at other times. So irregular and unaccountable is the occurrence of bad seasons, that one man might have nearly all bad luck and another nearly all good luck. The former might be ruined, bankrupted, and driven out of his shop or farm, before the tide turned in his favor. As many as seven successive bad seasons have been known in England. On the other hand, the metals are not subject to frequent value variations of great extent, though liable to incessant oscillations of moderate range. Gold and silver, especially, on account of their high degree of durability, are almost exempt from the influence of the production of a single year.

189. Fluctuations in the Value of the Precious Metals.—But while the precious metals are thus almost a perfect “standard of deferred payments,” from one year to another, they are yet subject to great periodic variations from generation to generation and from century to century. The production of the precious metals is of the most spasmodic character. At times, a flood of gold, or of silver, or of both, has poured from newly-opened mines, as after the discovery of the mines of Potosi in 1545, and of the mines of California almost coincidently with those of Australia, in 1849-51; at times, on the other hand, mining industry has almost wholly ceased, either from the exhaustion of known deposits, or as the result of war or civil disturbance. Such a cessation of mining industry followed the invasion of the Roman Empire by the Teutonic tribes. The series of revolutions and insurrections in the Spanish American States, beginning in 1809, destroyed the mining machinery, scattered the mining populations, and closed the mines of regions which had previously been among the most prolific sources of the world's supply of metallic money. In agriculture, however, while incessant fluctuations in the supply of the grains, even those most largely and widely planted, result from the mutability of the climate, the changes from generation to generation, and from century to century, are not so far reaching.

The vast breadth of arable land of reasonably uniform quality; the simplicity of the processes of agriculture, and the wide diffusion of the art of tillage; the comparative immunity of the soil amid ravages which greatly impair, perhaps permanently cripple, manufacturing, and in an even greater degree, mining industry; the limited applicability of the principle of the division of labor to agriculture and the relative inefficiency of machinery in its operations: these causes combine to render bread-corn, in truth, what Francis Horner pronounced it to be, “the real and paramount standard of all values.”

190. Corn Rents.—The superior stability of value of the cereals, through long periods of time, has led to the suggestion that, in the case of contracts extending over considerable terms of years, grain should be adopted as the standard for determining the obligations of the debtor, the rights of the creditor. To a limited extent this has been done; but the tendency to express the consideration of all sales in terms of that which is the current money of daily use in the community is so strong that few persons, even of those who are acting as trustees, take the trouble thus to guard the interests they represent. The manifest convenience of having that for the standard of deferred payments which is also the medium of current exchanges, the indolence and want of initiative in the mass of mankind, perhaps, also, a superstitious regard for the precious metals, combine to withstand the reasons which urge the expression of rents, interest and annuities in terms of some leading grain, in the case of long leases, permanent loans and fixed charges upon land.

191. Multiple or Tabular Standard.—It has even been proposed to go further, in the effort to avoid those undeserved losses which result to debtors or to creditors, from changes which take place in the value of even the precious metals through long periods of time. The scheme for a multiple standard or tabular standard, to form which a great number of articles should be joined together, in order that their individual value-variations may offset each other, was, early in the century, suggested by writers in England and Germany, and has more recently been advocated by Prof. Jevons of the former, and by Prof. Roscher of the latter country. This proposed scheme will be briefly discussed in Part VI.

[∗]At first, coins were impressed on one side, as is now the “gall,” the only native coin of Cochin China. This allowed the metal to be shaved from the smooth side of the coin. Afterwards characters were stamped on both sides, but the area of the coin was not fully defined, allowing the edges to be clipped, as is largely the case with the Tomans of Persia. Later improvements surrounded the coin with a well-defined rim, while the edges were milled to still further protect the integrity of the piece.

[∗]I have already quoted (par. 120) the remark of Prof. Senior that “any other cause limiting supply is just as efficient a cause of value in an article, as the necessity of labor to its production.”

[∗]This function of banks will be spoken of, more at length, under that title in Part VI.

[∗]Three gold coins, the Russian Imperials, the French Napoleons, and the American Eagles, are bought by the Bank of England without remelting. The United States Mint turns out the finest gold coin of the world; the Russian Mint the next best. The mint of France was, fifty years ago, charged with grave errors, all on one side, viz., in favor of the minters; but that mint is now of high authority. The mint of Great Britain has until recently been badly managed and has done poor work, in comparison with the others named, not out of any dishonest intention, or lack of mechanical skill, but from adherence to old fashions and antiquated machinery. Mr. Ernest Seyd and Prof. Jevons concurred some years ago in a very unfavorable criticism of the establishment on Tower Hill. More recently there has been improvement.

[†]Prof. Jevons estimated the proportion of “light” sovereigns in England, that is, of sovereigns reduced below the legal standard for circulation, to be 30 per cent., the proportion in some agricultural districts rising to 44 per cent.

[∗]From Sir Thomas Gresham, founder of the Royal Exchange of London. Died 1579.

[†]Mr. Ricardo clearly expressed this necessary qualification of Gresham's Theorem, but, in doing so, has been followed by few writers. It is, he says, “a mistaken theory to suppose that guineas of 5 dwt. 8 grains, can not circulate with guineas of 5 dwt., or less. As they might be in such limited quantities that both the one and the other might actually pass in currency for a value equal to 5 dwt. 10 grains, there would be no temptation to withdraw either from circulation; there would be a real profit in retaining them.”

[∗]Hence we see the error of Prof. Bowen's statement: “We can do without money as a medium of exchange, and can even barter commodities for other commodities without the use of any medium. But we can not do without money as a common standard or measure of value.” Were we to do without money in the former capacity, we should perforce have to do without it in the latter, inasmuch as it is only by being actually used as a medium of exchange, that the power of money to purchase each commodity by turns became known.

[∗]Prof. Senior calls money “Abstract Wealth.”