Front Page Titles (by Subject) LESSON IX. The Mystery of Money - The A B C of Finance
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LESSON IX. The Mystery of Money - Simon Newcomb, The A B C of Finance 
The ABC of Finance: or, the Money and Labor Questions Familiarly Explained to Common People in Short and Easy Lessons (New York: Harper and Bros. 1877).
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The Mystery of Money
When, in the early years of the greenbacks, our statesmen saw gold going up in the market, and wished to explain it without supposing a depreciation of the dollar, they coined a word to express their view of the matter, and said gold was "demonetized," and turned into a mere article of traffic, like leather and iron. I allude to this notion because it is based on a very common fallacy which underlies many of our notions about money. This fallacy consists in supposing that by being used as a medium of exchange gold becomes monetized, and thereby is affected with some mysterious power as a measure of value. We see this fallacy in the importance sometimes attached to the question what is and what is not money, the idea being that if a thing is money it is very different from what it would be if it were not money. In fact, however, anything is money which people universally give and take in exchange for their labor or merchandise. Salt, cattle, and iron have been used as such. In our colonial times, tobacco was used for money, and clumsy though it was, it was far better money than the bills of credit the States used to issue with such disastrous effects. Its use as money did not in any way change its nature, its properties, or even its real value. As men advance in civilization they find that these clumsy things will no longer answer, and take to gold and silver. The advantages of the precious metals are: (1) they include a great value in a small space; (2) they are not liable to decay or other damage from keeping; (3) they can be divided up into small and definite portions.
Gold in its crude state, entirely uncoined, was very recently in use as money in some parts of California and Mexico. But the difficulty of being sure of the weight and quality of the metal is a serious evil in such cases; so at a very early stage in civilization governments step in and coin the gold. Coinage, as we have already explained, has no other value than that of a certificate of the quantity and fineness of the gold in the coin.
Thus far there is no mystery. A coin is simply so much gold or silver, which people pass from hand to hand as the Indians used to pass wampum, and the colonists tobacco. The next step is the use of credit paper. In any mercantile community it would soon be found that there was no need of actually counting out the coin for every payment, and that trouble and danger of loss would be avoided by keeping the gold in a bank, and paying over checks or bills entitling the holder to so much gold at the bank. As every owner of a check could go to the bank and get the gold if he wanted it, they are just as valuable as the gold itself. We might thus imagine all the money of a community kept in one bank, and all payments made by checks on the bank. The gold would then lie there in the vaults year after year, disturbed only when some one required it, from time to time, to send away, or to melt into some useful article. The bank would also have to be paid for the expense of keeping the gold and paying the checks. To avoid this, the modern banking system is introduced, by which the bank is allowed to loan part of the gold out at interest for short periods, and thus compensate itself by the interest it receives. It still holds itself responsible to pay every one who wants it his gold on demand; and as long as the confidence of the business community is maintained, it can do this with perfect safety. It may have credits out, payable on demand, to three or four times the amount of gold in its vaults; but, unless an extraordinary number of depositors should rush after their gold at once, all demands can be satisfied. Unless a panic occurs, there is no more danger of this than of every one wearing out his shoes at once, and besieging the shoe-stores on the same day for a new pair. Even then the worst that can happen to the holder of the note is having to wait a few days for his money.
Such is the history of money, in brief. It is simply a commodity like gold, or a paper certificate entitling the holder to a commodity. Seeing these paper certificates pass from hand to hand, with only one man in a hundred going to get the gold to which they entitle him, people of wild ideas are constantly jumping to the conclusion that they need not entitle the holder to anything, and that a stage of progress may be reached in which mere stamped paper will answer the purpose of money. The plans for attaining this end are as numerous and as chimerical as those for attaining perpetual motion. One might with equal reason claim that the human race would reach a state of things in which such gross food as bread and beef would no longer be necessary, and people would live entirely on ideas.