-- 4. #The precious metals as money#. Certain of the metals early began to show their superior fitness to perform the monetary function. The metals first used as money were copper, bronze (an alloy of copper with nickel), and iron. These were truly precious metals in early times for they were found only in small quantities in a few localities. They, therefore, were widely sought and highly valued as ornaments and for use as tools and weapons. But as the great ancient nations emerged into history, these materials were already being displaced in large measure. Their value fell greatly as a result of greater production due to somewhat regular mining. As wealth grew, as trade increased, as the use of money developed, as commerce extended to more distant lands, the heavier, less precious metals failed to serve the growing monetary need, especially in the larger transactions. Silver and gold, step by step, often making little progress in a century, became the staple and dominant forms of money in the world, while copper and nickel still continued to be used for the smaller monetary pieces. Every community has witnessed some stages of this evolution. In this contest silver had proved itself a few centuries ago to be on the whole the fittest medium of exchange for most purposes, though gold was at the same time in use in larger transactions and in international trade.
-- 5. #Gold-using countries#. At the beginning of the nineteenth century nations were divided, in accordance with the metals they used as standards, into two great groups, silver- and gold-using. Since that time, and more rapidly after 1850, gold has displaced silver as the standard money. In a higher degree than any other one material, gold has the qualities of a good standard for rich and industrially developed communities. England for a long period practically has had gold as its standard money; the United States since 1834 (except for the period of paper money from 1862 to 1879); France since about 1879, having shifted gradually from silver, after 1855, under the working of the bimetallic law; Germany since 1873; and Japan since the later nineties. Other countries have been striving to attain it. Since about 1890 some states (including Mexico) and some of the colonial possessions of the great nations (including India and the Philippines) have adopted the plan of "the gold-exchange standard." By this plan gold is the standard price unit, while silver continues to be used all but exclusively as the material in circulation, its amount being controlled and its value regulated on principles to be explained below under coinage, seigniorage, and foreign exchange. There are now left but a few silver-standard countries, the most important being China.
There are, however, numerous countries, notably in South America and Central America, which have fiduciary paper-money standards.[2]
-- 6.# Varying extent of the use of money#. Trade by the use of money at no time has become the exclusive method. Barter still lingers to-day.[3] The extent to which, on an average, money is used in different parts of the world differs widely. The use of money in Siberia is less than in European Russia, and its use is less there than in western Europe. The use of money as compared with barter is generally much greater in the cities than in the rural districts. In the cities of Mexico not only money, but banks and credit agencies are in general use; whereas the rural districts are more backward and make far more use of barter than is the case in the United States. At the ports in the cities of China, India, and South America the use of money may be very like that in European cities; but go a little way into the interior of these countries and conditions as to the use of money change greatly.
However, the comparative per capita amounts of money (in terms of American dollars) in circulation in different countries is far from being a true index of their industrial development or of their commercial activity. Indeed, beyond a certain point the larger average amount of money in circulation in a country may indicate backwardness in the development of banks and other credit agencies rather than greater amount of wealth or of business. Notice, for example, the medium position of the great commercial countries, Germany and the United Kingdom, as compared with other countries above and below them in the following list.
PER CAPITA CIRCULATION OF MONEY IN LEADING COUNTRIES DECEMBER 31, 1912.
France..................$48.91 America (U.S.)..........$32.98
Australia............... 38.45 Portugal................ 29.46
Canada.................. 33.57 Netherlands............. 26.86
Switzerland............. 24.32 Mexico.................. 9.17
Germany................. 21.36 Finland................. 8.38
United Kingdom.......... 21.21 Chile................... 8.24
Spain................... 19.96 Turkey.................. 7.09
Brazil.................. 18.79 Russia.................. 6.45
Denmark................. 17.73 Japan................... 5.68
Belgium................. 15.83 Bulgaria................ 5.57
Austria-Hungary......... 14.68 Serbia.................. 5.49
Rumania................. 13.24 Venezuela............... 5.51
Italy................... 13.09 India (British)......... 5.19
South Africa............ 12.93 Ecuador................. 4.62
Norway.................. 12.50 Peru.................... 3.17
Sweden.................. 11.59 Colombia................ 2.32
Greece.................. 11.02 Paraguay................ .57
7. #Money defined and reviewed#. Money may be defined as a material means of payment and medium of trade, generally accepted as the price-good and passing from hand to hand. The definition contains several ideas. The words "generally accepted" imply that money has a peculiar social character, is not an ordinary good. As a price-good, money itself must be a thing having value, otherwise it could not be accepted. Trade means the taking and giving of things of value. Money is, therefore, not merely an order for goods, as a card or paper requesting payment; it is itself a thing of value (tho this value may be due partly or solely to its possessing the money function). Such things as a telegram when transferring an order for the payment of money, as the spoken word, and as a mere promise to pay, are not money. Even checks and drafts are merely substitutes for money. Money passes from hand to hand, is a thing that can be handled, and is or can be bodily transported.
The application of the definition is not always easy, for money shades off into other things that serve the same purpose and are related in nature. In many problems money appears to be at the same time like and unlike other things of value, and just wherein lies the difference often is difficult to determine. Even special students differ as to the border-line of the concept, but as to the general nature of money there is essential agreement.
8.# Metal money without or with coinage#. In antiquity the metals were used as money in bulk; that is, the amount was weighed at each transaction and the quality was tested whenever there was doubt.[4]
In countries industrially backward, payments are still made in this manner. For some time after the discovery of gold in California, gold dust was roughly measured out on the thumb-nail. In shipments of gold to-day by bankers to settle international balances, metal may be in the form of bars that bear the mark of some well-known banking house.
In all of the cases of this kind the gold is money in fact, but not by virtue of any act of government. The metal is simply a valuable good, the receiver of which values it according to its weight and fineness.
This is true even when the government mint, for a small charge, tests and stamps the bars at the request of citizens.
Very early it became the practice of governments to shape and stamp pieces of metal to be used as money, so as to indicate their weight and fineness. The act of shaping and marking metal for this purpose is called coinage.[5] The coinage by government had notable advantages in giving to the monetary units uniformity of size, fineness, and value, with the stamp that was readily recognized. But in its simplest form coinage in no way changed the value of the money, and any other mark equally plain put upon it would have served equally well, if only it had carried with it equal assurance of the quality and weight of the metal.
9. #Technical features of coinage#. For each kind of metal money there is an established _ratio of fineness_ for the more precious material, which is mixed with baser metals used as alloys. In the United States all gold and silver coins are made nine-tenths fine; in Great Britain, eleven-twelfths. The established weight of the gold dollar in the United States is 25.8 grains of standard gold which contain 23.22 grains of fine gold. The _limit of tolerance_ is the variation either above or below the standard weight or fineness that a coin is allowed to have when it leaves the mint. This is different for each of the principal coins, being about one-fifth of one per cent on a gold eagle. The _par of exchange_ between standard coins of different countries is the expression of the ratio of fine metal in them.
Thus the par of exchange between the American dollar and the English sovereign (the "pound") is 4.866; that is, that number of dollars contains the same amount of fine gold as an English gold sovereign.
The embossed design is merely to make the coins easily recognizable and difficult to counterfeit; and milled or lettered edges are to prevent clipping and otherwise abstracting metal from the coins.
10. #Seigniorage defined#. Coinage, as practised by early governments and rulers, came to be a function of great importance politically as well as economically. The right to issue money came to be one of the most essential prerogatives of sovereignty. The prince, king, or emperor stamped his own device or portrait upon the coin; hence the term seigniorage from _seignior_ (meaning lord or ruler). Seigniorage meant primarily the right the ruler, or the estate, has to charge for coinage, and hence it has come to mean also the charge made for coinage, and often, in a still broader sense, the profit made by the government in issuing any kind of money with a value higher than that of the materials (whether metal or paper) composing it. Coinage is rarely without charge, and often has been a source of revenue to the ruler. In antiquity and in the Middle Ages this right was frequently exercised by princes for their selfish advantage to the injury and unsettling of trade. This introduced a very great problem of value into the use of money.
The coinage is said to be _gratuitous_ when no charge is made for coinage. Coinage is said to be _free_ if the subject or citizen may take bullion to the mint whenever he pleases, paying the usual seigniorage. Coinage is _limited_ if the government or ruler determines when coinage is to take place. Thus, coinage may be both free and gratuitous, when citizens are allowed to bring bullion whenever they please and have it converted into coins without charge or deduction. But coinage is free without being gratuitous when any citizen may bring metal to the mint, whenever he chooses, to be coined subject to the seigniorage charge.
[Footnote 1: See Vol. I, pp. 15-16 and 50-53 for an introductory statement of the origin of money in connection with markets.]
[Footnote 2: See ch. 5.]
[Footnote 3: See Vol. I, p. 43, on the decline of barter.]
[Footnote 4: "I will ... refine them as silver is refined, and will try them as gold is tried." Zech. xiii, 9. "I bought the field ...
and weighed him the money, even seventeen shekels of silver. And I ...
weighed him the money in the balances." Jer. xxxii, 9, 10. A shekel was 224 grains, troy weight, which is about equal to six-tenths of the pure metal in a silver dollar to-day and worth now about twenty-four cents in gold. At that time, however, the purchasing power of silver was many times greater than it now is.]
[Footnote 5: From the French _coin_, in turn from Latin _cuneus_, wedge, suggestive either of an earlier wedge-shaped piece, or of a wedge-shaped mark on the piece. The German word _Munze_ is from the Latin _moneta_ (as is the English _mint_, the place where coins are made), which meant money, that name being taken from the temple of Juno, called _Moneta_, where coins were made.]
CHAPTER 4
THE VALUE OF MONEY
-- 1. Standard-commodity money. -- 2. Alternative uses of the money-good.
-- 3. Money as a valuable tool. -- 4. Relative importance of money. -- 5. Concept of the individual monetary demand. -- 6. Concept of the community's monetary demand. -- 7. The money-material in its commodity uses. -- 8. The general level of prices. -- 9. Effect of increasing gold production. -- 10. The quantity theory of money. -- 11.
Interpretation of the quantity theory. -- 12. Practical application of the quantity theory.
-- 1. #Standard-commodity money#. The actual money in use in almost every country to-day consists of a wide and confusing variety: gold, silver, nickel, copper, paper in various forms, issued by various authorities under various conditions as to amount and as to seigniorage. But among all the kinds, in each country some one kind is found standing preeminent and in a peculiar position, as the _standard_ money to which the value of all the other kinds of money is in some manner adjusted. Usually this standard money is composed of a material (gold or silver) which is a commodity; but there are many examples of paper money being for the time the standard. The difficulties of the money problem must be attacked at the point of standard-commodity money, where it is nearest to ordinary value problems and is less complicated than when the various other kinds of money and the various money substitutes are included.
We mean by standard money that kind, no matter what its form, which serves in any country as the unit in which the value of other kinds of money is expressed. The standard usually is a quantity of metal of a certain weight and fineness, which, as a commodity, has a value also in industrial uses. Coins of this standard are called full, or real, money by some writers that deny the title of money to everything else.
-- 2. #Alternative uses of the money-good.# Let us consider the problem of money-value as it would present itself if only one kind of commodity money were in use. This doubtless was in large measure, if not entirely, the case for a time in early societies after one material had proved itself to be the best suited for the purpose. The history of many kinds of money may, we have seen, be traced back to a point where they were not money, but commodities with a direct value-in-use. Such were ornaments, shells, furs, feathers, salt, cattle, fish, game, and tobacco. Each of these materials has, in each situation, a value which is the reflection of its power to appeal to choice. Now, if to the commodity-use is added the money-use, this increases the demand for that good. No new theory is required to explain the value of a commodity as it gradually acquires the added use of a medium of trade. The money use is one that works no physical or visible change in goods except a slight unavoidable abrasion, and at any time a person receiving a piece of commodity money may retain it for its use-value, as food, ornament, tool, or weapon, or may retain it for a time and then spend it as money. This case of value is no more difficult than that of anything else having two or more uses.
For example, cattle are used for milk, for meat, and as beasts of burden. Each of these uses is logically independent as a cause of value, yet all are mutually related, the value of cattle to a particular person being determined by the consideration of all the uses united into one scale of varying gratification.
-- 3. #Money as a valuable tool.# Money is often, by a figure of speech, called a tool. A tool is a piece of material taken into the hand to apply force to other things, to shape them or move them.
Figuratively, this is what money does. A man takes it not to get enjoyment out of it directly, but to apply force, to move something, and that which he moves is the other commodity. Money thus (as money) is always an indirect agent. Adam Smith aptly likened money to the roads and wagons that transport goods, thus gratifying desires by putting goods into more convenient places. The fundamental use that money serves is to apportion one's income conveniently as it accrues and as it is spent. The use of money increases the value of goods by increasing the ease with which trade takes place. Like any tool or agent, money is valued for what it does or helps to do. It enhances the value of the goods that it buys and sells by dividing them into quantities convenient for use and by making them available at the right times. In the light of the principles of diminishing gratification and of time-preference it is clear that the amounts in which, and the times at which, goods are available have an essential bearing on their values. Money is the most successful device ever discovered for distributing the supplies of a journey along its course, and the goods of daily need over a period of time. The use of money as a storehouse of value by hoarding it is merely a more extreme case of keeping income until a time when it will have a greater value to the owner than it has in the present.[1]
-- 4. #Relative importance of money.# Because money is the general expression of purchasing power, and comes to symbolize all other wealth, it often assumes undue and exaggerated importance in men's eyes. Money is but one of many forms of wealth. It constitutes but a small percentage of the total wealth of a country, and it is far from being the most indispensable to human welfare. Yet its importance, as a whole, in determining the form of industrial organization is enormous. In a society without money, industrial processes would be very different, and trade would be hampered in manifold ways.