<h2>CHAPTER 13</h2>
<h3>MONEY AS A TOOL IN EXCHANGE</h3>
<h4>§ I. ORIGIN OF THE USE OF MONEY</h4>
<div class="sidenote">The consideration of money can no longer be postponed</div>
<p>1. <i>The exchange of goods by barter is extremely difficult in most
cases.</i> Thus far we have not considered the subject of money and have so
far as possible avoided even the use of the term. Value in economics
does not depend on money, and is not necessarily connected with it.
Things can be compared in their utility, their importance to our welfare
can be estimated, without the use of money. Many problems of economics
can be discussed pretty thoroughly and solved without the use of the
word money or any term of similar meaning. But to-day it is impossible
to go very far in the discussion of economic questions without using the
concept of money, which is interwoven with every practical and
theoretical problem in economics. We have delayed to the farthest limit
the formal recognition of the subject; but we are now approaching the
question of capital and interest, and it is no longer possible to avoid
a preliminary consideration of the money concept.</p>
<div class="sidenote">Exact measurement of utilities is not possible without some
medium of exchange</div>
<p>In considering the problem of exchange of consumption goods, we have
assumed that it is possible to weigh small differences in the marginal
utility of goods, and that such<span class="pagenum"><SPAN name="Page_99" id="Page_99">[Pg 99]</SPAN></span> differences have influence on exchange.
Now in exchange by barter such a small estimate is impossible. In barter
things are exchanged directly for each other in kind. If the two things
do not chance to coincide in value, the exchange cannot be completed. An
equivalent must be found, or a multiple, if the marginal utility of two
goods is to be equalized for either party by exchange. As in most cases
this adjustment must be very incomplete, many exchanges that otherwise
would be advantageous cannot take place. In the earlier stages of
development, this careful estimate of value is not found. Children do
not make it. The typical trade of the small boy is a "trade even";
Johnny exchanges his gingerbread for Jimmie's jack-knife. It marks an
epoch in the industrial development of the boy when he begins to keep
store with pins, and no longer trades candy for apples, but both for
pins, which have become the medium of exchange in his boy world. He then
can express values in much more exact terms. In our society most
children begin early to grow familiar with this conception; but
travelers find some savage tribes still in the earlier childish stage of
development, unable to grasp the thought of a general medium of
exchange. When, through lack of a medium of exchange, there is a failure
to adjust utilities, there is a loss of the possible advantage in each
defeated exchange. There is a further waste of time and of vain efforts
to find something that will be accepted in exchange, and the loss
offsets a large part of the gain even when the barter is effected.</p>
<div class="sidenote">Money is found to serve as a general medium of exchange</div>
<p>2. <i>Some kind of enjoyable good in general use comes to be money, that
is, to be accepted as a medium of exchange.</i> The difficulties just
mentioned are met by the use of a medium of exchange. A medium of
exchange is simply one kind of wealth which is taken, not for itself,
but to pass along, in the belief that it will enable the taker to
gratify his wants and distribute his purchasing power in a more
effective way. Money is an "invention" in that it is a means of exchange
that came into use independently in a great<span class="pagenum"><SPAN name="Page_100" id="Page_100">[Pg 100]</SPAN></span> number of communities. It
is not an invention in the sense of a mechanical device suddenly hit
upon, but rather in the sense of a social custom that grows as its
convenience is tested by practice. Money is used, in some degree,
everywhere except in the most primitive tribes. Historically viewed, the
money first used in any community is seen in every case to be a
commodity capable of giving immediate gratification, a direct good in
immediate use. It then gradually comes to be used as money, which is an
indirect agent. Still later, when the money habit is well established, a
kind of material having no utility except as a medium of exchange may
come to be used.</p>
<div class="sidenote">Qualities of the primitive money</div>
<p>3. <i>Money in its origin is that good which best unites the qualities
that make it easy to sell, to carry, to know, to keep, to divide, and
unite.</i> It is evident that if some one commodity is gradually to take on
this use as a medium of exchange there will be a choice; some things
will be better fitted than others. First, this thing must have the
quality of salability, or marketability. In the channels of exchange it
is taken not because it is wanted for itself, but because it will help
to get something else that is wanted. To be sure of a ready sale in a
primitive community it must, however, be something that is generally
desired. Food and clothing, which supply the fundamental physical needs,
are the most generally used and desired of all goods. But they do not
have the second quality of a good money material, that of great value in
small bulk, transportability. Food is bulky. The carrying of a venison
or of a bag of wheat on one's back a short distance requires an effort
as great as that for the procuring of the food. Furs, however, have this
quality in a high measure, united with other qualities of money, as is
shown by their general use in the exchanges of northern tribes. Thirdly,
a thing must be recognizable; counterfeits must be easily avoided, and
the quality must be easy to test: this is the quality of cognizability.
The love of ornament is universal in human societies, and gives value to
many<span class="pagenum"><SPAN name="Page_101" id="Page_101">[Pg 101]</SPAN></span> materials combining in a high degree the qualities thus far named.
Fourthly, the money material, when taken in exchange, must remain
without loss of quality, perhaps for long periods, until it can be
exchanged again. Food does not answer to this requirement, being organic
and perishable. But some of the metals, having value in small bulk,
salability, cognizability, and durability, step by step displaced other
forms of money. Finally, money must be made of a material easy to divide
and unite. It is a great convenience in small transactions to be able to
represent a fractional value by a small coin. The money material thus,
likewise, is easily shifted to and from its money use. It is a very poor
money that has not this quality, yet a thing may serve for money in
larger transactions without it. Cattle, slaves, and land have been thus
used, although they answer in a very rough way these fundamental
requirements of the money material.</p>
<div class="sidenote">Industrial changes affect the convenience of certain money
forms</div>
<p>4. <i>The changing material and industrial conditions of society change
the kind of money that is used.</i> The money use, as has just been shown,
is a resultant of a number of different motives in men. Things that have
the highest claim to fitness for money with a people at one stage of
development would have a low claim at another. As each of these stages
is passed, the thing used as money either increases or decreases in its
fitness. The final choice depends on the resultant of all the
advantages. The use of a material may become more general or less so.
Shells used for ornament in poor communities cease to be so used in a
higher state of advancement, and thus their salability ceases. Furs,
used at some stage of development as money in all northern climes, cease
to be generally marketable when the fur-bearing animals are nearly
killed off and the fur trade declines. Tobacco was at one time in
Virginia a great staple. Merchants were always ready to take it, and its
market price was known by all; but as it ceased to be the almost
exclusive product of the province, it lost the knowableness and
marketability it<span class="pagenum"><SPAN name="Page_102" id="Page_102">[Pg 102]</SPAN></span> had before. In agricultural and pastoral communities
where every one had a share in the pasture, cattle were a fairly
convenient form of money, but to-day would be a most inconvenient one; a
city merchant exchanging goods for Poland China pigs and Texas steers
would envy the proverbial owner of a white elephant.</p>
<div class="sidenote">The proved fitness of gold and silver as money</div>
<p>The value of the money material may fall so greatly as a result of
greater production, as in the case of iron, tin, copper, that it becomes
unsuitable. Again, as wealth grows, as exchanges increase, as the use of
money develops, as commerce extends to more distant lands, the heavier,
less precious metals fail to serve the money need, especially in the
larger transactions. Thus, in a sense, different commodities compete,
each trying to prove its fitness to be a medium of exchange; but only
one, or two, or three at the most, can at one time hold such a place.
Silver and gold, step by step, often making little progress in a
century, have displaced other commodities, and are the staple and
dominant forms of money in the world to-day. Every community has
witnessed some stage of this evolution. Now nations are divided into two
great groups, silver- and gold-using, in accordance with the metals they
use as standards. The gold-using countries are the most advanced
industrially, requiring the most valuable money metal. Many countries
have passed in the last century from the silver to the gold standard,
and in an intermediate period have tried to use both standards. The
Asiatic and South American countries mainly use silver, while most of
those in North America and Europe use gold.</p>
<p>While industrial changes thus affect the choice of money, in turn money
reacts upon the other industrial conditions. If a new and more
convenient material is found, or the value of the money metal changes to
a degree that affects the generalness of its use, industry is greatly
affected. The discovery of mines in America brought into Europe, in the
sixteenth century, a great supply of the precious metals, and this
change in the use of money reacted powerfully on<span class="pagenum"><SPAN name="Page_103" id="Page_103">[Pg 103]</SPAN></span> industry. Money being
itself one of the most important of the industrial conditions, is
affected by and in turn affects all others.</p>
<h4>§ II. NATURE OF THE USE OF MONEY</h4>
<div class="sidenote">Money is an indirect agent, a tool to effect exchanges</div>
<p>1. <i>Money in all its money uses is an indirect agent, to be judged just
as other indirect agents are.</i> The key to this section is the thought
that the function of money is to serve as an indirect agent. Money is
often, by a figure of speech, called a tool. Literally a tool is a bit
of material which, taken in the hand, is used to apply force to other
things, to shape them or move them. Figuratively, this is just what
money does. A man takes it in his hand not to get enjoyment out of it,
but to apply force, to move something, and that which he moves is the
other commodity. Adam Smith aptly likened money to the road and wagons
that transport goods, thus gratifying wants by putting things into a
more convenient place. Money is only one of a multitude of forms of
wealth. It is not even the most "valuable"; it has value just as other
indirect agents have. The loss caused by taking away an indirect agent
entirely is greater than the benefit usually attributed to it. Its
utility in the extremest conditions is greater than its marginal utility
under ordinary conditions. Food is not credited in the market with
enormous value, but if starvation threatened, all else would be given
for food. In a like manner, each individual values money according to
the importance of the marginal service it renders, but the marginal
service is far from measuring the loss that would be caused by the
entire disuse of money. In a society without money, industrial processes
would be very different, and exchange would be hampered in almost
inconceivable ways. It is true, therefore, that money is an economic
factor of high importance, but it is not so indispensable as many other
factors to which far less value is attributed.</p>
<div class="sidenote">Why a poor community lacks money</div>
<p>A poor community has little money because it cannot afford<span class="pagenum"><SPAN name="Page_104" id="Page_104">[Pg 104]</SPAN></span> more; it
gets along with less money than is convenient just as it gets along with
fewer indirect agents of every other kind than it could use. Pioneers in
a poor community where the average wealth is low, cannot afford to keep
a large number of wagons, plows, good roads, or school-houses. If the
community were wealthy enough it would have more of these and of other
things, and great as is the convenience of money, poorer communities
have to do with little of it. It is, therefore, a confusion of cause and
effect for poor communities to imagine that their poverty is due to lack
of money.</p>
<div class="sidenote">The use of money as a common denominator</div>
<p>2. <i>Out of its use as a medium of exchange comes the use of money as a
common denominator of values.</i> Money serves as a "common denominator,"
for, as all other things can be expressed in terms of money, through it
the value of other things can be compared. The other things can be
expressed in money because they are constantly exchanged for it. All
things being compared with money, can in turn be compared with each
other. Some consider this service as a common denominator to be the
primary and most important function of money. Sometimes a money of
account is found, which is not in use as a medium of exchange. Cattle
and slaves have served as money of account while not used as a medium of
exchange in larger transactions. Money of account is used, as the
shilling in New York, which for a century has not been in use at all as
a medium of exchange. It is, however, only apparently a denominator of
value; the shilling represents five fourths of ten cents. The actual
standard is the dollar; the shilling is only a habitual form of speech
and is mentally reduced to terms of the money in use. A decimal system
is a great convenience in the use of money as a common denominator, but
not indispensable. It is a striking fact that England, until a few years
ago the greatest industrial nation, still uses a money unit requiring
cumbrous calculations.</p>
<div class="sidenote">Money used as a storehouse for saving.</div>
<p>3. <i>Other uses of money are as a storehouse of saving<span class="pagenum"><SPAN name="Page_105" id="Page_105">[Pg 105]</SPAN></span> and as a standard
of deferred payments. These uses grow out of those before mentioned.</i>
The standard of deferred payments is the unit of value in which debts
are agreed to be paid later. It is evidently most convenient, and
therefore almost inevitable, that the common denominator in which all
values are expressed from day to day should continue to be taken as the
value unit when the completion of the exchange is delayed a day, a
month, or a year. This will be more fully discussed at a later stage of
our study.</p>
<p>The use of money as a storehouse of saving was more common formerly than
it is now, when better ways than the hoarding of money are found for
"laying up for a rainy day." In some measure, however, money is hourly
serving this use, which is still an important one. Money kept to be used
to-morrow or five years hence is a storehouse of value for twenty-four
hours or for five years. In either case it is being kept to complete at
a later time its use as a medium of exchange. A thing ceases to be
money, logically viewed, the moment its owner keeps it without the
purpose that it shall be spent ultimately. The typical miser is a man
who has lost his reason as regards the money use. Money must be deemed,
therefore, to perform the same essential service as a storehouse of
saving that it does as a medium of exchange. In either case it is to be
kept only to the moment when it will afford the maximum of pleasure.</p>
<h4>§ III. THE VALUE OF TYPICAL MONEY</h4>
<div class="sidenote">The money use is added to other uses</div>
<p>1. <i>The money use, historically considered, is a new use added to a
good, and increases the demand for that good.</i> The history of any
particular kind of money may be traced back to a point where it was not
money, since which the money use has been added gradually to the other
uses. The value of the material later to become money is determined, as
is that of any good, according to its marginal utility in all possible
applications. No new theory is required to explain<span class="pagenum"><SPAN name="Page_106" id="Page_106">[Pg 106]</SPAN></span> the value of this
same commodity as it gradually acquires the added use of a medium of
exchange. The new use influences demand for the thing just as do the
other uses. What is here said must be understood as applying to typical
money, which is at the same time a commodity having other uses. Other
things that are not typical money come later to be used as money, under
legal regulations.</p>
<div class="sidenote">The other uses continue, slightly modified by the money use</div>
<p>2. <i>A good that comes to be used as money continues to have a commodity
use along with the money use.</i> When a thing is wanted for some quality
that gives immediate gratification to the user, the explanation of its
value is simple. Ornaments, shells, feathers, food can be seen to have a
direct want-gratifying power. The money use is one that works no
physical or visible change in goods, and to many minds it appears so
different from other utilities that it remains quite mysterious and
incomprehensible. To persons accustomed to thinking on problems of
value, this case appears to be no more difficult than that of anything
else having two or more uses. Cows 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 values of cattle being
determined by the consideration of all their uses united into one scale
of diminishing utility.</p>
<div class="sidenote">Money yields a series of rents which are the basis of its
value</div>
<p>3. <i>The uses of money make it a rent-bearing form of wealth.</i> The rent
that money yields is in the form of convenience and economy. This is
sometimes rendered directly as psychic income, as in enabling the
traveler to buy his dinner, for the money thus yields gratification just
as does the carriage in which he rides. One may go for a day to the
seashore without a parasol and suffer from heat, or without money and
suffer from hunger. In every case where money is retained for a time in
possession, there is expected from it a usufruct as great as, or greater
than, can be secured from anything else for which it can be exchanged.
This usufruct is a net surplus, or income, yielded by a sum of money
undiminished in amount up to the moment it is spent, but<span class="pagenum"><SPAN name="Page_107" id="Page_107">[Pg 107]</SPAN></span> meantime
increasing in the gratification it will help to secure. In many cases in
practical business money yields gratification only indirectly, as the
objective contract rent received as interest for borrowed money in
business uses, or as economic rent when the use of money in business
enables one to secure a larger income. Because money yields a rent men
make the sacrifice involved in keeping a stock of it on hand. On this
rent is based that part of the value of money that is derived from its
money use. As the use of money as a standard of deferred payment, or
basis of commercial obligations, does not require that it be owned by
the parties writing the contract, this use of money is a free good, a
sort of social by-product of the medium of exchange. When money is in
use in a community, any person may draw up contracts in terms of money,
borrowing and lending, buying and selling wealth, later to be repaid in
other wealth or services expressed in the circulating medium.</p>
<div class="sidenote">The general use of money is characteristic of this age</div>
<p>4. <i>Money may be defined as a generally accepted material means of
payment and medium of exchange.</i> This, its primary and essential
function, may appear to be less important as new modes of balancing
accounts of wealth are devised. But its functions as a common
denominator of values and as a standard of deferred payment are
increasingly important in an advancing society. It is this expression of
the value of all other things in terms of money which may well be deemed
the essential characteristic of the capitalistic age. In earlier periods
wealth was thought of and expressed in concrete terms; now it is
expressed in money. The general use of money affects men's ways of
looking at wealth and speaking of it. Without appreciating the nature
and function of money, it is impossible to grasp the significance of
capital in modern industry, the consideration of which we are now to
enter upon.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_108" id="Page_108">[Pg 108]</SPAN></span></p>
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