Some chapters on money; printed for the use of students in the University of Michigan

Front matter

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Preface

This book is printed for the use of students in the University of Michigan, the edition being Hmited to three hundred copies. It does not attempt to cover the subject completely, though not many important topics are omitted. The unduly elementary treatment noticeable in some parts arises from the fact that a considerable part of the matter is taken from the manuscript of a projected text book on Money and Banking intended for less advanced students.

Introduction

The starting point of the study of money is to be found in certain very familiar facts of everyday life. First, we are creatures having many wants dependent for -their satisfaction on our possession of certain material objects or conditions which are called by the economist commodities and services or simply economic goods. Secondly, our being possessed of these goods is not usually a matter of course but in nearly every case, involves supplying ourselves through the expenditure of labor or some other form of sacrifice. Thirdly, the method of supplying ourselves which we have found most successful is not for each to produce for himself all kinds of goods but rather to produce only some one kind and use it to get the rest through exchange from his neighbors. Now, it is at this point — this exchanging of our products for those of our neighbors — that money comes into the case. Doubtless the beginnings of exchange have always taken the form of barter, i. e. a direct exchanging of goods for goods. But it would always very soon appear that this method of exchange involves very serious drawbacks. Let us take a moment to make this plain.

If we suppose, for example, that one man has produced a surplus of wood which he wishes to exchange for a watch, it is evident that to carry out the plan it will be necessary ^to find someone who has a watch to dispose of and at the same time needs wood, and who, further, needs wood in an amount exactly corresponding to the value of the watch. But to find such a coincidence may not be the easiest thing in the world, may, indeed, prove very difficult. It would not be hard to find men who want wood ; but they may have no watches to dispose of. So it would be easy to find men who have watches to sell; but they may not want wood ; or, if any one of them does want wood, he may want only half as much as would be needed to pay for a watch. As civilization advances these obstacles to barter become more and more serious. For, with the advance of civilization, occupations, tastes, and incomes become more diverse, and a larger and larger number of workers are devoted to producing things for which only a few of their fellows have any use whatever. For such persons — ^that is, for most of us — exchanging their own goods directly for all the different kinds of goods which they want would be quite out of the question. Fancy a manufacturer of steel rails, or mowing machines, or microscopes, or surgical instruments going around trying to trade his wares for sugar or flour or a suit of clothes! In any highly developed society a general use of barter is not simply inconvenient; it is ridiculously impossible.

But I hardly need to say that no highly developed society, in fact no society, tries to run its exchange on the barter plan. With the very beginnings- of trade we find men making use of some medium of exchange — some go-between which each one seeks to get in exchange for his goods and, having gotten, uses to buy other goods. The thing specially set apart for this purpose we call money. With its assistance the troubles of the man who has wood to dispose of and wants a watch quickly disappear. He simply sells his wood to the different persons who want

INTRODUCTION 9

wood; and then, taking to the jeweler the money thus obtained, buys a watch.

Thus we find existing in the business world an institution called money which, as we can all see, is a very important factor in our lives. We are, doubtless, quite ready to believe that with respect to the nature, the working, and the management of this institution many interesting and important facts manifest themselves. It is to the study of these facts that the following chapters are devoted.

A word now as to the plan of treatment. While there is no formal ^livision of the matter into parts, the chapters naturally fall into three groups, (i) the first and second, occupied with a descriptive account of money, (2) the third to the sixth inclusive, devoted to the principles or natural lazvs which regulate monetary phenornena, and (3) the seventh and eighth, given to certain problems connected with the conscious regulation and management of a monetary system.

Chapter I. The Nature And Functions Of Money

I. MONEY DEFINED.

The essential nature of money has already been brought out, though of course only in general terms, in introducing our subject. That is, money is in essence something generally and habitually employed as the medium of exchange, the go-between which men obtain with their products and, having obtained, use to obtain other products. A very slight elaboration of this statement will furnish us with a fairly adequate definition of money as follows : Money is something which is specially designed for, and devoted to, serving as a medium of exchange, although it is also put to other uses for which it is specially fitted either because of its being a recognised medium of excliange or because of the nature of the substance of which it is made.

Commenting on this definition, we note first that it makes money primarily and essentially a medium of exchange. If money is put to other uses, these are derivative, incidental, growing out of its nature as a medium of exchange or some peculiarity in its substance. It follows from this that money, as money, is wanted, not for its own sake, but only for what it will buy. Money may be made of something which is much desired for other uses, and, be- I cause it can be put to these uses, we may have a desire for it flvf a substance rather than a desire for it as money. All this is substantially true of gold coin in the United States, England, and many other countries. But money as money is desired only because it will buy other things. If it does this, we ask no more of it. It has played its part.

To make an application of this special point, it does not seem proper to include in the definition or general description of money, as some writers have done, the idea that it is a commodity of the ordinary sort, a use-commodity, meaning by this a commodity which can be put to the satisfying of our wants in its own proper person or, at least, in some way more direct than through exchange for other goods. It is conceivable that experience would show that nothing could serve as money in the fullest sense — the standard or principal money of a country — unless it was such a use-commodity ;* but this fact would not belong to a deiinition of money but rather to an account of the principles which regulate the currency of moneys. It is of the very essence of money that people seek it, not to use it directly, but to get other things which they will use directly.

Again it is to be remarked that according to our definition ordinary commodities occasionally employed as media of exchange are not therefore money. Communities insufificiently supplied with money proper often employ as substitutes one or more kinds of goods which are common among the members of the community and for which there is always a fairly good market. Thus tobacco, cattle, corn, powder, bullets, skins, all served this purpose in the American Colonies. But none of these can quite properly be called money. Money is something specially dez'oted to this business of making exchanges. I can use a pocket knife to hold down loose papers ; but this does not make it a paper weight.

Finally, money is something specially designed to serve as the medium of exchange, something manufactured for the purpose. If a community contents itself with gold dust weighed out, or measured out, at each exchange, we can not say that gold dust constitutes the money of that community. We must rather say that the community in question has not yet come to use a true money. That is, only gold coin is money, not gold bullion. This statement,

* Experience surely does not show anything of the sort.

however, must be so far qualified as to admit that a considerable portion of the gold bullion actually present at an)' moment in a country having the gold standard is to be thought of as in effect a part of the country's stock of standard money. The explanation of this is to be found in' the fact that for making international payments gold in the form of bars is preferred to coin ; and, therefore, the institutions which keep the funds from which such payments are made naturally keep at least a portion of those funds in the form of gold bars.

The preceding paragraphs have brought out the characteristics essential to money. We must next remark on the inclusion of the term, the different things to which it can properly be applied. If the student is familiar with the system of the United States, the word money will at once suggest to him various coins of gold, silver, nickel, or copper, and various "bills'' such as greenbacks, bank notes, or silver certificates. He will not usually include under money checks or drafts, though he probably knows that these act in some respects as money.

Now, in interpreting thus broadly the word money, the student will represent the majority of the public and will not be falling into any serious error from the scientific point of view. Presently, indeed, it will be necessary to explain to him that of the various things in our system which we commonly call money one only — gold coin — is in the fullest sense money, real money, that the rest are more accurately described as in some degree representafive moneys, credit moneys. But very likely he has already recognized this fact ; and anyhow there are many connections in which he can safely ignore this distinction and treat as essentially the same — as really money — the things named above. In fact almost every writer on the subject does this, however much he may have emphasized the point that only such money as our gold coin is real money. He may indeed

14 CHAPTERS O

IN iVJ. W 1- take pains to prefix some qualifying adjective when applying the term money to the inferior or representative moneys. Thus he may speak of subsidiary money, token money, paper money, government money, and so on. But in doing this he seems to have recognized these as special varieties under the species money. In this book, therefore, the word money when unqualified will usually have the same extension that is given it in popular usage ; that is, it will include all the things which really circulate — ^pass from hand to hand as • media of exchange without endorsement — although standard money will be recognized as the only one which is money in the fullest sense.

II. MONEY AS A MEDIUM OF EXCHANGE.

The general character of the primary function of money — serving as a medium of exchange — has already been brought out in defining money. But it is desirable to go into the matter a little more fully, to make the analysis of the function more complete. An illustration which shows the precise nature of this function very clearly is furnished by the case of the farmer who comes to town with a load of wood, sells it for five dollars, and then spends the money buying groceries, dry goods, etc. What, now, are the characteristic features of this method of procedure? First, it is plain that the single transaction of barter has given place to two transactions, a sale of one goods and a purchase of another. This, however, does not quite exhaust the matter.

Between the two transactions thus substituted for the one transaction, there is necessarily an intermediate stage, an interval of waiting long or short, which gives the farmer who has sold his wood for money a chance to get himself into relation with the men from whom he is going to buy groceries and dry goods. Further, if money exchange is going to be a really great improvement over barter, this interval of waiting must be capable of indefinite extension ; for the farmer will not necessarily wish to spend the whole proceeds of his wood for groceries and dry goods or anything else on the same day that he sells that wood. It may easily be for hi^ interest to separate sale and purchase by weeks or even months. For example, he will be selling wood every day during the good sleighing of midwinter ; but he will want to do the buying part of the operation all along till summer crops begin to bring in something. It is thus evident that money exchange really breaks up barter into three parts ; viz. ( i ) selling goods for money, (2) keeping the money till other goods are needed, and (3) using the money to buy other goods. It is further evident that in these three stages, as looked at from the standpoint of the man who starts out with goods to sell, money plays three different parts. In the first, its role is that of a thing which can he obtained with any goods whatsoever. In the third, its part is that of a thing which can obtain any goods whatsoever. In the second, its business is to keep — store — this power to obtain other goods.

But just here we need to be a little careful. In trying to realize clearly that acting as a medium of exchange involves three stages, we must not fall into the mistake of supposing that money is to be thought of as a medium of exchange only when, and in so far as, it carries an exchange transaction comipletely through its three stages. Doubtless money has not entirely performed its part as a medivmi of exchange, till the farmer who has sold his wood for money has also used the money to buy shoes or something else. Still, it is performing that part in each stage of the operation. It is serving as a medium of exchange, provided it is doing for anybody any one of the three things which are essential to a complete exchange operation. That is, money is serving as a medium of exchange either (i^ when a man is getting it in exchange for goods, or (2) when a man is keeping it on hand with the intention of using it at the proper time in the purchase of goods, or (3)

when he is actually using it to purchase goods. Or, to change the form of expression, money is a medium of exchange so long as it is being sought after, or being kept, or being used, solely to buy goods, either for its owner or for someone to whom he transfers it as a gift or as a means of settling an obligation. When no longer employed in one of these ways it has ceased to be a medium of exchange, and has ceased to be money.

III. MONEY AS A MEASURE OE VALUE.

We have considered the primary, essential, function of money — serving as the official medium of exchange. We must next comment briefly on a second use which at times certainly seems to be an independent function, though one which is secondary and which does not at all interfere with the employment of money as a medium of exchange. This second function is to serve as a common measure* of value ; i. e. an instrument with which we ascertain, or in which we estimate, the quantities of value possessed by dififerent objects, and the denominations of which we employ in stating those quantities. Of course we are all familiar with the process of mensuration in other cases. We are aware that when any object possesses some property which can vary in degree or amount, we are able to get a quantitative expression of the degree or amount of that property in the given object by comparing it with the degree or amount of that property possessed by some other object which we choose to. employ as a criterion or measure. Thus, suppose I wish to get a new pane of glass to fit a particular sash and so need to measure the length of each side of the sash in order to buy a pane of the correct size. This I do easily

* Some years ago an eminent American economist, General Walker, tried hard to replace the phrase "common measure of value" with the phrase "common denominator of value." Economists generally have rightly refused to follow his lead. See problems 21 and 22 at the close of the chapter.

enough by comparing the sides of the sash with a strip of wood known as a rule, marked off into feet, inches, and fractions of inches, and seeing how many of these feet and inches are needed to make up the full length of the side measured.

The measuring of values with money is in no essential respect different. Exchange value, i. e. the power of any object to command in exchange some other object, is a property* of objects which varies in quantity ; and so can be measured. Further, in order to measure it in the case of any particular object we must compare it with the same power as existing in some other object. Thus, if I am called on to estimate the value of an old-fashioned sofa belonging to an estate and conclude that it is about $60, I have compared my conception of the value of the sofa with the value of one dollar and reached the conclusion that the former is 60 times the latter.

* Not a few writers have aiBrmed that value is a ratio rather than a property. There is an easy and decisive answer. A ratio can never be affirmed of a single object. We can not speak of the ratio of 20 and the^ratio of i ; though we can speak of the ratio between 20 and I. Twenty and one give us not two ratios but only one. Yet value is constantly affirmed of single objects and that by the very writers who call value a ratio. Thus Jevons, who is most responsible for the doctrine in question, after denouncing the usual theory, says : "The more correct and safe expression is, that the value of the ton of iron is equal to the value of the ounce of gold, or that their values are as one to one." Here we have two values with only two things and yet value, the writer claims, is only a ratio. Obviously value is a property of each of the goods, iron and gold, and a ratio comes in only when we try to express the relation of these two values. The mistake arises from supposing that to call anything a property of an object is to affirm it inherent in that object, inseparable from it, and so not relative to, or conditional on, anything else. Perhaps there are such properties. But many properties, certainly, are quite different. A soft iron bar has the property of magnetism because, and while, a current of electricity is passing through the wire coiled about it. So material objects possess the property of value because, and while, they are in certain relations, qualitative and quantitative, to human wants.

Now there is just a little doubt with respect to the propriety of setting up this measuring of value as an independent function of money. For in a sense acting as a common measure of values is merely a necessary incident to acting as a medium of exchange. Whenever, indeed, any object is exchanged for any other object, the exchange value of each is thereby measured. Thus if i pound of butter is exchanged for 3 pounds of sugar, then the value of i pound of butter is, for the exchanging parties, measured as 3 pounds of sugar, while the value of i pound of sugar is measured as 1/3 of a pound of butter. So, when, instead of directly exchanging the butter for the sugar, we first sell the butter for 21 cents and then use the money to buy 3 pounds of sugar, although primarily using money as a medium of exchange, we have necessarily measured the value of I pound of butter as 21 cents, and the value of i pound of sugar as 7 cents.

But, while there is some doubt whether one ought to treat measuring values as anything more than a necessary incident to acting as a medium of exchange, yet it is probably best to resolve this doubt in the affirmative for the reason that in not a few cases money seems to be used as a measure when it is not serving as a medium of exchange. Particularly good, though not very common, illustrations of this sort are furnished by those direct barter transactions which still occur in rural districts. Suppose I am a farmer and winter is coming on when I shall have a little more leisure. I get it into my head that I will cut enough wood off a particular lot to buy me a cutter. How much will it take ? Evidently I want to know the values of both wood and cutters as measured in a common unit, and then it will be easy to tell how many cords of wood will have the same value as a cutter. I therefore inquire how much the value of a cord of wood is when measured in money and find that it is five dollars. In the same way I learn that the value of the cutter as measured in money is thirty dollars.

Of course, then, it will take the quotient of five into thirty, or six, cords of wood to buy the cutter.

Cases just like this of the wood and the cutter are not very common ; but substantially the same needs come to us all very frequently. We need to estimate the exchange value of our own goods, because it is their value which determines what we shall have to buy with. We need to estimate the value of other peoples' goods; because it is the value of those goods which determines how far our money will go. Further we need to estimate the values of things in order to judge their significance to us, — to answer the question whether or not they are really worth getting. Now this property — significance to us — is plainly something much deeper than exchange value and it is probable that we do not usually measure it directly by money. Our immediate measure of the significance of one thing is usually the significance of some other thing which we have formed a habit of setting up as our standard in the particular class of cases. Thus, to judge whether it will pay to go to the Thanksgiving football game, I may compare the satisfaction to be obtained from it with that to be obtained from two Haskell golf balls. If it is a new easy chair, which I am looking at, I may compare its significance with that of a writing desk for my study. • And so in other cases. But plainly, as a prerequisite to making these comparisons and using them as a guide to economic conduct, I must know the relative exchange values of the two things compared. There is no advantage to be gained by settling whether the football game or the two golf balls are more significant to me, unless their exchange values are substantially equal. Thus, being able to measure exchange value makes us able to compare real, personal, values.

From what has been said it will be evident that the use of money to serve as a measure of value does not involve the withdrawal of any particular pieces of money from other uses to perform this function. If we are merely estimating values in terms of money, we are using, not the actual money, but merely the idea of value associated in our minds with money. Even when actual measuring takes place, i. e. when an actual sale shows the actual value of a certain object, the money or its equivalent which does the measuring at the same time serves as the medium of exchange ; and so no special portion of the stock is withdrawn from its regular function to perform this special duty of measuring. The use of money as a measure of value, therefore, interferes in no degree with its employment in its essential office as a medium of exchange.

IV. MONEY AS A STORER AND CARRIER OF VALUE.

In studying money as a medium of exchange and as a measure of value, we have probably covered all the services performed by it which can with strict propriety be called separate functions. But there are two other ways in which rtioney frequently serves us, which it is sometimes convenient, though not scientifically accurate, to treat as independent functions, and which are often so treated. These must now claim our attention.

The first of these quasi-functions of money has its origin in two facts already touched upon ; viz. ( i ) that a necessary stage in the effecting of exchanges through money is the interval of waiting between the sale of goods for money and the use of the money to buy other goods and (2) that this stage can usually be indefinitely prolonged at the will of the owner of the money. As a result of these facts our freedom of choice as to the time when we shall utilize our wealth is indefinitely increased. The products of today are sold today; but through the magic of money they satisfy the wants of next week or next month or next year. If the nature of a man's business causes his income to mass at one season, he does not, after all, have any trouble spreading its consumption over the whole year or even over many years.

The fruit grower does not live in plenty from June till October and then starve the rest of the year. Of course he would not, even under a barter regime; but he would have considerable difficulty avoiding that result. Under a svstem of money exchange the matter gives him no trouble. He sells his fruits at the time when they are ready for the market; while the buying of other gopds with the proceeds he effects whenever he pleases. /

Now, it is hardly necessary to say that, in a case like the above, money is performing is regular function of mediating exchanges ; the only peculiarity being that the goods exchanged are goods belonging to different times. July goods are exchanged for February goods; goods of 1902 for goods of 1903 ; and so on. But, while it is easy to interpret a case of this sort as one wherein money acts as a medium of exchange, it is possible to look at it in another way. The fruit grower's raspberries in their most desirable form would not keep till he wanted to buy some clothes in the winter. He must dispose of them in July or not at all. He may, therefore, think of himself as selling them for money, just because money being indefinitely durable and constant in vcMue will store the value of his berries till he is ready to use it. Of course, he is using money as a medium of exchange, but with an eye to this one special advantage among the many which the use of a medium of exchange gives.

Now this way of irtterpreting the matter, which perhaps seems rather forced as applied to the fruit raiser, has much more point in certain cases which can easily be imagined. Thus, it sometimes happens that people sell things which will keep indefinitely and which they really want and will later buy back with "the very money received from their sale, simply because they consider the money a safer f orrri in which to keep their wealth during the interval. This is especially likely to happen in badly governed countries where property is insecure. But it also happens in well-governed countries, if for any special cause temporary insecurity prevails. On the eve of a great war, bonds and stocks are likely to be treated in this way. So in the midst of a disastrous war even a civilized nation may be in such desperate straits that people anticipate a confiscation of certain kinds of property and hasten to turn them into money as being more easily concealed. In such extreme cases as these, it certainly seems legitimate to say that money acts as a storer of value. But even in the more ordinary cases, so long as the special object in the mind of the seller of goods is to get his wealth into a form which will keep, we may without serious impropriety describe the operation as a storing of value. Only we must not forget that money's storing value is not a work independent of its serving as a medium of exchange, but is merely the artificial prolonging or emphasizing of one of the three necessary stages in its mediating of exchanges.