1. _Money we have defined as a material means of payment and medium of exchange, generally accepted and pa.s.sing from hand to hand._ The origin and function of money were set forth in the study of capital. The subject must now be approached from a different side and with the two-fold purpose of seeing whether there is anything peculiar in the relation of money to the general problem of value, and what is the influence of the action of the state on the value of money. The definition of money implies several ideas. First, the words "generally accepted means of payment" imply that money, as something bearing the stamp of social approval, has a peculiar social character, is not an ordinary good. Second, the definition implies that money itself must be a thing having value, otherwise it could not serve as a medium of exchange. Exchange 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, though this value may be due solely to its possessing the money function. This point is one of the most difficult in the subject. Third, the definition implies that money is a material thing. The telegram when transferring an order for the payment of money, the spoken word, the promise to pay, etc., are not money. Fourth, it implies that money pa.s.ses from hand to hand, is a thing that can be handled, and is or can be bodily transported.

[Sidenote: Difficulty in applying the definition]

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. Even special students differ as to the border-line of the concept, but as to the general nature of money there is essential agreement. In many problems it 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. The use of money is of such social importance, and it touches so many practical interests, that it raises many questions of a political and ethical nature. There are perhaps more popular errors on this than on any other one subject in economics. Yet the general principles of money are as fully understood and as firmly established as any parts of economics.

[Sidenote: Standard, or primary, money]

[Sidenote: Gold-using countries]

2. _The precious metals, gold and silver, are the standard, or primary, moneys in the world to-day._ Primary, typical, standard money is the unit in which the value of the money of a country is expressed, no matter what its form is; the standard is a certain weight and fineness of a particular metal. Coins of this standard are called full, or real, money by some writers who deny the t.i.tle of money to everything else. It has been shown before that there has been an evolution in the use of money. The more efficient forms, gold and silver, have competed with copper, iron, tin, cattle, salt, tobacco. In this contest silver had proved itself a few centuries ago to be the fittest medium of exchange, but in the last century gold has, among the leading nations, been displacing silver rapidly. In a higher degree than any other material, gold has the qualities of a good standard money in rich and industrially developed communities. The gold-using countries to-day are those of the western world. England for perhaps two centuries 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 the year 1855, at which time she shifted from silver under the working of the bimetallic law; and Germany, then more backward industrially, since 1873. Australia and j.a.pan have reached that result only within the last few years, and Italy, Russia, India, Mexico--even China and other Oriental countries--are striving to attain it.

[Sidenote: Subordinate kinds of money]

In all these countries other kinds of money are used side by side with gold and silver. The actual money consists of a wide and confusing variety: silver, nickel, copper, paper in various forms and issued by various authorities. But among all the kinds, either gold or silver is found standing preeminent and in a peculiar position. The difficulties of the money problem must be attacked at the point of standard money where it is nearest to ordinary value problems and is less complicated than when the various money subst.i.tutes are included. Most of the fallacies regarding money have arisen not about standard money, but about paper and light-weight silver.

[Sidenote: Coinage defined]

3. _Coinage is the act of shaping and marking a piece of metal to be used as money so as to indicate its weight and fineness._ The precious metals can and do circulate as money without coinage. Any other mark equally plain and equally recognizable serves for many purposes just as well as the government stamp on the standard metal. The use of metals in antiquity was without coinage, by weight and test of fineness. In backward countries to-day most payments are made by weight.

International payments are made by means of gold ingots that bear the mark of some well-known banking-house, and for that purpose gold bullion is money without the coiner's stamp. But for most uses government coinage has marked advantages. It is far more convenient for the average citizen to handle coins uniform in size and design than the diverse coins that would be put out by private enterprisers.

[Sidenote: Technical features of coinage]

An established rate of fineness insuring uniform quality is a great convenience. In the United States all gold and silver coins are nine tenths fine; in Great Britain, eleven twelfths. The established weight of the gold dollar in the United States is twenty-three and twenty-two hundredths grains of fine gold or twenty-five and eight tenths grains of standard 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. The par of exchange between standard coins of different countries is the expression of the ratio of fine gold in them.

Thus the par of exchange between the American dollar and the English sovereign (the "pound") is four and eighty-six and two third hundredths, that is, four and eighty-six and two third hundredths dollars contain the same amount of gold as an English gold sovereign. The embossed design, milled or lettered edges, and other similar devices are merely to make the coins easily recognizable and difficult to counterfeit.

[Sidenote: Seigniorage defined]

4. _Seigniorage is the right the ruler or state has to charge for coinage, or it is the charge made for coinage._ Coinage as a function of great importance politically as well as economically was early exercised by governments or rulers. The prince, king, or emperor stamped his own device or portrait upon the coin; hence the term seigniorage from seignior (meaning lord or ruler). The right to issue money came to be one of the most essential prerogatives of sovereignty. Coinage is rarely without charge, and often has been a source of revenue to the ruler. In the Middle Ages this right was frequently exercised by princes for their selfish advantage to the injury and unsettling of trade.

[Sidenote: Free or gratuitous coinage]

When no charge is made for coinage, the coinage is said to be gratuitous. Coinage is said to be free if the subject or citizen can 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.

[Sidenote: Money value under free coinage]

5. _Where coinage is free and gratuitous the coin is worth the same as the bullion that is in it._ This evidently and necessarily must be near the truth if the citizens exercise their right. They will not long keep metal uncoined in their possession when it is worth more in the form of money, nor will they long keep money from the melting-pot when it is worth more as bullion. Yet there may be a slight disparity between the bullion and the money values before the metal is converted into coin or the coin melted down into metal. A motive for action must exist before either change will be made; but a thing cannot have considerably different values in two different uses at the same moment.

[Sidenote: Adjustment of supply to value]

There is here no special problem of value. The value of gold as bullion and money is fixed by marginal demand. The several uses of gold are constantly competing for it: its uses for rings, pens, ornaments, championship cups, photography, dentistry, delicate instruments, and as a circulating medium. If the metal becomes worth more in one use, its amount there is increased and correspondingly diminished in the others.

The supply likewise is influenced by changes in price. Gold-mining is one among various industries to which men may apply their labor and capital. Some mines are superior, others average, others marginal which it barely pays to work. There is, therefore, a rise and fall of the margin of production with change in price and change in cost of production. If at a given moment, when it barely pays to work a mine, gold becomes worth less, that mine will go out of use. As gold rises, some mines that did not pay before, come into use. A similar variation has been noted in the case of marginal land, marginal factories, marginal forges, and marginal agents of every kind.

[Sidenote: "What is a dollar?"]

The question was once asked in Parliament, "What is a pound?" and a good question to ask in beginning the study of money is, "What is a dollar?"

The answer, so far as it refers to the standard money, is: a dollar is a convenient name applied to twenty-three and twenty-two hundredths grains of fine gold or twenty-five and eight tenths grains of standard fineness. The exchange value of gold varies in different places and conditions, but the name remains the same. A dollar exchanges for more wheat in Dakota than in New York or for more iron in Pittsburg than in Oregon, yet it is sometimes a.s.serted that the value is always the same because the name is always the same. The fallacy of this may be seen in the equivalent expression that twenty-three and twenty-two hundredths grains of gold have the same value always and under all circ.u.mstances.

The problem of the bullion value of money metal, under gratuitous coinage, presents no special difficulties. The ordinary theory of value applies to it. The difficulties of the money question begin at the point where the money value is seen to diverge from, and depend on, something else than the value of the bullion. Yet in the principles just discussed are found a firm foundation for any further study of the question.

-- II. THE QUANt.i.tY THEORY OF MONEY

[Sidenote: The money use]

1. _The fundamental use that money serves is to apportion incomes of goods so as to make them yield the maximum gratification._ Money first increases utility by increasing the ease with which exchange takes place. Like any tool or agent, it is valued for what it does or helps to do. But further, it enhances the sum of enjoyments by the division of goods into proper quant.i.ties, making them available at the best time. It follows from the principle of diminishing utility that the particular time at which goods are available for wants has an essential bearing on their value. A hundred loaves of bread in the hands of a single individual would mold long before they could be consumed. Money enables men in society to acquire these hundred loaves in a series so that they can be used when most needed. Money is the most successful device man has 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 is merely an extreme case of keeping things for the future when they will have a greater gratifying power.

[Sidenote: Concept of the money demand]

[Sidenote: Variation in the average]

The fact that money is essentially a valuable good kept on hand as the best possible provision against emergencies points to the essential nature of the money demand. Money is sought, in order to form a cash reserve, up to a point where the loss from keeping it balances the probable gain. The money use is subject to the law of diminishing utility; beyond a certain point its added convenience is purchased at too great cost. Every man may be thought of as having an average, or usual, money demand, which is that proportion of his income that gives him more utility retained in money form than if at once expended. A man with an income and expenditure of fifty dollars a month paid monthly has use ordinarily for no more than fifty dollars as his cash reserve. While under ordinary circ.u.mstances this is his maximum demand, various circ.u.mstances may diminish it. If his expenses are distributed in two equal parts (the one on pay-day, the other thirty days later) his average money demand is twenty-five dollars, not fifty dollars. If most of his purchasing is done at the beginning of the month, his average money demand may be perhaps ten dollars. Many a workman purchases on credit, spends his fifty dollars within an hour after he receives it, and goes without money for the rest of the month. The average demand of a community for money required as a reserve is affected by the methods of doing business. With a given method of use a reduction in the supply of money results in loss of time and waste of effort; an increase in the supply results in a lowering of its value relative to other things. In either case the equilibrium of the marginal utilities of income must be restored. The thought of an average, rational, money demand relative to money income is the fundamental requisite for clear thinking on the question of money, but to grasp this thought there is needed a certain power of scientific imagination lacking in some minds.

[Sidenote: The quant.i.ty theory of money]

2. _The quant.i.ty theory of money is that, other things being equal, the value of money falls as its quant.i.ty increases, and vice versa._ This is an abstract statement of a concrete and difficult problem. The phrase "other things being equal" betokens the statement of a tendency where there are several unknown factors. In recent discussion the quant.i.ty theory of money has been questioned by some critics; yet it is held by most economists to be merely the general law of value as applied to money. There are three sets of facts to be brought into relationship with each other in the quant.i.ty theory: (1) amount of business or exchanges to be effected; (2) the methods by which this is done; (3) the amount of money available to do it. According to the quant.i.ty theory we must expect that when conditions (1) and (2) remain fixed, the value of money will vary inversely as its quant.i.ty. This conclusion follows from the conception of the money demand as the value of circulating medium that bears an average proportion to the value of goods exchanged.

[Sidenote: Example of its application]

Let us consider various conditions. When a number of men, by reason of increasing gold supplies, get larger stocks of money than they have had, the former proportion between their money incomes and their money is altered. In reducing their stock of money by buying goods they bid up the prices of goods until the total value of goods exchanged again bears the same ratio as before to the total value of money. Taking an extreme case: if twice as many dollars get into circulation in a community, either some few men must have several times as many dollars as before, while others have the same; or every man will have his due proportion, just twice as much as before. The latter, "other things being equal,"

must be the logical result after equilibrium has been restored. Is any other result thinkable? Now if prices of goods remained the same as before, there would be twice as great a value of money available to effect exchanges. There is no reason why each should tie up twice as large a proportion of his income in a supply of the medium of exchange.

If, however, there is a concerted movement to spend the surplus money, there results a general bidding down of the exchange value of money, a general bidding up of prices of goods. At what point will this movement stop? The rational conclusion must be that "other things being equal"

equilibrium will be reestablished only when the ratio between the value of money and the price of goods becomes the same as before. The money being doubled, prices must be double, and likewise for any other change in quant.i.ty.

[Sidenote: Objections made to the quant.i.ty theory]

3. _The quant.i.ty theory is misunderstood, and is criticized on the ground that the facts oppose it._ If but one kind of metal were used as money, and this were coined of uniform weight and fineness, the problem would be comparatively simple. But in fact gold and silver, full-weight and light-weight coins, circulate side by side. More mysterious still, the money in circulation is partly coin and partly paper. How can the quant.i.ty theory hold in these conditions? Several objections to the quant.i.ty theory are presented. It is said, first, that prices do not vary exactly with the per capita circulation of different countries at a given moment. The per capita circulation in Mexico may be five dollars and in the United States twenty-five dollars, while prices are much less than five times as great here as in Mexico. Secondly, it is said that prices do not vary directly with changes in the amount of money in a given country. There is now perhaps five times as much money per capita in the United States as fifty years ago and yet prices are not five times as high. Thirdly, it is said that credit methods change, and therefore that money does not fix prices. Fourthly, it is said that even if true of primary money the theory fails to apply to actual conditions with many forms of money in circulation side by side. Fifthly, it is said that there are too many unknown quant.i.ties to permit the rule to be used.

[Sidenote: The objections examined]

4. _A reasonable interpretation of the quant.i.ty theory makes it a statement of the effect of a change in a single factor._ The objections to the quant.i.ty theory a.s.sume that it is a statement of what occurs under all conditions, instead of what it is, an index to the working of one condition at a time. The foregoing objections need but to be further a.n.a.lyzed to show that in each of them it is not merely the quant.i.ty of money, but a number of other factors that differ in each of the propositions. We may note briefly in turn the defects in the arguments of the preceding paragraph.

[Sidenote: Not a per capita rule]

First, the quant.i.ty theory does not remotely imply that prices in different countries differ at a given moment according to the per capita money. In the case of the United States and Mexico not only the amount of exchange per capita but the method of exchange, and the rapidity of the circulation of money differ quite as much, doubtless, as does the per capita circulation. The quant.i.ty theory would lead any fairly careful student to a conclusion the exact opposite of that which its critics have twisted from it.

[Sidenote: Recognizes the growth of trade]

Second, the quant.i.ty theory does not imply that during a period of years when a country is changing in a mult.i.tude of ways, as in population, methods of industry, modes of exchange and transportation, and in wealth and income, the prices will vary directly either as the absolute or per capita amount of money does. In the light of the quant.i.ty theory the inquirer must be led to just the opposite of the ridiculous conclusion imputed to it.

[Sidenote: Recognizes use of credit]

Third, the theory does not overlook the effect of an increased use of credit, for it fully implies that any such a change, by economizing the use of money, would enable the same amount of money to support a higher scale of prices.

[Sidenote: Not confined to primary money]

Fourth, the theory does not overlook the variety of forms, and is not true merely of primary money. However great this variety, the money demand of individuals and of communities still represents a pretty definite ratio of the value of exchanges effected. If the primary money alone were doubled in quant.i.ty, while the various forms of subst.i.tute money (smaller coins, bank-notes, government notes, etc.) remained unchanged, the quant.i.ty of money as a whole would not be doubled, and according to the theory, prices would not be expected to double. Indeed, in such a case, the method of exchange would be very greatly altered, and the case is fully covered by the statement of the theory.

[Sidenote: Is a practical rule]