The value of wheat sinks rapidly with increase in supply, and is very unstable. Wheat meets some other tests that fit it for money, as easy divisibility, ease in standardization, and even has some degree of durability, though subject to deterioration and waste with keeping, and involving expense in keeping. Carlile and Ridgeway think that wheat was used to some extent among the Greeks in Southern Italy as money, at one time.[461] But this was possible because there was a regular export trade in wheat--the same thing that made tobacco available as money in Virginia. In general, however, commodities which minister to easily satiable wants are ill-adapted for money. And that is especially true of current stocks of goods currently consumed.

The acc.u.mulation of money, moreover, implies a stage of human development where the acc.u.mulation of _capital_ is possible. It implies foresight, the suppression of present wants in the interest of future wants, and almost always money has been a commodity well suited to serve as provision against future contingencies. Cattle, slaves, knives, fish-hooks, cooking implements, and similar things have been money. The "store of value" function manifests itself early.

But very early a different sort of commodity comes in. Articles of _ornament_ early begin to take the place of articles that minister to more animal wants. It seems strange that articles meeting wants which are commonly counted frivolous and fanciful should distance those obviously necessary in the race for a place as money. It seems strange that the nations now at war should seem more concerned about their gold supplies than about their wheat supplies.[462] But it is none the less a fact that men in all ages have been enormously concerned about ornament.

In warm regions, ornament has commonly preceded clothing. Very early, necklaces, bracelets, rings, earrings, nose-pendants, etc., became objects of exceedingly great desire. And very early, gold and silver were used for such purposes, and men made long expeditions for them and fought wars for them in very early times, before the money economy was developed far. Other ornaments than those made of gold and silver have also become money. Wampum, polished sh.e.l.ls, iron ornaments, etc., have all been money. The Karoks of California were accustomed to use strings of sh.e.l.l ornaments as money. When this was supplanted by American silver, they used strings of silver coins as ornaments, dressing their women lavishly with rows of silver dimes, quarters, and half-dollars!

Ornament and money are freely _inter_changeable in primitive life.

To-day, in the Western world, the thing is more specialized and differentiated, and the interchange of money and ornament is largely confined to jewelers, bankers, especially international bankers, gold brokers, and the mints, _through_ whom the rest of society make the interchange. In India, however, the peasant's h.o.a.rd takes the form of bracelets, bangles, and earrings for his wife and daughters, and the peasant himself seems to regard them in the double light of provision for future needs, and as conferring social distinction. They are both ornament and savings bank, and are superior to a savings bank from the standpoint of effective saving, since the natives would spend what they put in the bank, but only famine can make them dispose of the ornaments of their women.[463] Saving is a practice not easily started. There are powerful motives in human life making for prodigality. Social prestige comes to the man whose hospitality is lavish. Social expectation, which is the most powerful steady motive power in human life, makes powerfully for prodigality. Thrift is a virtue little esteemed among primitive men, and none too highly esteemed among the ma.s.ses in most countries. The grudging person, the tightwad, the man who fails to do his share of the treating, the woman who entertains her guests with inadequate fare--none of these enjoy high social esteem. To offset this, a motive equally powerful must manifest itself. It would be considered mean and contemptible for the Hindu to put money away instead of spending it on feasts at marriages and funerals, and in hospitality on other festive occasions. But he gains, instead of losing, in social esteem and prestige, if he decorates his women with gold and silver. Later, the advantage of such a practice as a matter of provision against future wants would get into men's minds, and would become an added incentive to maintain and increase the practice. Thus the frivolous and fanciful side of men's nature furnishes a powerful lever for the development of both money and capital. In the store of value function we find one of the earliest and most significant functions of money. Carlile offers a wealth of evidence to show this interchangeability of money and ornament among many peoples, at different stages of culture.

Three powerful elements of human nature work together in sustaining the value of the metals which become widely used as ornament:

(1) love of approbation;

(2) the s.e.x impulse;

(3) the spirit of rivalry, or compet.i.tion.

In these three we have, perhaps, the firmest basis which it is possible to construct for the value of anything! When religion is added, as has often been the case with the precious metals, the basis becomes solid indeed! Modern social psychology has increasingly made clear the power of the first. Social expectation can take the raw stuff of human nature, and mold it into almost any form it pleases. Original, hereditary differences remain. Some raw stuff is so inferior that no high social organization can be built out of it. Some stuff cannot respond very effectively to the social stimuli. But _qualitatively_, the tendency is for men to become what society expects. Individuals succeed more or less in meeting social expectation. But the very elements of individual aspiration and ambition, the very self of the individual, are molded to the social pattern, and, with the same racial stock, vary almost indefinitely from time to time and from place to place, with the _mores_. If ornament confers distinction,--and almost everywhere it does--men will seek to possess ornaments.

Commonly it is for the sake of the other s.e.x that men seek ornaments.

Ornaments are an aid in wooing! Men gain wives by being able to give them ornaments.--Not that this is the whole story!--And social expectation, almost everywhere, requires that men decorate the wives that they have won. Wives usually reinforce social expectation in this matter.

Further, the desire for ornament is compet.i.tive. One's women must be _better_ ornamented than the women of one's neighbors, if _distinction_ is to be gained thereby. But this sets a faster pace for the neighbors, and the standard of social expectation is raised as to the necessary amount of ornament. It is the same sort of compet.i.tion that arises among armed nations. A new battle-ship for one requires that all increase their naval strength. New armies in Germany call for new armies in France. A vicious circle is created. The desire for ornament, unlike the desire for food, becomes insatiable. And hence, the value-curve for the metal used as ornament sinks very slowly, being reduced, not by satiation of want, but by limitation of economic resources. I need not elaborate these notions further. They are of the same sort that Veblen has developed in his _Theory of the Leisure Cla.s.s_. They rest on fundamentals in human nature, however much they differ from the psychology of the "economic man." They give a.s.surance, I think, that, unless radical change in tastes and fashions come in, which displace gold and silver from their position as ornaments and as means of display, we may expect the value of gold to maintain itself at a high level regardless of great increase in quant.i.ty. I do not share the view which Carlile himself seems, at times, to express[464] that gold does not sink in value with the increase in quant.i.ty. It seems to me easily demonstrable that it has sunk, and does sink. But I should expect the value of gold to survive the shock that might come if gold were entirely displaced from monetary use vastly better than any commodity which serves wants of a different character could stand a similar shock. The demonetization of silver has, of course, not entirely displaced silver from the monetary employment. It has, however, made it necessary for the arts to absorb a greatly increased proportion of the new silver,[465]

and not a little of the old silver. The demonetization of silver, moreover, was accompanied and followed by a great increase in silver production. But silver has stood the shock amazingly well.[466]

It is, of course, thinkable that the att.i.tude of mankind, under new social conditions, and with new tastes and fashions, may change, with reference to gold and silver. Love of approbation and distinction, the s.e.x impulse, and the spirit of rivalry, are eternal elements in human nature. But their manifestations may change. There have been times when love of distinction gratified itself in poverty and filth and asceticism. Almost anything may be exalted into a social ideal. Society may even reach ideals of such a sort that a man may gain social approval and the love of woman in high compet.i.tion with his fellows in the service of mankind! But even here gold and silver may have a place. They are beautiful, as we now see beauty, and beauty itself is good! The world is better if it has beauty in it.

It is just as well to conclude at this point what I shall have to say regarding the value of gold as a commodity.[467] The same quant.i.ty of gold and silver may have widely varying values, depending on the distribution of wealth and power. It is not alone intensity of individual desire that controls values, but also the social weight of those who manifest the desire. And this depends on the legal and other inst.i.tutional values concerned with social organization. The point is strikingly ill.u.s.trated by Walker's[468] account--designed for another purpose--of the effect on the values of gold and silver of the conquests of the great Eastern empires by Alexander the Great and the Romans. The production of gold and silver, for the great Eastern empires, was like the rearing of the pyramids in Egypt. All power was centered in the hands of a few despots. Control of vast ma.s.ses of laborers was in their hands. The social values--it is difficult to cla.s.sify them as legal, economic and religious, since all three are blended--gave little weight indeed to the desires of the ma.s.ses, and tremendous weight to the slightest whims of the despot. Thus, since the love of gold and silver was intense in these despots, and since religious considerations also called for the acc.u.mulation of great treasuries of gold and silver, enormous numbers of laborers, living miserably, toiled in the mines to produce them, and amazing stores of gold and silver were acc.u.mulated.

The precious metals had, in these Eastern empires, a high value per unit, since so large a portion of the social energy of motivation attached itself to them. With the conquests by Greeks and Romans, however, a great change came. The old, gold-loving despots lost their power. The conquerors had vastly less love for gold and silver for their own sake. Moreover, the leaders among the conquerors had very much less power in their own social systems than had the oriental despots. Their soldiers were in considerable degree free mercenaries, who had a right to a share in the spoils, and who cared much less for h.o.a.rds of precious metals than for many other things. In the new regime, the social centre of gravity was changed. There remained few who loved great stores of precious metals who had power enough to acc.u.mulate them. Mining on the old basis was impossible. Though slavery persisted, more and more of the labor of slaves went into the production of things that the ma.s.ses of men could consume. Gold and silver sank enormously in value.

Radical readjustments in the distribution of wealth in our own day, might well make substantial changes in the value of gold, without any change in its quant.i.ty. That a more equal distribution of wealth and power, however, would lower the value of gold now, as in the case just discussed, is not so clear. The ma.s.ses in the Western countries are already fed and clothed, as a rule, even in times of adversity, and usually increasing income for them means increasing expenditure to satisfy less pressing wants, and particularly to satisfy wants connected with social esteem. The laborer's wife gets an expensive cab for her baby when she can afford it. The negroes have gold fillings put in their front teeth--sometimes when the teeth are sound! The practice of giving wedding rings, and even engagement rings, is spreading among the poor.

Our American rural poor, of pioneer stock, have had less concern for gold and silver ornament than the ma.s.ses of the Asiatics and recent European immigrants. But among the rural poor in America, as city standards spread, the tendency to use gold and silver ornaments seems to be increasing, while we may with considerable confidence expect, I think, that the rise of the immigrant to better economic conditions will mean a larger use of gold and silver on his part. Gold leaf on ceilings and radiators would cease, doubtless, except for public buildings, if great fortunes disappeared, and the use of gold, at least, for plate, would be impossible in an economic democracy.[469] Silver might well gain in value at the expense of gold if there were radical changes in the distribution of wealth. It is notorious that prosperity among the agricultural ma.s.ses of India is promptly followed by absorption of gold in that country. I venture no concrete conclusions on this point, beyond the general conclusion that a redistribution of wealth, with no change in the quant.i.ty of gold, might well be expected to alter the value of gold.

It may be added that the general impoverishment of Europe, growing out of the present World War, will probably lower the marginal value of gold in the arts (and hence as money) in considerable degree. From this cause alone, to say nothing of causes growing out of the money-employment of gold, and growing out of the values of goods other than gold, we might expect higher prices after the War than before the War, for articles of consumption.[470]

CHAPTER XXII

THE FUNCTIONS OF MONEY AND THE VALUE OF MONEY

In preceding chapters, I have spoken of the "money-service" as a source of additional value of money, under certain conditions. Before money can function as money at all, it must have value from some non-monetary source.[471] But, given this prior value, money performs valuable services. These valuable services, in certain cases, add to the value of money. Moreover, the fact that money, when made of a metal used in the arts, lessens the amount available for use in the arts, raises the marginal value of that metal there, and consequently raises its value in monetary form as well. It is now necessary to a.n.a.lyze the money-service, and to see in precisely what ways it does affect the value of money. And first, we must notice that the money-service is not simple, but compound; that in fact there are several services of money, in many ways distinct from one another; that not all money can perform all of these services; that most of them may be performed by things other than money, that these services are not all equally important as sources of the value of money, and that the same service varies, from time to time and from place to place, in its significance from this angle; and finally, that one of these services which is of the greatest social importance, namely, the "common measure of values" function, does not add to the value of money at all.

I shall not now undertake a history of theories of the functions of money. Many of the points which follow are common property of many writers.[472] The nature of some functions has been more clearly explained than that of others. I have not found in the literature of the subject any very clear statements, moreover, as to the relations of different functions to the value of money. I shall try in what follows, by a series of hypothetical cases, to isolate each function of money, as far as may be, and shall try, by varying my hypotheses, to indicate variations in the influence of the different functions on the value of money.

The functions of money have been variously described and named. The following list seems most satisfactory to me:

1. Common measure of values (standard of value).

2. Medium of exchange.

3. Legal tender for debts (_Zahlungs-_ or _Solutions-mittel_).

4. Standard of deferred payments.

5. Reserve for credit instruments, including reserve for government paper money.

6. Store of value.

7. Bearer of options.

The common measure of value function rests in the intellectual needs of man. It grows out of the necessity for calculation, for bookkeeping, for understanding what is going on. Any object of value may be used to measure the value of anything else, just as any object of weight--say an irregular ma.s.s of iron--may be put in the balance against some other object, and the relation between the absolute weights of the two objects thus more or less definitely ascertained.[473] But it helps little, in getting at the aggregate weight of a collection of objects, to know that A among them is heavier than B, while D is lighter than F. To get a knowledge of the situation adequate for quant.i.tative manipulation, it is best to compare all of the objects with some _one_ object, chosen as the standard of weight, or common measure of weights. Thought is thus immensely simplified. If we may imagine the calculations of a dealer in a rural region, where no common measure of values is used, it will help to make clear the nature of this function. Let us suppose that he deals in nails, wire, cotton cloth, eggs, b.u.t.ter, hams, sugar, and moonshine whiskey, and that his customers also make and use most of these things, using him as a central clearing house in their rude division of labor.

Without a common measure of values, it is necessary for him to keep in mind the price of every commodity in terms of every other commodity. If there are twelve commodities, this means 66 ratios which he must remember, according to the formula for permutations and combinations. In general, in such a situation, there would be the following ratios: (n - 1) + (n - 2) + (n - 3) + ... (n - (n - 1)). Let him choose, however, one of his commodities, say eggs, as the common measure of values, and he needs to bear in mind only eleven prices, namely, the prices of each of the other eleven articles in eggs. Thinking is immensely simplified. In general, with a common measure of values, dealers need bear in mind only (n - 1) prices. Suppose that at the end of the day, after considerable trading, our dealer finds the following changes in his stock:

_He has gained_ _He has lost_ 8 doz. eggs 12 lbs. nails 3 gallons whiskey 8 lbs. wire 4 hams 13 lbs. b.u.t.ter 5 yards cloth 10 lbs. sugar

Has his trading been profitable? How can he tell? Reduce all the items in both columns to their equivalents in eggs, however, and the answer is very easy. No complicated business is possible without this common measure, and common language, of values.

Be it noted that this common measure of values does not necessarily involve the use of a medium of exchange. The practice of _thinking_ in a common measure is what is involved. If the article chosen be eggs, which all are accustomed to use, the service of a common measure might easily be performed without the practice of indirect exchange, a.s.suming that other physical difficulties of barter to which I shall shortly refer, were absent. Indeed, as I have pointed out in the chapter on "Barter" in Part II, a great deal of barter goes on in modern life, made very much easier by the fact that we have a common language of values, a common measure of values. For the easy working of the system, it is important that the common measure of value be an article with whose value the group is well acquainted. The frequent testing of this value in actual exchanges vastly facilitates this. But actual exchange is not necessary for the performance of the measure of value function. We have cases where the measure of values and the medium of exchange are different.

Thus, in the Homeric poems, we find indications that cattle served as a measure of values, even though payments were made in gold. The Virginians commonly _thought_ in pounds, shillings and pence, even when using tobacco as a medium of exchange. The need for a common measure of values would manifest itself in any complex socialistic society, even though exchange were largely dispensed with. No systematic plans for utilizing the resources of such a society would be possible, no bookkeeping would be possible, without some such device.

For this function, I prefer the term, "common measure of values," to the term often used instead, "standard of values." The latter term, as used in connection with the expression "standard money," sometimes carries the connotation of "money of ultimate redemption," and its main function is thought of as serving in reserves. The reserve function is a separate function, however. It is common to have money made of the standard metal in reserves. But this need not be the case. I would refer once more to the hypothetical ill.u.s.tration developed in the chapter on "Dodo-Bones": gold, not coined, as the "standard of value"; paper as the medium of exchange; silver bullion, at the market ratio with gold, as the reserve for redemption of the paper. This may suggest that a distinction may properly be drawn between measure of values, and ultimate standard money. The paper money, in this case, would be the thing of which the ma.s.ses would ordinarily _think_, so long as the system worked smoothly.

And the paper could serve as a measure of values. The case is not unlike the case where a "standard yard," or "standard pound" is kept for ultimate reference in a government bureau, while yardsticks or pound weights in the shops and warehouses do the actual measuring. The cases do not, indeed, run on all fours. The measurement of weights and lengths involves physical manipulation; the measurement of values is an intellectual operation, made by comparing two objects of value. The comparison may be made in actual exchanges; it may be made by an accountant's estimate; it may be made by comparing the results of several exchanges, in sorites form, only one of which involves the ultimate standard measure. The yardsticks actually used may vary more or less, by accident or design, by variations of temperature, etc., from the standard yard. The paper dollars, under a smooth working of the system described, would be held closely to the ultimate standard, and would, in any case, not vary as compared with one another at the same time and place.

When the medium of exchange diverges in value from the ultimate standard, as in the case of the American Greenbacks during the period from 1862 to 1879, we have, sometimes, shifting relations among the functions. The Greenbacks were the measure of value most commonly in use. They were legal tender for debts, except where gold was specified in the contract. They were commonly the standard of deferred payments.

To a considerable extent, however, gold was used in reserves, and even as a medium of exchange. People _thought_ in both standards. And finally, gold remained an ultimate standard to which the Greenbacks were referred, and by which variations in their value were measured. The terms, "primary standard" (gold) and "secondary standard" (Greenbacks), have been employed to aid in straightening out this confusion.[474] I think, on the whole, that the term, "common measure of values" describes the function which I wish to emphasize more clearly than the term, standard of values, and I shall, in general, employ it for that purpose.[475]

The medium of exchange function grows out of the physical difficulties of barter, rather than out of intellectual needs. The discussion in the preceding chapter of the origin of money has emphasized the nature of the difficulties which a medium of exchange meets. A has an ox, which he wishes to trade for shoes, sugar, and a coat. Neither shoe-maker, tailor nor grocer cares to take the ox, however, and, besides, no one of them could supply A with all three of the things he wishes to get. Moreover, even if A should meet a man who had all three things, he would not care to give up the ox for them, since the ox is worth more than all three.

If there be a medium of exchange, however, A may sell his ox to the butcher, and take his pay in that medium, which will be something easily and minutely divisible, buy coat and sugar and shoes, and take the surplus of his medium of exchange home, waiting for another occasion.

The medium of exchange function overcomes the difficulties arising from low saleability of many goods, due to limited number of possible buyers, lack of divisibility, etc., etc.

The common measure of values aids greatly in determining the prices, the terms, at which exchanges may be made; the medium of exchange makes possible exchanges which could not be made at all in its absence.

The measure of value function does not add to the value of money. The medium of exchange function is commonly a cause of additional value for money. The source of this extra value is the gains that come from exchange.

Exchange is an essential part of the productive process, where you have division of labor with private ownership of the instruments of production, and private enterprise. Values[476] may be created by changing the forms, the time, the place, or the ownership of goods. All these operations are necessary in an economic system like our own. Those who possess money are in a position to take toll, in values, from those who wish to get rid of the goods which they have produced, and to get hold of the goods which they wish to consume. The holders of money do this by means of the money, and under the laws of economic imputation, these gains are attributed to the money itself, first in the form of a rental value, and sometimes, under conditions later to be discussed, as increments to capital value.

Before giving full discussion to this topic, it will be well to consider certain other functions, which are, or may be, sources of value for money.

The reserve for credit instruments function cannot be fully discussed till we take up credit. Provisionally, it may be said that it is a source of absolute value for money, _per se_, even though the effect on prices may be that, owing to a rise in the values of goods, the prices rise. The fact of credit may even tend to lessen the absolute value of money itself, by lessening the value that comes to money from the medium of exchange function. On the other hand, credit increases exchanges, making possible a vast ma.s.s of transactions which without it would not occur at all. Of course, in our hypothetical case above, where the reserve for credit instruments is silver bullion, the reserve for credit instruments function does not add to the value of money at all.

The "bearer of options" function of money is also a source of value for money. It is a valuable service. The man who holds money, waiting his chance in a fluctuating market, antic.i.p.ates a gain which justifies him in holding his capital without return upon it. Money is not alone in performing this service. High grade bonds also perform it. They bear a lower yield per annum to compensate. The service of bearing options is itself a part of the yield, and is itself capitalized, in their case.

Two 5% bonds, each equally secure, but one of which has a wide market, while the other has a restricted market, will have a very unequal value.

This "bearer of options" function is often identified with the "store of value" function. The two are properly distinguished. If a man has in mind a definite contingency, at a definite future time, for which he wishes to hold a store of value, he may well find that a high yield bond, or a loan upon real estate, or many other productive investments, will serve him better than money or bonds with wide market. So far as money is concerned, the "bearer of options" function is much more important than the "store of value" function to-day. The reserve of value in liquid form, for undated emergencies (like the War Chest at Spandau, or the big reserve acc.u.mulated between 1900 and 1913 by the _Banque de France_), would, from the point of view of this distinction, come under the "bearer of option" function, rather than the "store of value" function. The important thing about the distinction is that for one purpose a high degree of saleability in the thing chosen is necessary, while in the other, such is not the case. The most common case of the "bearer of options" function arises when men hold money, liquid securities of low yield and stable value, short loans, call loans, or bank-deposits, waiting for special opportunities in the market.

The medium of exchange function would exist in a society where business goes always in accustomed grooves, where uncertainty is banished, and where most of the a.s.sumptions of static economic theory are realized.

If we push static a.s.sumptions to the limit, and a.s.sume "friction" of all sort gone, a.s.sume that all goods can flow without trouble or expense to the places and persons where their values are highest, etc., even the medium of exchange function would disappear. But if we make our static a.s.sumptions a bit more realistic, leaving the "friction" of barter, but banishing the need for readjustment, and the uncertainties that grow out of dynamic changes (whether caused by growth of population, or changes in laws and morals, or in fashions and tastes, or in technical methods, or by accidents of various kinds), then the medium of exchange function will still remain. Given dynamic changes, we have need for a vast deal more of readjustment, and a vast deal more of speculation. I have shown in the chapter on "The Volume of Money and the Volume of Trade" that the great bulk of trading in the United States to-day is speculation, which increases or decreases with the amount of dynamic change, with its accompanying uncertainty and need for readjustment. The major part of the medium of exchange function arises from this. The whole of it arises from factors which purest static theory is accustomed to abstract from.