  Section CXVI. Instrument Of Exchange. Measure Of Value. Barter. Wherever the division of labor is very highly developed, the continuance of barter, or the direct exchange of one object of consumption for another, presents difficulties well nigh insurmountable. How difficult it would be always to find the person who could supply us with precisely what we wanted, and at the same time have need of what we had a surplus of.687 But how much less frequently would it happen that one's [pg 341] want and another's surplus would correspond exactly the one to the other in quantity; that, for instance, the manufacturer of nails, desirous of exchanging his nails for a cow, should meet a cattle-dealer who should want exactly as many nails as a cow is worth! Here there is one chief difficulty in the way, viz.: that there are so many commodities which cannot be divided without causing a diminution or even a destruction of their value; and that others cannot be stored away in any quantity without becoming a very heavy burthen to their owner. How useful it would therefore be, if there was one commodity which should be acceptable to every person, at all times, especially if in addition to this, it possessed the qualities of durability, capacity for transportation and for being stored up and preserved. Any person who possessed a proper supply of this one commodity would then be certain of being able to obtain all other exchangeable commodities through its instrumentality; and every seller would be satisfied to exchange what he had to dispose of against this “universal commodity.” If two values are equal to a third, they are equal to each other. It is, therefore, a simple matter to use this most current of all commodities, with which all others are most frequently compared, as a measure of the relative values of all other exchangeable commodities. There is need of such a measure, and it is analogous to the want experienced by the mathematician who has a column of fractions to sum up, and who does it by first reducing them all to a common denominator. (Storch.)688 A person entrusted with the duty of assessing [pg 342] the values of two hundred different articles would be obliged, if he had no such measure to use, to burthen his memory with at least 19,900689 different ratios. With it, he need carry only 199 in his head. Such a commodity, universally in favor, and which, on that account, is employed as an intermediary in the effecting of exchanges of the most varied nature, in the measuring of all exchange-values and as a value-carrier (WerthtrÄger) in time690691 and space, we call money. (Merce universale: Berri; produit prÉfÉrÉ: Ganilh; marchandise intermÉdiare; Bastiat.)692 [pg 343] The more enlightened portions of every business community gradually come to require payment in the commodity [pg 344] which has for the time being the greatest circulating capacity. If to this be added the sanction of the government, and if the [pg 345] government itself recognizes this same “universal commodity” as the means of payment of all debts, or as “legal tender” [pg 346] (puissance libÉratoire), where no other is expressly agreed upon, the “universal commodity” in question then becomes money in the fullest sense of the idea conveyed by the word.693 [pg 347] Section CXVII. Effect Of The Introduction Of Money. By the introduction of money, most exchanges are divided into two halves: purchase and sale.694 We may also say with SchlÖzer, that by its means, exchange, for the first time, becomes a sale, and obscure value in exchange, clear and definite price. (Permatio vicina emtioni). Were there no money, the party to an exchange, occupying the most advantageous economic position, would possess a much greater superiority over the other than he does now. Many a bread-buyer, especially, would be half starved before he could agree with the seller on the quantity of bread to be received in exchange for the commodity he had to dispose of. The producer of the means of subsistence would here possess an extreme advantage, since the urgent necessity of the exchange for the one party, and the power of the other to postpone it, would make the determination of the price an entirely arbitrary matter.695 Hence, the development of money as the instrument of trade, keeps pace with the development of individual liberty. Payment of wages in money makes the workman more responsible for his husbandry etc., but at the same time, freer, than payment in produce. Now, also, a higher division of labor becomes possible; for the easier it is to obtain everything else for money, the easier it is for each person to devote himself exclusively to one branch of business.696 Without money, too, only ready [pg 348] commodities could be exchanged one against another. Only when money has become the instrument of trade, is it possible to separate the net from the gross returns, and, therefore, to manage income properly. (SchÄffle). Now, also, it becomes for the first time really remunerative to produce more than one needs for his own use, and to save. Without money, the owner of any one kind of capital, who could not employ it himself, would be obliged, if he desired to loan it, to find not only a person who was in need of capital, but one who needed the very kind of capital he had. For instance, the person who had one horse too many, would be obliged to look for another who was in need of one etc. And how difficult a task it would be to determine the amount of interest, if it had to be paid in produce or kind, and even to make a return in produce or kind of capital which had been presumably used. (Storch). Moveable property or resources can attain importance only after the introduction of good money, since, previous to such introduction, it was by reason of its great variety,697 and of its perishable nature, immensely inferior to landed property. Hence it is, that money, in a nation's economy, is what the blood is in the life of the animal. It is, so to speak, the common reservoir in which all food is first dissolved, and by which, at a later stage, the elements of nutrition and preservation are distributed to the several organs.698 There is, indeed, no machine which has [pg 349] saved as much labor as money. (Lauderdale). It is true that the shadows which wealth is wont to cast, extravagance, avarice and inequality of every kind, may readily grow longer and darker in consequence of the introduction of money.699 But may not the knife which, in the hands of the surgeon, does so much for life, become an instrument of danger in the hands of a child? The invention of money has been rightly compared to the invention of writing with letters.700 We may, however, call the introduction of money as the universal medium of exchange (money-economy),701 in which goods intended for use are exchanged against money702—instead of barter (barter economy), which is a system of public economy (SchÄffle), in an, as yet, very little developed form, man being there less sociable [pg 350] with his fellow men—one of the greatest and most beneficent advances ever made by the race.703 [pg 351] Section CXVIII. The Different Kinds Of Money. Very different kinds of commodities have, according to circumstances, been used as money; but uniformly only such as possess a universally recognized economic value.704 On the whole, people in a low stage of civilization are wont to employ, mainly, only ordinary commodities, such as are calculated to satisfy a vulgar and urgent want, as an instrument of exchange. As they advance in civilization, they, at each step, choose a more and more costly object, for this purpose,705 and one which ministers to the more elevated wants. [pg 352] A. Races of hunters, at least in non-tropical countries, usually use skins as money; that is the almost exclusive product of their labor, one which can be preserved for a long period of time, which constitutes their principal article of clothing and their principal export in the more highly developed regions.706 B. Nomadic races and the lower agricultural races,707 pass, by a natural gradation, to the use of cattle as money; which supposes rich pasturages at the disposal of all. If it were otherwise, there would be a great many to whom payments [pg 353] of this kind had been made, who would not know what to do with the cattle given them, on account of the charges for their maintenance.708 [pg 354] Section CXIX. The Metals As Money. C. That metals were used for the purpose of money much later than the commodities above mentioned, and the precious metals in turn later than the non-precious metals, cannot by any means be shown to be universally true. Rather is gold in some countries to be obtained by the exercise of so little skill, and both gold and silver satisfy a want709 so live and general, and one so early felt, that they are to be met with as an instrument of exchange in very early times.710 In the case of isolated races, much depends on the nature of the metals with which the geologic constitution of the country has furnished them.711 In general, however, the above law is found to prevail here. The higher the development of a people becomes, [pg 355] the more frequent is the occurrence of large payments; and to effect these, the more costly a metal is, the better, of course, it is adapted to effect such payments. Besides, only rich nations are able to possess the costly metals in a quantity absolutely great.712 Among the Jews, gold as money, dates only from the time of David.713 King Pheidon, of Argos, it is said, introduced silver money into Greece, about the middle of the eighth century before Christ. Gold came into use at a much later period.714 The Romans struck silver money, for the first time, in 209 before Christ, and, in 207, the first gold coins.715 Among modern nations, Venice (1285) and Florence seem to have been the first to have coined gold in any quantity.716 Henry III. of England (ob. 1272), was the first to coin gold, but with so little success, that for a long time after, Edward III. (ob. 1377) was regarded as the first English monarch who had coined gold.717 How little a barbarous people are in a condition to make use of very costly material as money, is [pg 356] proved by the account which Tacitus gives of the ancient Germans, who preferred silver to gold in trade.718 England presents us with an instance of the other extreme. Since 1816, silver, in that country, has been used only as a species of change, and the circulation of gold governs in almost all commercial transactions.719 D. The local usage of some countries has raised many other commodities to the dignity of instruments of exchange, especially where the population are poor and the metals which might be used as money have not existed in sufficient quantities or in the requisite proportion. But people have always limited themselves in the material of their money to such commodities as are universally acceptable, as uniform as may be, and current as articles of export or import.720 [pg 357] Section CXX. Money—The Precious Metals. That the precious metals are uniformly preferred in highly [pg 358] cultivated nations721 as the instrument of exchange, depends on the greatness and uniformity of their value in exchange, but especially on their durability and pliancy as to form. This value in exchange is great, because their beauty, which consists in their luster and their sonorous ring,722 gives them great value in use; and because, at the same time, their rarity in nature makes the supply of them relatively small,723 and not susceptible of increase at pleasure.724 As they contain so large [pg 359] a value in so small a volume, they are adapted to transportation from one place to another, with but little difficulty—a matter of the greatest importance in an instrument of exchange.725 Hence, it is much easier to keep the demand for them and the supply of them at a level all over the world, than it is the demand and supply of most other commodities. And this all the more as there are not different kinds of gold and silver, but only different qualities of their fineness.726 It also contributes to the uniformity of their value in exchange, that they minister mainly only to wants of luxury. The most indispensable commodities are subject to the greatest variations [pg 360] in price (see § 103), whereas, in the case of the precious metals, the diversity of uses to which they may be turned contributes greatly to render their value, as instruments of exchange, more equable. If the supply of them be small, gold and silver vessels are less in demand; a part of the old ones are melted down, and vice versa. In durability, the precious metals surpass almost all other commodities. They are not at all affected by air or water, and they can be corroded only by very few fluids. Fire may, indeed, change their form, but scarcely in any degree the value of the material of gold, and that of silver very little, and then only when it is subjected to a very powerful blast or draught of air.727728 Hence, while by laying them by, they suffer virtually nothing at all (a most valuable article is an article to deposit savings in), their wear and tear from use may be very much decreased by an admixture with other metals in the proper proportion.729 This durability contributes largely to keep the price of the precious metals more uniform. By the time that the wheat crop is rightly harvested, the great bulk of the previously stored wheat is, as a rule, consumed; and, therefore, the supply of wheat depends almost entirely on [pg 361] the yield of the last crop. On the other hand, it is probable that there is many a piece of money, the raw material of which was dug from Thracian gold mines in the time of King Philip or from the silver mines of Spain during the reign of Hannibal, in circulation to-day. Compared with the immeasurable stores of gold and silver which have gone on accumulating for thousands of years, the new yield of them, in any one year, is lost like a drop in a bucket. Hence, only when the yield of the mines has continued for a very long time, or when it is exceedingly great or remarkably small, can the price of their products change to any great extent.730 Even during the revolution in prices, between 1492 and 1560, the yearly decline in their prices was only one-half of one per cent. per annum. Their great pliability of form has, too, very important advantages for our purpose: first, that they can be divided very accurately into very small parts, and that the volume of every part corresponds exactly to the value of the part;731 and secondly, that they take an impression at very little cost, an impression which is an authoritative and trustworthy expression of their weight and quality, thus saving the commercial public the perilous trouble of weighing and testing them every time they are used.732733734 This duty the state, as a rule, assumes. [pg 362] (Coinage.) When its authority, however, is not recognized, as is generally the case in international trade, gold and silver bars are even now used, and have, therefore, to be weighed and tested.735736 [pg 363] Section CXXI. Value In Use And Value In Exchange Of Money. The original value in use of the precious metals, to satisfy certain wants of luxury in the most aesthetic and the most substantial manner, continues still; but with the advance of civilization, the employment of gold and silver for this purpose has fallen farther and farther behind the more recent employment of these metals as the best material for money. And since now the services rendered by money may be divided into two classes: storing up or preservation, and the transmission (division, concentration) of values,737 the former always plays a greater part in the earlier states of the development of trade by money; and the latter plays the larger part in the later stages of the same development. We may best compare money to the other machines or instruments of commerce.738 The person who, in times when there is a dearth of goods, and especially of capital, complains of a want of money, commits the same error as if he ascribed a scarcity or absence of grain, when it exists, to a too small number of wagons to carry it, or to the narrowness of country highways. The inference may, indeed, be sometimes well-founded, but certainly only by way of exception; and yet it is generally the first which politico-economical [pg 364] quacks think of in practice.739 Like all tools or instruments, money constitutes a part of an individual's or a nation's, or of the world's capital. Considered from the point of view of private business or economy, money is circulating capital, but from the point of view of the world's economy, it is fixed capital.740 [pg 365] Section CXXII. Value In Exchange Of Money. The value in exchange of money is said to be high when all other commodities estimated in money are cheap; and low in the opposite case. We have here to do with the application of the most general of all laws of price; therefore, with the demand and supply of money. The demand for it depends on the wants and the means of payment of its purchasers. Therefore, if a country has little trade, it will, on this account, need only few instruments of trade, that is, of little money to effect exchanges. If it be poor in other goods, it will get little money in exchange. In the former respect, there is a beneficent principle of equalization or compensation which decreases the price-variations of money, no matter of what kind, in the necessity, when the number of business transactions remains the same and money becomes cheaper, to use more of it, and less when it becomes dearer.741 The supply of money is, in the long run, dependent chiefly on the cost of production. But since the cost of production in different mines is very different, the value in exchange of the precious metals is determined by the cost of producing them from the poorest mines which must be worked in order to supply the aggregate want of them. (See § 110.)742 The more unfavorable the conditions [pg 366] of their production are, the greater is the quantity of commodities which must be given for a pound of gold, silver etc.; that producers may not be deterred from the prosecution of their work. The extremes of the value in exchange of money are dependent on the use for which it is intended. That value cannot rise higher than to the point at which single pieces of money become inconvenient on account of their smallness, nor sink lower than the point at which a similar inconvenience is produced by their too great size. In both instances, it would become necessary to have recourse to other instruments of exchange. Section CXXIII. The Quantity Of Money A Nation Needs. How great the amount of money needed in the entire economy of any state is, cannot be always rightly determined, either by the amount of the national resources, or by the number of the population.743 It is a very easy thing to refute the opinion, that the aggregate amount of cash money in a [pg 367] country constitutes an equivalent of the aggregate amount of all other commodities to be found there at any time, in such a way that the two pans of this great scales (Locke) hang always in a state of equilibrium, and that an increase of the amount of money, the amount of all other commodities remaining the same, must be productive of an exactly corresponding decrease in the value of each piece of money.744 Think [pg 368] only of the great many commodities which are obtained and consumed without any exchange whatever! Rather does the amount of money necessary to keep the value in exchange of the money employed in a people's public economy unaltered,745 depend on the cooperation of the following conditions: A. The number and extent of such commercial transactions as are effected by means of money;746 a relation which, evidently, increases (see § 56, ff.) with every advance in the division of labor. Hence the transition from serfdom and socage service to free labor, from domestic-servant labor to day-labor and piece-work, from feudal military service to that of paid and standing armies, from land-privileges and allowances in produce, such as fire-bote etc., to the payment of officials in money, from dues in produce to taxes in money, and regular lease-hold interests, from requisitions to loans of money; in a word, from the barter-economy (Naturalwirthschaft) of the middle ages to the trade by means of money in the higher stages of civilization, that is, from the “feudal” to the “commercial” system must, of itself, increase the money-need (Geldbedarf) of a people. B. The rapidity of the circulation of money; because, in most commercial transactions, one dollar which circulates ten times a year really performs the same service as ten dollars which go from hand to hand once in a year; just as the economic use of a ship employed in the transportation of commodities does not depend on its commodiousness alone but on its rapidity also.747 The economic use of money does [pg 369] not depend on its amount simply. Says Sismondi: “The amount of the medium of circulation in a state must be equal to the sum of the payments made in it in a given time, divided by the sum of the times the former has, on an average, changed owners within that time.”748 Under given economic circumstances, the rapidity of the medium of circulation is, taken all in all, not by any means an arbitrary matter. It will happen very seldom that one man will purchase or consume a commodity in order that another may not want money.749 Were the greater number of money-earners (and in nations with a healthy economic life this number is always made up of men noted for the good management of their own affairs) inclined to pay out the money which they had taken in, rapidly, a very active production would prevail everywhere; and this, in turn, supposes general commercial freedom and great legal security. The less these conditions are developed, the more difficult it becomes, not only to lay out the money received to-day productively to-morrow, but the more imperatively does a proper foresight demand, that a reserve-fund should be maintained for times of necessity. (See § 43.)750 Even in the same age and among the same people, money moves most slowly under the influences of troublesome and critical epochs; for the dangers of war and sedition, of impending burdensome taxation, commercial gluts and numerous cases of bankruptcy uniformly operate to make the possessors of money hold anxiously to their present supply.751 In less civilized countries, the same condition of things leads [pg 370] the people even to bury their money-treasures. In large cities, the circulation of money is generally more rapid than in the country districts; in a thickly populated than in a thinly populated country; and in trade than in agriculture.752 Every improvement in the means of intercommunication tends to facilitate it. The rich man possesses, as a rule, less money, relatively speaking, than the poorer man. Hence, a more equable division of a nation's resources among the people would increase the amount of money needed.753 While the concentration, as to time, of circulation into few great terms of payment is calculated of itself to cause a large sum of money to remain idle in the interval,754 its concentration in space in large commercial cities must dispense with the necessity of a great number of instruments of exchange. In England, it is customary for every man in comfortable circumstances, as soon as he receives any money, to deposit with a banker, and to make all his payments by means of checks upon the latter. Cash money is now employed by Londoners only in payment of [pg 371] wages, and in trade between retail dealers and consumers. The banker is there the common cashier of a great number of private individuals, and is in a condition to make their payments for them with a much smaller amount of money, especially when they are to be made by one of his depositors to another.755 This “union of money-chests” (Kassenvereinigung) has been effected also on a larger scale; inasmuch as bankers, in greater or smaller numbers, are wont to have one bank as a center; and the country banks, in turn, to be in constant relation with the great moneyed institutions of London, subject to a species of general superintendence by the Bank of England. These great monetary institutions have, so to speak, a common rendezvous at the Clearing-House, where the greater part of their payments are made by a mere off-setting of debits and credits;756 and this bank is, as it were, the cashier-in-chief of the nation, and in possession of almost the entire cash stores of the English people.757 [pg 372] C. The quantity and rapidity of circulation of the representatives of money. These, in so far as they are worthy of the name here given them, depend on the credit of those who issue them; that is, on the certainty that they shall, at the time fixed, be redeemed in money. To this category belong the paper money of the state which bears no interest, and the treasury-notes of the state which do bear interest, bank notes, bills of exchange, promissory notes, book-credits of private persons, sometimes even certificates of the storage of goods in public stores. It is estimated, that, at the present time, nine-tenths of all the payments made in Great Britain are effected without the aid of money, or even of bank-notes.758 The capacity of a person to make purchases does not depend simply on the [pg 373] amount of money he possesses, but on his credit likewise. The person who buys on credit, contributes as much to raise the price of commodities as the person who buys for cash; with this exception, however, that when the former eventually fails to redeem his promise to pay, the price raised by him quickly falls again.759 And, indeed, all the various forms of credit, mentioned above, agree essentially in this, however they may differ from one another in costliness and rapidity of circulation. Section CXXIV. The Quantity Of Money A Nation Needs. (Continued.) Of the three conditions above mentioned, it is evident that the first operates on the amount of money needed, in a direction opposite to that of the other two. The usual course of development is this: among an advancing people, the number of money transactions increases at first; later, when education has become general, and the people have grown habituated to the giving and receiving of credit, the circulation of money is accelerated, and an increase of the substitutes for money effected. Hence, it is perfectly natural that the money-need of a people whose public economy is only half developed, should, in proportion to the number of inhabitants, be greater, not only than that of a people whose economy is wholly undeveloped, but also, than that of a people whose public economy has been carried to the highest point of perfection.760761 [pg 374] Section CXXV. Uniformity Of The Value In Exchange Of The Precious Metals. The peculiar properties of the precious metals described above (§ 120), explains satisfactorily enough, why, at the same [pg 375] time, but in different countries, they have more nearly the same value in exchange than any other commodity whatever. Like a fluid in tubes which communicate with one another, the precious metals seek the one same level of value the whole world over.762 Only, it must not be supposed that every absolute or relative increase of the amount of money in a country must produce immediately a corresponding diminution of the value of money; and in addition to this cause an exportation of money.763 If the number of trade-transactions increases in the same proportion as the amount of money, the value of money remains entirely unaffected.764 The same thing occurs when the increased influx of money, instead of overflowing the channels of circulation, only swells the volume in the [pg 376] ready-money reservoirs. By means of these stores of ready money, very large payments may be made by one nation to another, without changing the circulation, or, therefore, the value of money, in the slightest degree, on either side.765 If, indeed, such payments should continue for a long time to flow in the same direction, they would certainly influence the circulation, and then produce a current in the opposite direction. However, it may happen, that the value of money in different countries may be permanently different, when there are lasting difficulties in the way of the leveling influence of the incoming or outgoing current of money. Thus, the precious metals maintain a high value in those countries especially which can obtain them only by giving commodities difficult of transportation for them. If, for instance, an Englishman, anxious to take advantage of the high value of money in Poland, [pg 377] should cause Polish articles, such as wheat, wood, wool etc., to be imported into England, they would reach their destination very much increased in price, because of the great cost of transportation. Whether Poland or England would have to bear this cost depends on the relations of supply and demand. Certain it is, however, that the migration of money is hereby rendered exceedingly difficult, forbidden even within the limits of certain value-differences, especially where the means of communication are universally bad. And so, the smaller the number of countries which minister to the want of commodities of precious-metal districts, the more must other nations obtain the money they need only at second and third hand; by means of which, naturally, money itself is made dearer each time. Now, it is, as a rule, nations in a low stage of civilization, that engage in the exportation of raw material, and they are the worst adapted to engaging directly in the carrying on of trade. When, therefore, they do not possess gold or silver mines themselves, money-value is, as a rule, highest with them; especially as the absence of legal security and protection, which generally obtains there, makes the value in use of the precious metals one of great urgency to them.766767 Direct legislative or governmental provisions may operate in the same direction; as, for instance, the Japanese embargo laws which, not long since, limited all foreign trade to two [pg 378] foreign nations.768 I intend to treat of the influence of taxation on the value of money, in a future work to be written by me, on the Political Economy of the State. Section CXXVI. Uniformity Of The Value In Exchange Of The Precious Metals. (Continued.) Most nations can satisfy their want of the precious metals, only through the medium of foreign trade. Hence they very naturally look upon the cost of production of the articles of export by the exchange of which they obtain the precious metals either directly or indirectly, as the cost of production of these metals themselves. But, the rule that all commodities of equal cost of production have equal value in exchange is applicable only within the limits of the same economic territory (§ 107), for it is frequently physically impossible, and still more frequently rendered difficult, by laws, customs and states of mind to transfer factors of production from one country to another simply on account of the more advantageous market they would there find. Thus, for instance, when England exchanges its cotton and woolen goods, and steel instruments for Mexican silver, the cost of production of the two equivalents may be very different, and the one party in this trade may permanently make a larger profit than the other.769 According to § 101, that party will be most favored in whom the desire of holding to his own commodities is farthest from being [pg 379] out-weighed by his desire to obtain the other. But, at bottom, silver is no very indispensable article. Especially in highly civilized commercial communities, it is easiest to obtain substitutes for it, while the principal articles of English export are, for the most part, objects with which to satisfy wants rather urgent in their nature, very general, and of rapid growth; and which, besides, are not, to any extent, difficult of transportation. It is not a matter of surprise, therefore, that English commodities, in silver countries, are generally sold above the mean price between the English cost of production and the Mexican, for instance, or the cost of procuring them elsewhere; and that silver, on the other hand, is sold in England, under the same. But this lowers the price of the precious metals of the latter country in general. Hence a change in the channels of international trade, which in most countries is the only source of gold and silver, may make the price of the precious metals dearer in one place and cheaper in another, even when the conditions of the production of mines remain entirely unaltered.770 In an isolated country, any [pg 380] amount of gold and silver whatever would, finally, as soon as the people had grown accustomed to it, suffice for all the wants of circulation. But, in commerce with the rest of the world, the greater quantity and greater cheapness of the precious metals, that is of those commodities which are most current and are possessed of the greatest amount of economic energy, must, without fail, be of the greatest advantage to a country; and this irrespective of the fact that they are under certain circumstances the symptom of an especially highly developed public economy. If we suppose two nations, A and B, equal in every other point, but that A has twice as much money as B, and that prices are twice as high there as in B; yet, with the same effort or sacrifice, A could levy twice as many taxes as B. In case of a war between them, A might pay in ready money for the necessities of an army which had invaded B, with one-fourth the sacrifice which B would have to make to support its army in A, if we reverse the case, and suppose that B had invaded A.771
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