ferent periods are compared. The measure of value contemplates the estimation of commodities at the same time; the standard of value, their estimation at different times. The standard of value is often called the standard of deferred payments. Credit organization involves future payments. These payments are expressed in money and present goods are transferred for a promise to pay money in the future. In the ordinary transactions of mercantile life the futurity contemplated is not far distant, but in many operations, both public and private, a lapse of years is contemplated. In such contracts stability in the value of money is of the highest importance; and were it not that money has been subject to certain variations, it is quite possible that it would not have been found necessary to differentiate this function from that of a measure of value.
The substances which at various times in the world's history have fulfilled these several functions have not performed the office equally well, and gradually all except gold, silver, certain minor metals, and paper have been eliminated among advanced nations. The selection of the precious metals for this purpose is due in part to certain physical characteristics and in part to economic conditions. In the first place, they are durable, and while it is true that there is always some loss through abrasion, the process is a remarkably slow one. Secondly, they are homogeneous and divisible. If a given quantity be divided into parts, those parts will be absolutely alike, and the sum of the parts will equal the whole. Finally, they are portable, since relatively to their weight they are of high value. Other objects such as precious stones excel the metals in portability, but they do not present the other necessary qualities of divisibility and homogeneity. Furthermore, it should be remarked that the metals are relatively stable in value, a result of their durability, since the existing stock is always so much greater than the annual output that violent fluctuations in supply are avoided. Some writers have insisted that the money substance should itself possess value, and have gone so far as to speak of the necessity of ‘intrinsic’ or inherent value. The use of the word ‘intrinsic’ evidently indicates a confusion of thought. These writers mean that the money substance should possess a ‘utility’ apart from that which it gains by virtue of its money function. It may be true that no substance without utility could have become established as money, but this initial primary utility is insignificant after it has acquired the greater utility which attaches to it as a medium of exchange and measure of value.
It has already been noted that besides the precious metals which possess in a high degree the qualities named, other substances, minor metals and paper, are used as money among advanced peoples. The role of the former is quite subordinate. For use in minor exchanges they are sufficiently portable and they possess the other physical qualities named. Since their quantity is limited, and provision is usually made for convertibility into money made of the precious metals, their value is not less stable than that of gold and silver. The problems of paper money are more complicated, since it is used in far greater quantities and for large payments. In portability it excels the metals, and, while it is not literally indestructible or divisible, the case of replacement of old notes by new, or one denomination by another, is a substitute for these qualities. Its ‘intrinsic value,’ i.e. its utility for non-monetary uses, is of course a negligible quantity. Far more important is the question of the stability of its value. This question we can answer only after an investigation of the laws which govern the value of money.
There are two explanations of the value of money, one that it is fixed by the law of supply and demand, the other that it is fixed by the costs of production. These are the general explanations of value and are complementary rather than antagonistic. The first is the law of market value, the second of normal value. In the case of freely reproducible goods, while market value may at a given moment vary from normal value, it cannot maintain such variation for any length of time. Money is in a less degree freely reproduced than most of the other goods with which it can be compared. We should, therefore, without neglecting the influence of the cost of production, expect to find that in the fixation of the value of money supply and demand are the dominant factors.
Before discussing what the supply of money and the demand for it are, it may be well to call attention to the way in which the value of money is expressed. The values of all commodities are expressed in money as prices. Conversely, the prices of commodities express the value of money. We speak of prices as high or low, but we might as well speak of money as cheap or dear. Money is cheap when prices are high, and is dear when prices are low. When wheat rises from 50 cents a bushel to $1 a bushel, we say it has risen in value, but we might also say that the wheat price of money has fallen, because in the first instance it required two bushels of wheat to secure a dollar in exchange and in the second instance only one bushel. Wheat in our illustration stands for commodities in general, and, while the rise in price of one commodity does not mean that money has fallen in value, yet if all commodities rise in price we cannot escape the conclusion that it has so fallen. Prices and the value of money are therefore reciprocals.
The supply of money is the amount of money in existence. This has led some writers to say that the value of money depends upon its quantity. Other things being equal, this is true; but it does not in itself furnish an adequate explanation of the value of money. Assuming that no other influences are at work, it must be admitted that any increase in the quantity of money will lower its value and that any decrease will enhance it. There is a certain money work to be performed, a certain volume of exchanges to be transacted. If the units of money are numerous, each transaction will call for a larger number of units than when the money units are relatively few. Every increase in the world's money supply has been followed by a rising in prices or a fall in the value of money. If the fall is not commensurate with the increase in amount, it is because the quantity of money is not the exclusive factor in fixing the value of money. Monetary legislation endeavors to adjust supply to demand by providing an automatic regulation of the quantity of money. Under a metallic currency system we usually find provisions for the
