The Value of Money Part 16

29. An increase of credit tends to increase trade. (Same chapter.)

30. An increase of trade tends to increase the volume of credit, and, where the money supply is flexible, tends to increase the money supply also. (Chapter on the "Volume of Trade and the Volume of Money and Credit.")

31. Production waits on trade. The problem of marketing in the modern world is often more important than the problems of production in the narrower sense. Selling costs are probably greater than strict "costs of production." "Volume of trade," far from being dependent on "physical capacities and technique," is almost indefinitely flexible, with changing tone of the market, with changing values, and with other changes, including changes in the volume of money and credit. (Chapter on "Volume of Money and Volume of Trade.")

32. The relation between the volume of money and the volume of credit is exceedingly flexible. The relation between the world's volume of credit and the world's volume of gold is likewise exceedingly loose, uncertain, and flexible. (Chapters on "Volume of Money and Volume of Credit," and "The Quant.i.ty Theory and World Prices.")

33. "Velocity of circulation" is a blanket name for a complex and heterogenous set of activities of men. It is a pa.s.sive resultant of many causes, and is itself a cause of nothing. The safest generalization possible concerning it is that it varies with the volume of trade and with prices.

34. Barter remains an important factor in modern economic life, and is a flexible subst.i.tute for the use of checks and money, increasing when the money market "tightens." It is greatly facilitated by the "common measure of values" function of money.

35. The general criticism of the mechanistic scheme of causation involved in the quant.i.ty theory has, as its positive corollary, the doctrine that psychological explanations must be given--that the phenomena are intricate and complex, as intricate and complex as the play of human ideas and emotions, and the network of social relationships.

36. This means that the theory of value, and of the value of money, as here presented, cannot a.s.sume the simple form, or the mathematical precision, which have made the quant.i.ty theory so alluring. It means, further, that the present study, as in part pioneer work, will lack finish and definiteness in many places, will contain errors and gaps, and will leave many problems unsolved, and many distinctions undrawn. At many points, the a.n.a.lysis is confessedly incomplete, and the problems imperfectly thought through--often inadequately _stated_, if seen at all.

In what follows, these theses, with doctrines yet to be developed, will be woven together into a systematic theory of money and credit.

The study of the functions of money, in relation to its value, will best be approached, I think, through a study of the origin of money. In this, I shall base my conclusions chiefly on the work of Karl Menger and W. W.

Carlile, who seem to me to have done most in this field.

On the basis of the general theory of value developed in the first chapter, and the results of the two chapters which are to follow on the origin and functions of money, I shall reach my main conclusions as to the laws of the value of money. On the basis of this theory of value, and of the theory of the functions of money, I shall also try to develop a psychological theory of credit, and to a.s.similate credit phenomena to the general phenomena of value. The development which the theory of credit has had, at the hands of men whose chief interest was that of the jurist or accountant, is valuable and important. I do not wish to discredit what has been done. Many important doctrines concerning credit have been developed. The general theory of elastic bank-credit, worked out in the controversy between the "Currency" and the "Banking" Schools, is of the highest importance. This theory I have discussed in the chapter on "The Volume of Trade and the Volume of Money and Credit." I still feel, however, that there are gaps in the prevailing ideas on credit which only a social psychology can fill. I shall undertake to construe credit as a part of the social system of motivation and control, and to differentiate it from other parts of that system by an a.n.a.lysis of its functions. I think, too, that the theory of the relation of credit and money is in especially unsatisfactory shape, particularly with reference to the factors governing reserves.

A final chapter, in Part IV, will undertake to bring together the various points in our discussion which deal with the theory of prosperity, and will seek to bring the notions of "theory of prosperity _vs._ theory of wealth," "statics _vs._ dynamics," "normal _vs._ transitional tendencies," and certain other similar contrasts, into a higher synthesis, which will, to be sure, not rob these contrasts of their significance, but will rather find certain generic principles which they share, and so make it possible to measure considerations in one sphere in terms of considerations in the other sphere. In very large degree, students of dynamics and students of statics have been talking at cross-purposes, missing the force of one another's arguments, and have been quite unable, even when understanding one another, to come to agreement, precisely because they have lacked principles by means of which they could compare in any quant.i.tative way the forces which each studies. A higher synthesis, which would give static and dynamic theories common ground, would seem to be a desideratum of high importance. Such a synthesis would go far toward unifying the science of economics. I believe that the theory of money and credit, approached from the angle of the social value theory, will meet this need.

CHAPTER XXI

THE ORIGIN OF MONEY, AND THE VALUE OF GOLD

This chapter is not concerned with history or anthropology for their own sake. The present writer has made no independent historical or anthropological researches, in connection with the question of the origin of money. The chapter is primarily concerned with giving an exposition of the theories of two writers, Karl Menger and W. W.

Carlile.[455] It is not important, for my purposes, whether either writer has presented a theory which anthropology will accept as a correct account of actual origins. The theories do throw light on present functioning, and seem to me to be correct as a.n.a.lytical theories, whether historically adequate or not. There are two main questions with which the chapter is concerned:

(1) How did money come to be?

(2) Why should gold and silver have pa.s.sed all rival commodities in the compet.i.tion for employment as money?

Viewing these questions from the standpoint of present functioning, rather than from the standpoint of historical origins, we may restate them as follows:

(1) Why should men accept small disks of metal, or paper representatives of these metal disks, for which, _as_ metal, they have no use, or at all events far in excess of the amount which they can make use of as metal, in return for economic commodities which they can use? The social utility of a money economy may well be granted, without giving an answer to this question. Granting that social economic life works better by far when men do accept these disks of metal in payments, the question still remains not merely as to why the practice started, but also as to why it continues. Granted that it is to the individual, as well as to the social advantage, that each individual should accept these metal disks in excess of his personal need for the metal, _if he is a.s.sured that he can pa.s.s them on to others at will_ in return for the goods he wishes to consume, the question still remains as to why the individual should have this a.s.surance, as to why the general practice should continue. Menger quotes Savigny as holding that the thing is downright "mysterious," and the Aristotelian answer of social convention (sometimes interpreted as "social contract") is, in effect, a confession that the thing does baffle explanation on the ordinarily understood laws of exchange. The convergence of individual and social advantage, which English economic theory has done so much to emphasize, is less clear by far in connection with money than with the case where A trades a sheep (of which he has a surplus) to B for a quant.i.ty of grain (of which B has a surplus), while A has not enough grain, and B has not enough sheep.

This exchange is clearly to the advantage of both A and B, and the practice of making such exchanges is clearly to the general advantage.

But in the case of money, A trades sheep (of which he may not have an excess, so far as his capacity to consume is concerned) for disks of metal which he probably does not intend to consume at all. The social advantage of a general practice of the sort is easily established, but it is not clear that it is to A's advantage, _unless we a.s.sume the practice general_. But there are many practices which could be shown to be socially advantageous if all men practiced them, and, indeed, individually advantageous, if generally practiced, which can, none the less, not be made a general practice. If thieves would cease stealing, we could dispense with a vast expense now incurred in police and safe deposit vaults and heavy locks, etc., and with a small fraction of the savings could give pensions to the thieves which would surpa.s.s by far their present incomes! Individual and social advantage would converge.

But for many reasons the practice could not be inst.i.tuted, and would break down quickly if inst.i.tuted. Very powerful social pressure indeed is needed to make an advantageous social inst.i.tution--like morality--work, so long as individuals sometimes find advantage in breaking the general practice, even though the general practice, _on the part of other people_, is of advantage to every individual. Now it is clear that the inst.i.tution of money is to the social advantage. It is clear that it is to the advantage of every individual who has money that everyone else should be ready to accept it in unlimited amount, in return for his goods and services. But it is not clear, on the surface, why everyone should be ready to take metal disks in unlimited amount in return for goods and services. People will not take coal or horses or hay or land or white elephants in unlimited amount in return for goods and services. Why should there be such a general practice regarding metal disks or pieces of paper?

This question, to one who has always lived in a money economy, may seem childish. Such questions regarding anything to which we have grown accustomed seem childish to those who have not been used to raising them. Why does the sun rise? Why does seed-corn sprout? But these also are proper scientific questions, the answer to which is of high practical importance! The answer to the question just raised regarding money will go far toward explaining the functions of money, and the theory of the functions of money, together with the general theory of social value, will give an answer to the question as to _how the money function adds to the value of money_. The answer which I shall give on the first question will in large measure follow the lines laid down by Menger.

(2) The second question needs little revision, when stated from the standpoint of present functioning, rather than of historical origin. We have more recent history to deal with in connection with this question, and Carlile, in his answer, offers substantial historical and anthropological proofs. It is still, however, present functioning that is important, and the question may be restated thus:

Why are gold and silver, and particularly gold, the standard money of the great part of the world to-day? The principles of social psychology which Carlile employs in explaining the historical development, are also important in explaining the present att.i.tude of mankind toward gold and silver, and will serve, together with the general theory of social value, to answer the question as to the value which money receives from the employment of the money metal _as a commodity_.

It is worthy of note that neither of these questions has been seriously raised or discussed by most recent writers of the quant.i.ty theory type.

Professors Kemmerer[456] and Fisher give no attention to them at all.

Both a.s.sume money as circulating, as the starting point of the argument, without noticing how much is involved in the a.s.sumption. Neither, moreover, gives an _a.n.a.lysis_ of the functions of money. Considerations drawn from the question as to the origin and functions of money are hard to bring into the quant.i.ty theory scheme. If money circulates, there are causes for it. Fully to understand those causes, would be to understand also the _terms_ on which money circulates, that is to say, the _prices_. But then a quant.i.ty theory would be superfluous! And if the quant.i.ty theory answer should not be obviously in harmony with the answer already given by the theory of origin and functions, then doubt would be cast on the quant.i.ty theory explanation. The quant.i.ty theorists do well to avoid mixing up with their discussion considerations drawn from the general theory of value, and from the theory of the origin and functions of money.

The answer to the first question rests primarily in the fact that there are differences in the _saleability_ of goods. Value and saleability are not the same thing. A copper cent has high saleability; a farm has low saleability.[457] Some valuable things cannot be exchanged at all. The Capitol at Washington cannot be exchanged, yet has value. Under a communistic or socialistic regime, exchange, as we now know it, would largely or wholly cease. An entailed estate cannot be sold, yet has value. If society should really come to the stable equilibrium of the "static state," most of the exchanges of lands,[458] securities, and other long-time income-bearers would cease, but they would still be valuable. I have developed these notions in my article on "Value" in the _Quarterly Journal of Economics_, Aug. 1915, and have referred to them again in the chapter on "Value" in the present book, and so need not expand the discussion here. Exchangeability and value are different characteristics of goods. Value is an essential precondition of exchangeability, but can exist without it. Value is, however, commonly increased by exchangeability. But the theory of exchangeability is a separate matter, and cannot be deduced from the theory of value alone.

Menger points out the difference between "buying price" and "selling price." You can buy a piano for $400. If you try the next minute to sell it for $375 you will probably fail. You may pay ten thousand dollars for a farm. The income of the farm may increase. The tax a.s.sessment may increase. The capital value of the farm may increase. And yet, you may have to wait for a long time before you find a buyer who will pay you ten thousand dollars for it. One buys pianos or farms, as a rule, only when one wishes to use them, or when one has such special knowledge of the market that one knows pretty definitely where purchasers can be found for a resale, at a profit. Even in such highly organized markets as the stock and produce exchanges, one cannot usually buy in quant.i.ty and sell immediately without some loss. "Buying price" and "selling price" of such a stock as Industrial Alcohol Preferred are sometimes five points apart, at a given time. The forced sale of land in bankruptcies, or for taxes, notoriously often bring prices far below the price which would correctly express the value of the land. It is only in the ideal fluid market a.s.sumed by static theory, where adjustments are instantaneous, where causal-temporal relations have become timeless logical relations, that values are perfectly expressed in prices.[459]

All these difficulties were enormously greater in days of primitive barter, before money and organized markets had been evolved. The difficulties of barter have been much elaborated in the literature of money. I shall recur to the topic in my chapter on the "Functions of Money." Part of the trouble arises from the "want of coincidence" in barter--the failure to find the man who has what you want, and who at the same time wants what you have. Goods have high or low saleability, depending, in considerable degree, on the _universality_ of the desire for them. They may have high _value_ if only a few rich men desire them, provided they be scarce. The paintings of old masters would be a case in point. Incidentally, the difference between buying price and selling price is often enormous in this case, and the making of a sale may well involve long and expensive negotiations. The difficulties of exchange here arise not alone from the limited market, however, but also from the fact that each painting is a unique, and a unique of high value. A good might have high saleability despite the fact that the ultimate demand for it comes from only a few rich men, if it could be easily subdivided and standardized.

Menger enumerates a number of circ.u.mstances connected with a good which increase its saleability. Among them are the following:

1. Widespread and intense desire for the thing (to which should be added, adequate wealth on the part of those who desire it).

2. Scarcity of the commodity in question.

3. Divisibility of the commodity.

4. Considerable development of the market.

5. That the demand for the article should be more than local.

6. That it be cheaply transportable.

7. That commerce between localities in the article be unrestricted.

8. That demand for the article be constant, not fluctuating, in time.

9. That the article be durable.

10. That it be uniform in quality, so that standardization is easy.

In general, Menger's list meets the requirements often laid down for a good _medium of exchange_. In general, to the extent that any commodity meets these tests, it will be _saleable_. Commodities will vary indefinitely in the extent of their saleability.

Starting with the distinction between value and saleability, and with the a.n.a.lysis of the circ.u.mstances affecting saleability, we may now undertake to see how money tends to develop out of a barter economy.

Suppose that a man, in a barter economy, has a good of low saleability, which he wishes to trade for some other specified commodity. He finds no one who possesses the commodity he wants who is willing to trade with him. But if he can trade his article of low saleability for some other commodity of higher saleability, _still not the thing he wants_, he has yet made progress, he has got _one step nearer_ the object which he does want. It will be possible now, perhaps, to trade the new article, of higher saleability, for the commodity he wants. If not, he can trade it for some article of still higher saleability, which he can finally trade for the article he wants. By several indirect exchanges, he finally reaches his object. Incidentally, it is erroneous to distinguish money and barter economies as economies based on direct and indirect exchange. The barter economy may well involve much more indirection than the money economy, in many cases.

If there be in the market some one commodity which has a conspicuously higher degree of saleability than any other, the more sagacious men in the market will make it a point to get hold of it and acc.u.mulate it in excess of their antic.i.p.ated consumption of it. They will do this, because they will see that they can thereby get other things which they do need more easily than in other ways. With the acc.u.mulation of a given kind of highly saleable goods, in excess, by a few men in the group, in the expectation that the surplus will subsequently be used to buy other goods,--as yet perhaps not specifically determined--we have, not money, but a big step toward money. At first only a few grasp the great idea.

They succeed and become wealthy. Then others see the advantage of the thing, and imitate them. The prestige of the wealthy and successful men would induce imitation even if the advantage were not clearly seen. Then a tradition and a custom grows up. With the growth of tradition and custom, picking out one or a small number of things as particularly desirable objects to acc.u.mulate because of their saleability, with the practice of acc.u.mulating these articles in excess of intended consumption, money becomes an accomplished fact. There is no need for agreement or legislation. Money is not, in its origin, certainly, a matter of law or conscious public planning.

With the development of a highly saleable article into money, moreover, we have further a great increase in that saleability itself. The quality which made the practice possible becomes greatly enhanced by the practice. Menger thinks that this leads to an absolute difference between money and goods, the money article, which formerly was merely superior to other goods in saleability, now becomes absolutely saleable.

The absoluteness of this distinction, which would make it a distinction in kind, rather than in degree, seems to me not to be sound. I think that the distinction remains a distinction of degree. For one thing, the development of money, while it adds to the saleability of the money-commodity, _also adds to the saleability of other goods_. _Two_ things must be exchanged, in order that _one_ may be! It is the business of money to facilitate exchange, to overcome the difficulties of barter, to bring about the fluid market. And it does this not merely by acting as a medium of exchange. The fact that goods can be _priced_ in terms of money, can have a common measure of value, makes barter itself easier, as I have shown in my chapter on "Barter" in Part II. There are many articles in trade at the present time whose saleability is not much less than that of money, in ordinary times. Wheat in the grain pit is surely highly saleable. Stocks and bonds are. If it be objected that in the wheat market there is always some difference between buying price and selling price, if considerable quant.i.ties are involved, it may be answered that the same is true in the "money market" The man who has just negotiated a three months' loan of five hundred thousand dollars at 3-1/2% may well have trouble in turning that loan over to someone else immediately without shaving 1/4% from the money-rate! Besides, it is not true that values remain unchanged when a big buyer shifts from the bull to the bear side of the market. Buying price is higher than selling price in that case partly because _his economic power_ has ceased to sustain the value of the wheat, and the price would not correctly express the value if it remained uninfluenced by that fact.

Further, as we shall see when we come to the a.n.a.lysis of credit, one chief function of modern credit is to increase the _saleability of goods_, and to enable men to use the value of their goods in effecting exchanges without actually alienating their property in the goods. It seems to me that the drift of modern systems of exchange is toward closing up the gap between money and goods, in respect of saleability, rather than to widen it.[460] But this is to antic.i.p.ate later discussion.

It is not necessary, in answering our second question, as to the reasons why gold and silver have become the standard money of the world, to go far in the study of primitive moneys. Wheat has almost never been money.