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 analytical 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 passed all rival commodities in the competition 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 assured that he can pass 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 assurance, 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 quantity 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 assume 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 surpass by far their present incomes! Individual and social advantage would converge. But for many reasons the practice could not be instituted, and would break down quickly if instituted. Very powerful social pressure indeed is needed to make an advantageous social institution--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 institution 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 attitude 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 quantity theory type. Professors Kemmerer[456] and Fisher give no attention to them at all. Both assume money as circulating, as the starting point of the argument, without noticing how much is involved in the assumption. Neither, moreover, gives an _analysis_ of the functions of money. Considerations drawn from the question as to the origin and functions of money are hard to bring into the quantity 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 quantity theory would be superfluous! And if the quantity 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 quantity theory explanation. The quantity 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 assessment 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 quantity 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 assumed 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 circumstances 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 analysis of the circumstances 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 accumulate it in excess of their anticipated 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 accumulation 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 accumulate because of their saleability, with the practice of accumulating 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 quantities 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 analysis 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 anticipate 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. 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 accumulation of money, moreover, implies a stage of human development where the accumulation 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 shells, iron ornaments, etc., have all been money. The Karoks of California were accustomed to use strings of shell 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 hoard 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 masses 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 sex impulse;
(3) the spirit of rivalry, or competition.
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 sex 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 competitive. 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 competition 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 Class_. They rest on fundamentals in human nature, however much they differ from the psychology of the "economic man." They give assurance, 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 quantity. 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 quantity. 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 attitude 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 sex 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 competition 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 quantity 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 institutional values concerned with social organization. The point is strikingly illustrated 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 masses of laborers was in their hands. The social values--it is difficult to classify them as legal, economic and religious, since all three are blended--gave little weight indeed to the desires of the masses, 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 accumulation 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 accumulated. 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 hoards 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 accumulate 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 masses 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 quantity. 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 masses 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 masses 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 masses 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 quantity 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]