Part II, a great deal of barter goes on in modern life, made very much

easier by the fact that we have a common language of values, a common measure of values. For the easy working of the system, it is important that the common measure of value be an article with whose value the group is well acquainted. The frequent testing of this value in actual exchanges vastly facilitates this. But actual exchange is not necessary for the performance of the measure of value function. We have cases where the measure of values and the medium of exchange are different. Thus, in the Homeric poems, we find indications that cattle served as a measure of values, even though payments were made in gold. The Virginians commonly _thought_ in pounds, shillings and pence, even when using tobacco as a medium of exchange. The need for a common measure of values would manifest itself in any complex socialistic society, even though exchange were largely dispensed with. No systematic plans for utilizing the resources of such a society would be possible, no bookkeeping would be possible, without some such device.

For this function, I prefer the term, "common measure of values," to the term often used instead, "standard of values." The latter term, as used in connection with the expression "standard money," sometimes carries the connotation of "money of ultimate redemption," and its main function is thought of as serving in reserves. The reserve function is a separate function, however. It is common to have money made of the standard metal in reserves. But this need not be the case. I would refer once more to the hypothetical illustration developed in the chapter on "Dodo-Bones": gold, not coined, as the "standard of value"; paper as the medium of exchange; silver bullion, at the market ratio with gold, as the reserve for redemption of the paper. This may suggest that a distinction may properly be drawn between measure of values, and ultimate standard money. The paper money, in this case, would be the thing of which the masses would ordinarily _think_, so long as the system worked smoothly. And the paper could serve as a measure of values. The case is not unlike the case where a "standard yard," or "standard pound" is kept for ultimate reference in a government bureau, while yardsticks or pound weights in the shops and warehouses do the actual measuring. The cases do not, indeed, run on all fours. The measurement of weights and lengths involves physical manipulation; the measurement of values is an intellectual operation, made by comparing two objects of value. The comparison may be made in actual exchanges; it may be made by an accountant's estimate; it may be made by comparing the results of several exchanges, in sorites form, only one of which involves the ultimate standard measure. The yardsticks actually used may vary more or less, by accident or design, by variations of temperature, etc., from the standard yard. The paper dollars, under a smooth working of the system described, would be held closely to the ultimate standard, and would, in any case, not vary as compared with one another at the same time and place.

When the medium of exchange diverges in value from the ultimate standard, as in the case of the American Greenbacks during the period from 1862 to 1879, we have, sometimes, shifting relations among the functions. The Greenbacks were the measure of value most commonly in use. They were legal tender for debts, except where gold was specified in the contract. They were commonly the standard of deferred payments. To a considerable extent, however, gold was used in reserves, and even as a medium of exchange. People _thought_ in both standards. And finally, gold remained an ultimate standard to which the Greenbacks were referred, and by which variations in their value were measured. The terms, "primary standard" (gold) and "secondary standard" (Greenbacks), have been employed to aid in straightening out this confusion.[474] I think, on the whole, that the term, "common measure of values" describes the function which I wish to emphasize more clearly than the term, standard of values, and I shall, in general, employ it for that purpose.[475]

The medium of exchange function grows out of the physical difficulties of barter, rather than out of intellectual needs. The discussion in the preceding chapter of the origin of money has emphasized the nature of the difficulties which a medium of exchange meets. A has an ox, which he wishes to trade for shoes, sugar, and a coat. Neither shoe-maker, tailor nor grocer cares to take the ox, however, and, besides, no one of them could supply A with all three of the things he wishes to get. Moreover, even if A should meet a man who had all three things, he would not care to give up the ox for them, since the ox is worth more than all three. If there be a medium of exchange, however, A may sell his ox to the butcher, and take his pay in that medium, which will be something easily and minutely divisible, buy coat and sugar and shoes, and take the surplus of his medium of exchange home, waiting for another occasion. The medium of exchange function overcomes the difficulties arising from low saleability of many goods, due to limited number of possible buyers, lack of divisibility, etc., etc.

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

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

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

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

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

The "bearer of options" function of money is also a source of value for money. It is a valuable service. The man who holds money, waiting his chance in a fluctuating market, anticipates a gain which justifies him in holding his capital without return upon it. Money is not alone in performing this service. High grade bonds also perform it. They bear a lower yield per annum to compensate. The service of bearing options is itself a part of the yield, and is itself capitalized, in their case. Two 5% bonds, each equally secure, but one of which has a wide market, while the other has a restricted market, will have a very unequal value.

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

The medium of exchange function would exist in a society where business goes always in accustomed grooves, where uncertainty is banished, and where most of the assumptions of static economic theory are realized. If we push static assumptions to the limit, and assume "friction" of all sort gone, assume that all goods can flow without trouble or expense to the places and persons where their values are highest, etc., even the medium of exchange function would disappear. But if we make our static assumptions a bit more realistic, leaving the "friction" of barter, but banishing the need for readjustment, and the uncertainties that grow out of dynamic changes (whether caused by growth of population, or changes in laws and morals, or in fashions and tastes, or in technical methods, or by accidents of various kinds), then the medium of exchange function will still remain. Given dynamic changes, we have need for a vast deal more of readjustment, and a vast deal more of speculation. I have shown in the chapter on "The Volume of Money and the Volume of Trade" that the great bulk of trading in the United States to-day is speculation, which increases or decreases with the amount of dynamic change, with its accompanying uncertainty and need for readjustment. The major part of the medium of exchange function arises from this. The whole of it arises from factors which purest static theory is accustomed to abstract from. The _whole_ of the "bearer of options" functions arises from dynamic change. _This is the dynamic function_ of money _par excellence_. It is commonly treated by economists as an unusual and unimportant function. Merged with the store of value function, it is frequently treated as of historical, rather than present, importance. In my own view, it is of high present importance.[477] I should count it as in considerable degree a _function_ (using function in the mathematician's sense) of "business distrust"[478] waxing and waning in importance as business distrust increases and decreases. In past ages, this function was primarily concerned with consumption, money and other goods being held, at the loss of interest, as a safeguard against personal danger and as a means of subsistence in emergency. Increasingly to-day, it is concerned with _acquisition_ of wealth in _commercial_ transactions. When war and domestic violence were the main cause of social disturbance, the consumption aspect was most prominent. That aspect came strongly to the fore at the outbreak of the present war. The heavy selling of securities, which closed the bourses of the world, grew out of men's efforts to get money and bank-credit as a "bearer of options" for the old reasons. The old reasons explain in large measure the accumulation of gold by the _Banque de France_, and by the German Government, referred to above. But to-day, in general, the main purpose of those who use money, or other things, as a "bearer of options" is to make gains, or avoid losses, in industry and trade. The man who, in a given state of the market, is afraid to lend, or afraid to invest, foregoes the income which lending and investing promise, and holds his money. The man who sees uncertainty and fluctuation in the market, and expects them to give him bargains in time, foregoes income for a time, and holds his money. The man who has investments of whose future he is uncertain, and who fears to try any other investment for a time, sells what he has, foregoes income, and holds his money. It is not always possible, in discussing the money functions, to preserve the distinctions between money and credit, or money and "money" in the money-market sense. How much difference is made by these distinctions will best be discussed in our chapter on "Credit."

The significance of the "bearer of options" function is especially manifest, I think, in connection with call loans. The "call rate" is commonly well below the regular "discount rate," or rate for thirty-day, sixty-day, or ninety-day paper. The explanation is to be found, I think, in the fact that the lender of call money does not entirely dispense with its service. He reserves a part of the "bearer of options" function. To be sure, he will, in practice, have to wait an hour or two, or even more for it,[479] and this may well mean that he cannot take full advantage of an option. But the right to demand money on even twenty-four hours' notice is more available than a high-grade bond, as a means of meeting rapidly changing situations. This principle will explain, too, I think, why money-rates in general, including even ninety-day paper, are usually lower than the long-time interest rate on safe farm mortgages, or on real estate mortgages in a city. The thirty-day rate will commonly be lower than the sixty- or ninety-day rate--though exceptions can easily be found, if the thirty-day period is to cover a time of active business, which is expected to grow less active during the second or third month. The influence of the bearer of options functions is not the only influence at work on the rates. If it be objected that the long-time interest rate on high grade railroad bonds or government securities is sometimes lower than current money-rates, or just as low, the answer is that these bonds also share the "bearer of options" function, and that the interest rate on them is, like the money-rate, lower than the "pure rate" of interest. Writers[480] have been accustomed to look for the "pure rate" of interest, _i. e._, an interest unmixed with insurance for risk, in the highest grade of government securities. I think that this is a mistake. I think that the "pure rate" should be sought in long-time loans, of assured safety, which lack a general market. Such loans, _at the time they are made_, should represent the "pure rate" _for that time_.[481]

I shall recur to the question of the money-rates, and the question of the relation of the money-rates to the general rate of interest, in the chapter on "Credit."

For the present I would call attention to the interesting case of Austria, where the money-rates are normally very low, because the volume of commerce and speculation is small, and the volume of banking capital, politically fostered, is large; and where, on the other hand, the general rate of interest on long-time loans is high, owing to the scarcity of capital in industry and agriculture, as distinguished from commerce.[482] This case may illustrate, incidentally, that even as a "long run" or "normal" tendency, an excess of currency in a country may lead, not, as the quantity theorists contend, to high prices, but rather to low money-rates. Austria presents simply a striking case of what I should regard as the general tendency. The money-rates and the interest-rates tend to approach one another to the extent that paper representatives of many different industries get into the "money market"--to the extent that industrial investments in general become saleable enough for it to be safe to finance them by means of short-time banking credit. When banks lend on collateral security of corporation stocks to the buyers of those stocks, they are, in effect, financing the corporation itself.[483] Industries differ widely in the extent to which they depend on the money market for their finances. The difference depends often less on the nature of the industry than on the type of the industrial organization. An individual farmer cannot get the bulk of his credit that way! But there is no reason why a well-organized corporation, assuming it successful in agriculture, might not draw on the money market, even if not so freely as a manufacturing corporation does.

For the contention that the money-rates for short periods are lower on the average than the rates on longer loans, and that the call rates are, on the average, well below all time rates, there is abundant statistical evidence. From 1890 to 1899 in New York City, the average rate on 4- to 6-month paper was 5.99%; the average rate on 60- to 90-day paper was 4.58%; the average call rate was 3.29%. In the same city, for the period from 1900 to 1909, the averages were: 4- to 6-month paper, 5.61%; 60- to 90-day paper, 4.78%; call rate, 4.05%.[484] This last figure for call loans represents an average of quotations at the "Money Post" at the Stock Exchange. While normally the call rates are well below this, occasional high figures, like those in 1907, pull this average up. The high rates at the "Money Post," however, are not always representative. Banks frequently do not charge their regular customers as much as the quoted rates.

Even more detailed evidence for our thesis is to be found in W. A. Scott's investigation of New York money-rates, for the period, 1896-1906.[485] He studies _two_ sets of quotations for call loans, those at the Stock Exchange "Money Post" and those at the banks and trust companies; _seven_ sets of quotations (five of which appear regularly) under the head of "time loans," namely, 30-, 60-, 90-day, and 4-, 5-, 6-, and 7-month; and _three_ under the head of "commercial paper," namely, double name choice 60- to 90-days, and two varieties of single name paper.

He finds a clear tendency for the rate to vary with the length of the loan, although noting many exceptions. "The difference between these quotations rarely exceeds one-half of one percent, and the general rule seems to be that the influence of time in raising the rate grows less as the length of the loan increases. For example, there is apt to be a greater difference between the quotations of 60-and 90-day paper than between 90-day and four months. Likewise there is a greater difference between 90-day and four months than between 4-months and 5-months paper."

The call rate, though much more variable than all time rates, and sometimes high above them, is, on the average, well below them. For the period, 1901-06, the averages are: call loans, 3.3%; time loans, 4.5%.

The declining influence of differences in time as the length of the loans increases, is what our theory would require. If the "bearer of options" functions of short loans is the explanation of the lower rate on them, it is a factor which would count for less and less as the length of the loan increases. A month's difference is all-important, when the month involved is proximate, say the difference between 10 and 40 days. But it is of virtually no importance, from the standpoint of the man who wishes to meet sudden and indeterminate emergencies, whether the note he holds matures in eleven months or twelve months. The difference between a one-year loan and a five-year loan might, on the other hand, still be important from the angle of bearing options. The factor should cease to have any meaning at all, or at least any appreciable meaning, when the difference is between, say, twenty and twenty-five years.

I have no statistical evidence that the one-year loan can normally expect a lower rate than the five-year loan. At times, short time financing may be even more expensive than long time financing. But such study as I have given to quotations of short-term notes of corporations, as compared with the longer term bonds of the same corporations, would leave the distinct impression that short-term notes fare better in the security market, and yield less return. A complication arises, here, of course, that the short-term note may often lack the safety which a first mortgage bond of the same corporation would have.

The legal tender for debts function calls for a brief discussion. Whatever gives legal quittance from contract obligation, or from legal obligation as for taxes, performs this function. "Legal tender" money, in the strict sense, is not alone in performing this function. Usually a government will by law or administrative practice with the force of law, bind itself to accept forms of money which it will not compel other creditors to accept. Thus, silver certificates, without being "legal tender," are a means of legal quittance from obligations to the Federal Government. Sometimes governments will receive only gold at the customs house. This was true in the Greenback period, when Greenbacks were "legal tender," but not good for payments of customs duties. The reader who is interested in refinements of the legal distinctions among different kinds of money will find the thing elaborately worked out by G. F. Knapp, in his _Staatliche Theorie des Geldes_.[486] But "legal tender" money is not always an adequate means of quittance. If the contract calls for corn, or wheat, or Northern Pacific stock, the best legal tender money is a poor substitute! Witness the "Corner" in Northern Pacific in 1901. It is doubtless true, as Davenport[487] points out, that all contracts, whatever they call for, may be ultimately met, under the common law, by money damages, but that does not mean that a man can maintain his solvency or position in business by offering money when Northern Pacific is designated in his contract. Doubtless even there money will free him, _at a price_, but Northern Pacific stock is at least more convenient for the purpose! A man does not need money to get free from debts, even when money is required by the contract. He can turn in whatever he has in an assignment for the benefit of his creditors, and get free _via_ the bankruptcy court. In other words, the legal tender function of money, while it does distinguish money from other goods as a matter of _degree_, does not erect an absolute difference of _kind_.

Under a smoothly working monetary system, where all forms of money are kept at a parity by constant and ready redemption, and where people have no doubt that this redemption will occur, the legal tender quality which attaches to part of the money is a matter of no consequence. It adds nothing to the value of the money. In times of stress, the legal tender quality may be a source of a considerable temporary value. This is especially likely to be true of an inconvertible money. The legal tender quality of the Greenbacks led to a very considerable fall in the gold premium in the Panic of 1873. I have mentioned this point in the chapter on "Dodo-Bones," where part of this discussion has been anticipated. In general, the legal tender quality may be recognized as a factor in sustaining the value of money, if as a consequence of this quality men take the money when they would not otherwise take it, or take it on terms which they would otherwise not agree to. Where, however, the money is money which they are glad to get in any case, the legal tender quality is a matter of supererogation.

The standard of deferred payments function, as distinguished from the legal tender function and the medium of exchange function, does not add to the value of money. Of course, if the standard of deferred payments is actually used in making the deferred payment, then it finally becomes assimilated to the other two functions. But it is quite possible to divorce them completely. Suppose, for example, that the standard named in a contract in the Greenback Period was gold, but that payment was made in Greenbacks at the market ratio. Or, suppose that the standard of deferred payments should be a composite of commodities, the tabular standard, with the understanding that the index number on the day of payment should determine the amount of money to be paid. In neither of these cases does the standard of deferred payments function supply any reason for an increase in the value of the thing which serves as the standard.

In general, the standard of deferred payments and the measure of value functions do not, _per se_, add to the value of money. The legal tender function may or may not do so. The medium of exchange function, the store of value function, the reserve for credit function, and the bearer of options function, normally do occasion an added value which is to be attributed to money, either as a capital increment, or as a rental.

The question remains, however, as to the relation of the rental value, and the capital value, of money. This question is not easy to answer. As I have already shown, in the chapter on "Capitalization" and elsewhere, various complications present themselves in the case of money. (1) In the case of money, the rental, and the prevailing rate of interest at which rentals are discounted to make a capital value, are not independent variables, but tend to vary together. Thus, whereas increased rentals would in the case of most income-bearers tend to give a higher capital value, this is offset, in the case of money, by the fact that rentals are subject to a higher discount. (2) In the case of income-bearers generally, the magnitude of the income, or rental, is causally prior to the capital value. The capital value, in our illustration of the candle, the disk and the shadow on the wall, is the shadow, while the rental is the disk. This is the general relation insisted upon by the Boehm-Bawerk-Fetter-Fisher line of capital and interest theory. Productivity theories of capital have been criticised on the ground that capital value is not productive, that only concrete capital-instruments are productive, and that they produce, not value, but goods, that these goods receive value from the market, which is reflected back, but discounted, to the capital instruments which produced them, so that, in value-causation the line of causation is precisely the reverse of the line of technological causation. Capital instruments produce consumption goods, but the value of the consumption goods is the cause of the value of the capital instruments. In the case of money, however, this is not true. It is the _value_ of the money, the capital value, which does the work that makes a rental value. The value of the money is a precondition of the money-function. So far as money is concerned, both "productivity theories" and "use theories" seem vindicated. There is a "use," an "enduring use" in addition to the "uses."[488] (3) The capitalization theory, as hitherto formulated, assumes money and a value of money. It is a part of the general body of price theory for which this assumption has been shown to be needed.

With reference to the second, at least of these points, however, it has been shown that money is not unique. Diamonds, and all other goods which have as part of their function the conspicuous display of wealth, likewise perform this function _because_ they have value. This gives them an additional value. Diamonds are bought for this purpose, when they would not otherwise be bought, or when they would not otherwise be bought in such quantity. This additional value makes diamonds still more effective as a means of displaying wealth, with a further increment in their value, etc. We seem, here, to have an endless, and vicious, circle in value causation, the value mounting indefinitely, building upon itself, a sort of "pyramiding" process. But the limitation comes from several angles. In the first place, _as_ diamonds rise in value, from whatever cause, a smaller and smaller number of diamonds is required to display a given amount of wealth! The increase in the value makes each diamond so much more effective for the purpose in hand that it tends to cut under the cause of the increase. These two tendencies come into some sort of equilibrium. I suppose that by making strict enough assumptions, and limiting the problem rigidly, it would be possible for the mathematician to work out a formula for this equilibrium, letting the increment in value grow feebler with each rebound, till at last it is dissipated in infinitesimals. In the second place, diamonds are not alone in performing this service. They must compete with other precious stones, with the precious metals, with limousines and Turkish rugs, with servants and livery, with houses and lots in restricted neighborhoods, with opera boxes and memberships in clubs which confer prestige, with a very wide range of goods, for the detailed discussion of which I would refer again to Veblen's _Theory of the Leisure Class_. The _differential_ advantage of diamonds, when it is borne in mind that the conspicuous display of wealth is not the _only_ purpose, as a rule, for which any of these things are bought, that the concrete diamond, or other good bought, is a _bundle_ of valuable services,[489] of which the displaying of wealth is only one, is not, necessarily very great. For many people, other forms of wealth do better. And, as a rule, diamonds would not perform that service satisfactorily alone. A large number of diamonds, without proper "setting," in clothing, servants, house, opera box, etc., would excite ridicule, and fail[490] in their purpose of gaining social prestige. They must be part of a complex of goods of the same sort, to accomplish their purpose.

Now it is the _differential_ advantage of diamonds which makes possible the extra value, in this use. If all wealth were equally serviceable in conspicuous display, if cattle and barns and shares in a coal mine or slaughter-house or glue factory could display themselves as well as diamonds can, and if possession of these things conferred prestige as much as possession of diamonds does, this differential advantage of diamonds would disappear, and with it all extra value from that cause. Diamonds are members of a _class_ of goods, a restricted, but still large class, which possess this advantage. We may apply the old Ricardian rent analysis here, arranging goods in a series from the standpoint of their capacity to perform this additional service. Bread would, for the purpose in hand, be a "no-rent" good. Ford automobiles are probably nearly no-rent goods now! That the differential factor is a _cause_ of value in land, as the Ricardian doctrine seems to hold, is not, I think, true. If all land were of equal quality, and of equal accessibility to the market, all land would still bear a rent, if it produced goods which had value, and if the land were sufficiently restricted in quantity.[491] But here is a case where the differential factor is an actual _cause_ of value. If all wealth were equally effective in displaying itself, no form of wealth could gain in value as a means of display.

This proposition calls for one important qualification. The fact that wealth, in general, confers prestige is, undoubtedly, a source of stimulus in wealth creation and acquisition, and a big source of the value[492] of total wealth. It is probable, however, that it is so great a stimulus to production that it defeats itself so far as the values of _units_ of goods are concerned. It stimulates production, which reduces the marginal values that arise from other causes. Thus, while a source of additional value to the _aggregate_ of wealth, it probably reduces the values of given items.

I have dwelt at length on the case of diamonds, because principles applying there will give us important clues to the case of the value of money.

Money, by being valuable, is so far equipped to perform the money service. But its _differential_ advantage over other valuable things comes from its superior _saleability_. Its original value comes from non-monetary causes, and has been sufficiently explained in the chapter on "Dodo-Bones" and in the chapter on the "Origin of Money." The extra value which comes from the money functions rests chiefly in its superior _saleability_. Saleability is itself a cause of additional value. But here again we may arrange goods in a series, starting with the least saleable, and ending in money. Money has an advantage, but its advantage is not absolute. Under a system of free coinage, gold bullion is virtually on a par with coin, and even without free coinage, bullion is for many purposes as good, and for foreign exchange may be better. Modern credit, moreover, as has been indicated before, tends to add to the saleability of all goods, and so to lessen the differential advantage of money.

Here, again we may see the principle that the extra value that comes from the differential advantage tends to limit itself. As the money-use adds to the value of money, a smaller amount of money is required to do the money work, and hence the source of the increment of value is cut under. This principle will partly explain why the rental of money cannot be capitalized in the same way that the rental of land can be. Increasing the capital value of land is not the same as increasing the productive power of land. But increasing the capital value of money does mean an addition to the power of a dollar to do money work. It tends, moreover, to lessen the work that there is for money to do, both by reducing the total amount of trading, and by increasing the incentive to the use of substitutes for money. Only a part of the value of the services of money, thus, can be added to the capital value of money. There is a further point which is important, as differentiating money from diamonds: much more of the value of the services resting on the value of diamonds can be added to the capital value of the diamonds than is the case with money. The reason is that diamonds may give forth a continuous flow, _in the same hands_, of the service of conspicuous display of wealth. Money, however, can perform most of its services for a given owner _only once_. For a given owner, it can serve only once as a medium of exchange. For one owner, it can serve only once as legal tender for debts. It can serve indefinitely as a store of value, or as "bearer of options." In these cases, however, the relation between value of service and capital value does work out in accordance with the capitalization theory. The money thus held brings in no money income. It is held thus only if the services which it performs are equivalent to the income which would come if it were alienated, and something which would bring in a money income were purchased in its place. Money may have added to its capital value the value that is created by _one_ marginal exchange, but the whole series of values which a dollar may create in exchanges cannot be capitalized, if only because the same owner cannot get them all. This holds strictly true only so long as no credit arrangements exist. If loans of money can be made, then the lender can take toll on successive exchanges, and get an income which may be capitalized in part, subject to the limitation already discussed, that increasing capital value of money cuts into the rental, and so, in large measure, destroys its own source.

Where money is not freely coined, there may be an increment, growing out of the capitalization of the money-services, in the value of the coin. The coin may be worth more than the uncoined bullion. This need not be true. If the amount of money work to be done is not increasing, it will not be true, unless the value of the bullion declines, and need not be true then. But an agio on coined over uncoined metal is quite possible, and has frequently occurred. Such an agio has limits, however. In the first place, the bullion may be used as a substitute for coin, so lessening the amount of work there is for coin to do, and lessening the source of the agio. Bullion would tend to rise in value from being thus employed, and coined money would lose in value from a reduction in the services it performed. Further, _anything_ which has more than ordinary saleability may be used as a substitute, in one or another capacity. Again, the agio, if it appeared in a country where men are accustomed to thinking about money, might well arouse distrust, lessen the scope of the coin still further, and so cut into its own source. But such agios have appeared, and while a pure case, where the sole source of the agio is the values created in the money-functioning, is hard to find, I think it is not to be questioned that cases where this is part of the explanation have arisen. I should be disposed to find part of the explanation of the rise of the rupee in India after the closing of the mints in 1893 in this factor. There seems to be evidence, however, that Laughlin is right, in part, in ascribing the rise to an expectation of the adoption of the gold standard.[493]

Modern money, in general, however, rests on a system of free, even where not strictly gratuitous, coinage. Coined metal thus rarely gets, save to a limited extent or temporarily, an agio over uncoined bullion. Uncoined bullion is acceptable in a host of places where coin would otherwise be used, particularly in reserves for credit instruments. Bullion is even superior in international trade as a medium of exchange. Credit paper (particularly bills of exchange), is superior to both in international exchange, as a medium of exchange, because of various reasons of economy. Such paper is even used in reserves in many places, particularly by the Austro-Hungarian Bank.

The fact of free coinage means, substantially, that the state has made the money form a free good. How much value is thereby destroyed we may best see if we ask precisely how much the money form could mean _at the limit_. Initially, the money form means simply the certification of weight and fineness by a trusted authority. It saves, therefore, the delay and expense of testing the weight and fineness by assay, etc. It saves the trouble and delay of subdivision of a formless metal. It averts many difficulties. For small retail transactions, indeed for retail transactions in general, the conveniences of coined over uncoined metal are very great. Small transactions do not justify the trouble and expense of assaying and weighing and subdividing gold! In a country, therefore, where the bulk of the money work is in effecting small transactions, we might expect a considerable agio for coined over uncoined metal. This would be especially true if that country had few facilities for credit substitutes for the coin, particularly for small transactions. In a country like the United States, however, where checks are often drawn for amounts less than a dollar, and where the bulk of the gold, or standard money, is to be found, not in circulation but in reserves, one need not anticipate that the medium of exchange function would give a big agio to gold coin, even if free coinage ceased. So long as coinage means merely a certification of weight and fineness, this conclusion will hold. For purposes of large transactions, the item of weighing and assaying would not be serious. Indeed, American banks are accustomed to weigh even gold coin, in quantity. It goes by weight, rather than by tale, and if light-weight, it counts for less than its nominal value. The writer knows a bank which has a considerable store of light-weight gold coin that has been in its vaults for over twenty years. Such coin may be counted at par in reports by the bank to the Government.[494] It might be paid out through the window to customers, who would not weigh it, in case of a "run" on the bank. But it cannot be used in dealings with other banks without loss.

Does the legal tender aspect of coin count for more? Under a smoothly working system of free coinage, where moreover, all forms of money are kept at a parity by ready redemption, we have seen that the legal tender feature makes no difference. Would it make a difference where coinage is restricted? If we assume that the use of checks for small payments, and the use of bullion in reserves, in a given case, prevents the existence of an agio growing out of the other functions of money, I think it clear that the legal tender feature alone will not create one. But suppose that there is an agio from other causes, will not the legal tender aspect of money tend to increase it? Will not men demand coin, which bears an agio, rather than bullion, when they have the right to demand either? And will not the agio then, in a way, grow out of itself, a bigger agio appearing, because an agio has already appeared? It does not seem to me that this need follow. If there be an agio, then creditors will demand either coin, or bullion _on a different basis from coin_. But so long as they get the benefit of the agio, either in the form of coin, or of a larger amount of bullion, particular circumstances, rather than a general rule, will determine which they will demand. The banker might well prefer bullion. The international banker would prefer bullion. The man who wishes money for retail transactions will take coin. Men will use the legal tender quality of money as a means of getting the benefit of what agio there is (though contract right, where the contract calls for coin, would accomplish all that a legal tender law would accomplish), but whether they take 23.22 grains of coined gold, or 25.5 grains of gold bullion, will depend on which they prefer in the circumstances. I do not see that the legal tender feature adds anything to the case of restricted coinage that it does not add to the case of free coinage.[495] In either case, there will be temporary emergencies, when panics arise, when legal tender money gets an agio over any possible substitute. Solvency may depend on it. This might arise under free coinage, if the panic were acute, and if settlements had to be made immediately. But as long as there is time for men to work things out, I should not expect the legal tender feature, _per se_, to add to the agio of coined metal even under restricted coinage.

In general, the possibility of an agio for coined metal, under restricted coinage, rests on the extent to which coin has a unique function. In so far as substitution is possible, there is no room for an agio. For many purposes, bullion may be substituted. To the extent that credit is developed, and is flexible, various other substitutes are possible. To the extent that barter can be used, still other substitutes are possible.

Among an ignorant people, little accustomed to developing new expedients, having an economic life that is not flexible, having an economy based on petty economic units, having little development of credit, accustomed to the use of money in most transactions, money might well be, in many connections, highly important if not indispensable. In England, before the War, where no bank-notes under five pounds were in circulation, and where small checks were little used, an agio on coin might appear if coin got so scarce as to be inadequate for retail trade, but for bank reserves bullion would have served virtually as well as coin, and with the stock of coin she had at the time England could have gone on for a long time indeed with no more agio than just enough to prevent the melting down of the coin. In the United States, where checks can be used for very small transactions, and where a high percentage (very conservatively estimated by Kinley at from 50 to 60%) of retail business is done with checks, the agio on coins of a dollar or over growing out of retail trade might be expected to be very slight. On the other hand, the legal requirements for reserves in specified types[496] of money might, in time, lead to some agio. I do not think that the reserve function in England would ever do so. If we could combine our use of checks in retail trade with England's absence of legal reserve requirements, I should think that the agio would have little chance indeed of growing great! If to this could be added Canada's extensive use of small elastic bank-notes, the chance would be still less. If bank-notes of one dollar could be issued, the agio would be less still.

It is in the case of coins of very small denomination that the agio might appear most readily. Such coins, if limited in amount, and if given the usual restricted legal tender,[497] do not need redemption to circulate at face value, even when made of baser metals. It is quite thinkable that such coins should, even when redeemable, circulate at an agio over the redemption money. In small retail transactions the need for money to do business is most imperative. Even here, however, there is large flexibility. The present writer, during the period of money stringency in the Panic of 1907, made much larger use of checks in very small payments than was his usual practice, and the same was true of various of his acquaintances.

I think that the quantity theorist, with his doctrine of an unlimited agio through the restriction of coinage proportionate to the restriction, is best understood if we say that he has taken an exaggerated estimate of the imperativeness of the need for formed money in the smallest retail transactions as typical of the whole situation.[498] I have elsewhere shown, however, that, in so far as Kinley's figures for 1909 give us a clue,[499] the total retail trade of the United States is less than one-eleventh of the total of all transactions calling for the use of money and checks. Of that total retail trade, the part in which money is actually used is, on Kinley's high estimate, between 40 and 50%,[500] and the part in which money is imperative is much lower still. Small retail transactions do not give the type for the pecuniary transactions in the United States! They more nearly do so in India, and the possibility of agio is, doubtless, greater there. For our larger transactions, there is an almost indefinite possibility of substitutes for coined money, if profits can be made by making the substitutions. Beating the agio would be a source of profits.

I repeat what was said in the chapter on "Dodo-Bones" differentiating this doctrine of the agio from the quantity theory doctrine: (1) This doctrine presupposes value for the money article from some non-monetary source. It relates only to a differential portion of the value of money. (2) This doctrine denies the law of proportionality even for this differential portion. (3) This doctrine is concerned, not with the general level of prices, but with the absolute value of money measured in the ratio of coin to bullion.

Under the system of free and gratuitous coinage, no agio of coined over uncoined bullion is possible. Where small brassage charges are made, as in France (or as in England, where the interest lost during the period of coinage is charged to the man who exchanges bullion for coin at the Bank of England) there may be an agio of this amount, though it often happens that this agio disappears, particularly in England. So perfectly is bullion a substitute for coin in England, that the Bank of England will often forego its privilege of taking the slight toll in interest, and will credit men depositing bullion with as much as if they had deposited coin. From what has gone before, as to the possibility of an agio, I conclude that the United States, England, Canada, and possibly France, would be unable to make large brassage charges. If the brassage charge were much larger than the charges made by reputable and well-known jewelers for assaying and weighing, etc., there would be a large substitution of bars for coins, and the mints would have little to do. However, it needs no arguing that with free coinage, and either very low or no brassage charges, the value of bullion and of coin will, quality for quality and weight for weight, be virtually identical, within a narrow range of variation.

What, then, shall we say of the way in which the forces drawing gold from the arts into money manifest themselves?

How describe the equilibrium between the value of gold as money and the value of gold in the arts? How construct intersecting curves, presenting a marginal equilibrium? The problem is baffling, and I frankly confess that what I shall have to say does not satisfy me. I hope that some critic may solve the problem better. I can point out the difficulties of the situation, and can indicate reasons why the sort of solution which the economist's training in marginal analysis leads him to desire are not easily found. But I fear that I shall fail to satisfy the demand for an application of curves to the problem!

The first difficulty is that we are barred from the use of our yardstick. Money is the measure of all things in economic theory--except money and gold bullion! Of course there are economic values other than those of gold which do not actually come into the market, but even there we can commonly, by the accountant's methods, make use of the money measure. In very high degree, our conventional curves of all sorts run in money terms, and assume a fixed value of money. Clearly the money curve of diminishing value for gold would tell us nothing. The value of gold might sink as its quantity increased, but then the value of the money-unit would sink _pari passu_, and so the curve, with ordinates expressed in numbers of dollars per ounce, would not sink. The value-curve of gold, expressed in money, is a straight line, parallel to the X axis. Possible substitutes in the form of abstract units of value,[501] or of composite units of goods, of an assumed fixed value, will have to be used if anything is used, but they are less satisfactory in the application, and leave the analysis a good deal less realistic.

If this were all, the problem would be easy! But there is a second difficulty. We find the factors requiring gold as money, if summed up in a curve, presenting themselves as a call for the temporary rental of the gold. The money functions are performed, in general, not by keeping gold, and getting an endless series of uses from it, as in the arts, but by passing it on, sooner or later. Even in the case of the reserve function, the bearer of options function, and the store of value functions, it is not expected to hold the gold indefinitely--always there is the anticipation of some time when it will be passed on again. A curve for gold in the monetary employments, therefore, would be a curve showing the diminishing values of rents, or particular services rather than a curve for capital values. The curve for gold in the arts, however, would be a curve showing the diminishing _capital values_ of units of gold, as the supply in the arts is increased. The two curves do not run in common terms. But another and more fundamental difficulty. In the case of wheat, we may construct our curve free from complications, in idea, at least. On the base line, we lay out quantities of wheat. For each quantity of wheat, we erect an ordinate, a sum of money, or a number of abstract units of value, as the case may be. Connecting these ordinates, we have a curve, showing how the value (or the money-price) of wheat descends as the quantity of wheat increases. Given the shape of the curve, and given the number of bushels of wheat, the marginal value of the wheat is given. In idea, at least, it does not matter, for the shape of the curve, whether the amount of the wheat is great or small, whether the marginal value of the wheat is low or high. If there are ten thousand bushels only in the market, wheat will be worth $5 per bushel. With 100,000 bushels, it is worth 40c. The fact that there are 100,000 bushels does not lessen the magnitudes on the higher portions of the curve. The nature of the services which wheat performs is not affected by its value. This is _not true of gold_, either in the arts or as money. In the arts, I have already shown that one function of gold is as a means of conspicuously displaying wealth. Gold is like diamonds in this. _Because gold is a valuable_, it gets an additional valuable service. This additional valuable service enhances its value. The thing is checked, however, before an endless circle is created, by the fact that as gold rises in value a smaller amount of gold will display a given amount of wealth. The value-curve for gold in the arts, therefore, is not a simple thing like the curve for wheat. It turns upon itself, in ways that I see no graphic device for presenting. This is even truer for money. Men wish to have, when they seek money, a quantum of _value_ in highly saleable form.[502] The curve for the value of the services of money presupposes a fixed capital value of money. It is the capital value of money which does the money work. Given a value of money, and given the values of goods, we may see how much money is required to effect a given exchange or perform some other money service. Then, knowing how much value will be created by each exchange, or other money service, we may arrange the services in a series, a scale of descending importance, and get a curve. This curve is, in fact, the curve which presents itself in the money market. There we find a curve, running in terms of money itself, so much money for the use of money for such a length of time. But this is a curve of demand for money funds, rather than for gold as such. The "supply" that corresponds to this "demand" is, not gold, but all manner of credit instruments, chiefly bank-deposits, expressed in terms of gold. Such a curve is clearly not to be put into equilibrium with the value-curve for gold in the arts, (1) because it assumes a fixed value for money (2) because it is concerned with temporary rentals, and not capital values, and (3) because the demand it expresses is not for the use of gold alone.

We may get some aid in reducing these complexities to familiar terms if we employ the device of assuming an equilibrium between gold in money and gold in the arts, without trying to explain in quantitative terms how that equilibrium is arrived at, and then see what causes will lead that equilibrium to shift. In getting the laws of _change_, we may get closer to the causes of the phenomenon itself. The effort to reduce the thing to precise mathematical form requires a degree of simplification which seems to me likely to rob an answer of much significance.

Assuming that the equilibrium is reached, we may see what factors would tend to cause gold to go into the money-use, and what factors would tend to draw gold into the arts use. We may also see how these changes from one side or the other would modify the value of gold.

Assume that a manufacturing jeweler has extra demand for his products. His products, of course, are composites of gold, labor, and other raw materials, etc., but part of the extra value that comes to his products attaches itself to the gold that is in them. He now has an incentive, which was lacking before, to melt down full weight gold coin in his possession, or to buy gold bars which might otherwise have been coined. To buy the gold bars, however, probably means that he must have accommodation at the bank. He borrows from the bank the amount he needs, giving a short-time note, since he expects to make up his gold and market it in a fairly short time. The paper of manufacturers of gold will commonly stand well in the "money market," and this is especially true of those in whose hands the gold is not worked up into such specialized forms that the value of the bullion is a minor matter. (I find it necessary to refer frequently to the money market, though a full analysis of money-market phenomena cannot come till after our discussion of credit.) If he must borrow to get the gold, _then the money-rates will come into comparison with the profits he expects to make from working up the gold_. This will usually be true even if he melts down gold coin already in his possession. He might deposit that gold, and so reduce his expenses at the bank, either buying back his own discounted paper, or getting interest on daily checking account. If he has to borrow to get the gold, he may get it either by drawing gold from the bank directly, or by giving a check on the bank to a bullion dealer, which may ultimately lead to a diminution in the bank's supply of gold. However he gets the gold, there is bound to be some reaction, (1) on the bank's supply of gold, (2) on the supply of loanable funds in the money market, and hence (3) on the money-rates themselves. If he borrows from the money market, he affects the money-rates directly (even though probably, in a given case, not noticeably); if he melts down coin, instead of depositing it (or paying it out to others who may ultimately deposit it) there tends also to be less gold in the bank's vaults; if he buys gold with his own funds in the bullion market, the supply of current bullion for which the banks also compete is reduced. In any of these cases, the banks have less gold than would otherwise be the case. The relation between gold reserves and the supply of money-funds has been partly discussed already. We have seen that there is no proportional relation, as Fisher, and other quantity theorists contend. Loanable funds, on a given gold reserve, are highly elastic. But the elasticity calls for higher money-rates, and higher money-rates tend to reduce the volume of trading, and check the demand. Borrowings from the money market by workers in gold, therefore, are much more significant than borrowings by other manufacturers or merchants, because the latter are content with credit devices, for the most part, while the workers in gold withdraw gold itself from the money market. It is, moreover, harder for the money market to resist extra demand from the jewelers than from many other interests. The assets of the jewelers, especially from those who do not work the gold up in highly specialized forms, are exceedingly liquid. Their paper, therefore, is exceptionally good in the discount market. Usually, too, the larger jewelry houses have specially good general credit and high reputation. There is, then, less disposition for the market to look askance at an unusual supply of their paper than would be the case with many other sorts of paper. They tend to get about as low rates as anyone else in the market. A money market under centralized control seeking to protect its gold, might tend to raise discount rates on jewelers' paper, but a competitive money market is very unlikely to do so.

An increase in the value of gold in the arts would, thus, reflect itself pretty quickly in the money market, first in the form of added value for the services of money, and then, secondly, in an increase in the capital value of money. Indeed, an increase in the value of a single rental is an increase in the capital value also, since the value of the single rental is one portion of the capital value. Not only does it mean a higher capital value for gold, but it consequently tends to mean a higher "price." It does mean a higher "price" for present money as compared with future money. It tends, also, to mean a higher "price" of money in terms of other goods. Meeting higher money-rates, all borrowers tend to borrow less, and to buy less, to offer less money for goods. It need not follow, however, that the rising value of gold reduces prices. The rise in the value of gold in the arts may well be a manifestation of a general rise of values. General prosperity, rather than causes affecting the value of gold in the arts alone, may have occasioned the increasing demand for gold in the arts. This would mean rising values for goods at large. It might well be, therefore, that the rise in the values of goods would offset the rise in the value of money, and that prices of goods would rise at the same time that gold is being withdrawn from the money market to the arts.

Business in general, as well as the jewelers, may be making increased demands on the money market. This would tend still further to raise the money-rates. It would also, however, tend to increase the supply of money-funds. Commercial and industrial paper, in a time of buoyancy and expansion, is particularly acceptable to the banks, and they are likely to expand their loans despite the failure of gold reserves to keep pace. They simply get along with smaller reserves. Higher money-rates in such a case tend to reduce the volume of business, but need not actually reduce it, if there are bigger profits than before anticipated in business transactions. Not absolute money-rates, but money-rates in relation to anticipated profits from the use of money, are significant. There is large room here for flexibility, elasticity, etc. There is much slack to be taken up by the money-rates, much slack in the fluid substitutes for money in various functions, and much slack to be taken up by the volume of trade. But all this will best appear after our discussion of the money market.

I have said enough to indicate the character of the factors immediately determining the equilibrium between gold in the arts and gold in the money employments. In the preceding discussion, also, I have discussed the more fundamental factors governing the value of gold in both employments. The problem of translating the fundamental theory of value into money market terms, and of translating the phenomena of the money market into terms of fundamental values is not easy. Most of our value theory in the past has been concerned with individual psychology, Crusoe economics, trading in small markets with a few buyers, barter transactions, etc. It has been abstract and unrealistic. The practical students of the money market, who are immersed in the facts of modern money, have got little help from it, and have often been scornful of it. I hope to be able to contribute something to bringing the two methods of approach to common terms. They are correlative aspects of the same problem. Each gives highly important clues to the understanding of the other. Neither can be understood without some understanding of the other. A theory of value which cannot be applied in the money market, the stock exchange, and the great field of modern business generally, has small _raison d'etre_.

In the next chapter I shall take up the problems of credit, and the money market.