3. A COMMON DENOMINATOR OF VALUE1 It is necessary to ask, first, Why does a country need a common denominator or standard of value? Obviously, every article possessing value can be compared with other articles having value only by reference to some given standard which itself possesses value. The value of a commodity, it should be said, is the quantity of another commodity, or other commodities, for which it will exchange. To be obliged to go through an arduous comparison of one article with every other article created would be an insuperable difficulty. If a tailor had only coats, and wanted to buy bread or a horse, it would be very troublesome to ascertain how much bread he ought to obtain for a coat, or how many coats he should give for a horse. The calculation must be recommenced on different data every time he barters his coat for a different kind of article, and there could be no current price or regular quotations of value. As it is much easier to compare different lengths by expressing them in a common language of feet and inches, so it is much easier to compare values by means of a common language of dollars and cents. In short, a common denominator is as necessary in comparing the value of commodities as is a common language among many persons in any one city to enable them readily to compare ideas. Before property can be conveniently traded in, or exchanged, its value must be expressed in terms of a common denominator of value.

There is, however, no absolute measure of value, as there is of length. A common denominator of value and a unit of length, like a yardstick, are wholly different in kind. A yardstick is an unvarying measure of length; but a metal, or any commodity, is not and never can be an unvarying measure of the relations of that metal or commodity to other commodities which are constantly changing relatively to each other. The very commodity chosen as a standard can be changed in value by causes affecting itself; and the other commodities (which are compared with the standard) can be changed by causes affecting them; so that the ratio of exchange with the chosen standard may be modified by causes affecting either or both terms of the ratio. It is inconceivable that any one article should alter. exactly, and in a compensating direction, with innumerable other commodities.

Adapted from Report of the Monetary Commission of the Indianapolis Convention (1898), pp. 77-80.

A wide difference is thus observable between the function of money as a common denominator of value and its function as a medium of exchange. A common denominator, whether it is a perfect one or not, is used to measure value; a medium of exchange is used to transfer value. The two processes are entirely distinct. The difference will be instantly seen by the analogy with weight: the machinery for weighing coal, the scales, does one duty; while that for transporting coal, the horses and wagon, does another duty. If, instead of coal, we think of all goods, and, instead of weight, we think of value, then money is used both as a measure of the value and also as a means of exchange-although these two functions are quite distinct. In the case of value, an article, after being expressed in terms of a standard, is ready to be exchanged.

But the one important idea to be kept firm hold of in all discussions of money is that when it comes to exchanging goods the metal chosen as the common denominator is not necessarily used as the medium of exchange. If gold, for instance, is chosen as the common denominator by a country, it does not at all follow that gold is used in all the transactions requiring a medium of exchange. Various forms of subsidiary currency may be and indeed usually are used instead of the standard money. The first historical fact which confronts us is that in a society which has passed beyond the stage of barter, but which has not yet developed the habits of a modern commercial nation, money is usually passed from hand to hand in buying and selling. The commodity selected as a common denominator is then, also, practically the sole medium of exchange. But as soon as commerce develops, expedients arise for saving the expense and risk of using actual money.

4. THE FUNCTION OF A MEDIUM OF EXCHANGE1
BY FRED M. TAYLOR

An illustration which shows the precise nature of this function very clearly is furnished by the case of the farmer who comes to town with a load of wood, sells it for five dollars, and then spends the money buying groceries, dry goods, etc. What, now, are the characteristic features of this method of procedure? First, it is plain that the single transaction of barter has given place to two transactions, a sale of one commodity and a purchase of another. This, however, does not quite exhaust the matter.

1 Adapted from Some Chapters on Money, pp. 14-16. Published by the University of Michigan, 1906.

Between the two transactions thus substituted for the one transaction there is necessarily an intermediate stage, an interval of waiting, long or short, which gives the farmer who has sold his wood for money a chance to get himself into relation with the men from whom he is going to buy groceries and dry goods. Further, if money exchange is going to be a really great improvement over barter, this interval of waiting must be capable of indefinite extension; for the farmer will not necessarily wish to spend the whole proceeds of his wood for groceries and dry goods or anything else on the same day that he sells that wood. It may easily be for his interest to separate sale and purchase by weeks or even months. For example, he will be selling wood every day during the good sleighing of midwinter; but he will want to do the buying part of the operation all along till summer crops begin to bring in something. It is thus evident that money exchange really breaks up barter into three parts; viz., (1) selling goods for money, (2) keeping the money till other goods are needed, and (3) using the money to buy other goods. It is further evident that in these three stages, as looked at from the standpoint of the man who starts out with goods to sell, money plays three different parts. In the first, its rôle is that of a thing which can be obtained with any goods whatsoever. In the third, its part is that of a thing which can obtain any goods whatsoever. In the second, its business is to keep-storethis power to obtain other goods.

But just here we need to be a little careful. In trying to realize clearly that acting as a medium of exchange involves three stages, we must not fall into the mistake of supposing that money is to be thought of as a medium of exchange only when, and in so far as, it carries an exchange transaction completely through its three stages. Doubtless money has not entirely performed its part as a medium of exchange till the farmer who has sold his wood for money has also used the money to buy shoes or something else. Still, it is performing that part in each stage of the operation. It is serving as a medium of exchange, provided it is doing for anybody any one of the three things which are essential to a complete exchange operation. That is, money is serving as a medium of exchange either (1) when a man is getting it in exchange for goods, or (2) when a man is keeping it on hand with the intention of using it at the proper time in the purchase of goods, or (3) when he is actually using it to purchase goods. Or, to change the form of expression, money is a medium of exchange so long as it is being sought after, or being kept, or being used

solely to buy goods, either for its owner or for someone to whom he transfers it as a gift or as a means of settling an obligation. When no longer employed in one of these ways it has ceased to be a medium of exchange.

5. A STORE OF VALUE1

BY FRED M. TAYLOR

This function of money has its origin in two facts already touched upon in speaking of the medium of exchange; viz.: (1) that a necessary stage in the effecting of exchanges through money is the interval of waiting between the sale of goods for money and the use of the money to buy other goods, and (2) that this stage can usually be indefinitely prolonged at the will of the owner of the money. As a result of these facts our freedom of choice as to the time when we shall utilize our wealth is indefinitely increased. The products of today are sold today; but through the magic of money they satisfy the wants of next week or next month or next year. It sometimes happens that people sell things which will keep indefinitely and which they really want and will later buy back with the very money received from their sale, simply because they consider the money a safer form in which to keep their wealth during the interval. This is especially likely to happen in badly governed countries where property is insecure. But it also happens in well-governed countries if for any special cause temporary insecurity prevails. On the eve of a great war bonds and stocks are likely to be treated in this way. So in the midst of a disastrous war even a civilized nation may be in such desperate straits that people anticipate a confiscation of certain kinds of property and hasten to turn them into money as being more easily concealed. In such extreme cases as these it certainly seems legitimate to say that money acts as a storer of value. But even in the more ordinary cases, so long as the special object in the mind of the seller of goods is to get his wealth into a form which will keep, we may without serious impropriety describe the operation as a storing of value. Only we must not forget that money's storing value is not a work independent of its serving as a medium of exchange, but is merely the artificial prolonging or emphasizing of one of the three necessary stages in its mediating of exchanges.

Adapted from Some Chapters on Money, pp. 20-22. Published by the University of Michigan, 1906.

6. THE RELATION OF MONEY AND PRICES When we say that money serves as a common denominator or standard of values we mean that it is the one commodity with which or by which all others are compared. Now in comparing any given commodity with money it is of course necessary to take a certain definite quantity of such commodity and also a definite quantity of the monetary material. The quantity of money that has been chosen in the United States as the standard, or dollar, is 25.8 grains of metal, of which 23. 22 grains is gold and the remainder copper alloy. To express the value of another commodity in terms of money, therefore, we always compare a certain quantity of it, as a pound, bushel, or yard, with 25.8 grains of standard gold. If a bushel exchanges for a dollar, we say its price is one dollar; while if it requires two dollars, or one-tenth of a dollar only, to make an even exchange, then we say the price is two dollars or ten cents.

While this universal statement of values in terms of price is of inestimable advantage, it nevertheless gives rise to problems of its own. The article chosen as a standard is itself a commodity and subject in consequence to fluctuations in value when compared with other commodities. The forces that may influence prices in general are numerous and the question of price levels is one of the most complex in the entire field of economics. But without going into any of the controverted questions we may nevertheless elucidate here a fundamental principle. If for any cause whatever the value of the standard should fall, it is obvious that the prices of all other commodities, assuming no change in them, would rise. And, conversely, if the value of gold should rise, the prices of other commodities would fall. Indeed, it is often stated that a fall in the value of gold is a rise in prices, since it is by means of rising prices that the fall in value manifests itself. At any rate this general price relation or equation is fundamental to monetary discussions.

In connection with time contracts there is always the possibility that the money which constitutes the legal means of payment may change in value, and at the expiration of the contract stand for a greater or less purchasing power in terms of other commodities. Ordinarily not of great importance, there have been occasions when a fluctuating standard has virtually prohibited long-time borrowing. Again changing price levels due to an unstable standard has serious consequences through the failure of wages and salaries to change with equal rapidity. The present high cost of living is generally regarded