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CHAPTER VIII:  THE THEORY OF MONEY

1. The Nature and Origin of Money[1]

IN THE EARLY STAGES of trade, when economizing individuals are only slowly awakening to knowledge of the economic gains that can be derived from exploitation of existing exchange opportunities, their attention is, in keeping with the simplicity of all cultural beginnings, directed only to the most obvious of these opportunities. In considering the goods he will acquire in trade, each man takes account only of their use value to himself. Hence the exchange transactions that are actually performed are restricted naturally to situations in which economizing individuals have goods in their possession that have a smaller use value to them than goods in the possession of other economizing individuals who value the same goods in reverse fashion. A has a sword that has a smaller use value to him than B’s plough, while to B the same plough has a smaller use value than A’s sword—at the beginning of human trade, all exchange transactions actually performed are restricted to cases of this sort.

     It is not difficult to see that the number of exchanges actually performed must be very narrowly limited under these conditions. How rarely does it happen that a good in the possession of one person has a smaller use value to him than another good owned by another person who values these goods in precisely the opposite way at the same time! And even when this relationship is present, how much rarer still must situations be in which the two persons actually meet each other! A has a fishing net that he would like to exchange for a quantity of hemp. For him to be in a position actually to perform this exchange, it is not only necessary that there be another economizing individual, B, who is willing to give a quantity of hemp corresponding to the wishes of A for the fishing net, but also that the two economizing individuals, with these specific wishes, meet each other. Suppose that Farmer C has a horse that he would like to exchange for a number of agricultural implements and clothes. How unlikely it is that he will find another person who needs his horse and is, at the same time, both willing and in a position to give him all the implements and clothes he desires to have in exchange!

     This difficulty would have been insurmountable, and would have seriously impeded progress in the division of labor, and above all in the production of goods for future sale, if there had not been, in the very nature of things, a way out. But there were elements in their situation that everywhere led men inevitably, without the need for a special agreement or even government compulsion, to a state of affairs in which this difficulty was completely overcome.

     The direct provision of their requirements is the ultimate purpose of all the economic endeavors of men. The final end of their exchange operations is therefore to exchange their commodities for such goods as have use value to them. The endeavor to attain this final end has been equally characteristic of all stages of culture and is entirely correct economically. But economizing individuals, would obviously be behaving uneconomically if, in all instances in which this final end cannot be reached immediately and directly, they were to forsake approaching it altogether.

     Assume that a smith of the Homeric age has fashioned two suits of copper armor and wants to exchange them for copper, fuel, and food. He goes to market and offers his products for these goods. He would doubtless be very pleased if he were to encounter persons there who wish to purchase his armor and who, at the same time, have for sale all the raw materials and foods that he needs. But it must obviously be considered a particularly happy accident if, among the small number of persons who at any time wish to purchase a good so difficult to sell as his armor, he should find any who are offering precisely the goods that he needs. He would therefore make the marketing of his commodities either totally impossible, or possible only with the expenditure of a great deal of time, if he were to behave so uneconomically as to wish to take in exchange for his commodities only goods that have use value to himself and not also other goods which, although they would have commodity-character to him, nevertheless have greater marketability than his own commodity. Possession of these commodities would considerably facilitate his search for persons who have just the goods he needs. In the times of which I am speaking, cattle were, as we shall see below, the most saleable of all commodities. Even if the armorer is already sufficiently provided with cattle for his direct requirements, he would be acting very uneconomically if he did not give his armor for a number of additional cattle. By so doing, he is of course not exchanging his commodities for consumption goods (in the narrow sense in which this term is opposed to “commodities”) but only for goods that also have commodity-character to him. But for his less saleable commodities he is obtaining others of greater marketability. Possession of these more saleable goods clearly multiplies his chances of finding persons on the market who will offer to sell him the goods that he needs. If our armorer correctly recognizes his individual interest, therefore, he will be led naturally, without compulsion or any special agreement, to give his armor for a corresponding number of cattle. With the more saleable commodities obtained in this way, he will go to persons at the market who are offering copper, fuel, and food for sale, in order to achieve his ultimate objective, the acquisition by trade of the consumption goods that he needs. But now he can proceed to this end much more quickly, more economically, and with a greatly enhanced probability of success.

     As each economizing individual becomes increasingly more aware of his economic interest, he is led by this interest, without any agreement, without legislative compulsion, and even without regard to the public interest, to give his commodities in exchange for other, more saleable, commodities, even if he does not need them for any immediate consumption purpose. With economic progress, therefore, we can everywhere observe the phenomenon of a certain number of goods, especially those that are most easily saleable at a given time and place, becoming, under the powerful influence of custom, acceptable to everyone in trade, and thus capable of being given in exchange for any other commodity. These goods were called “Geld[2] by our ancestors, a term derived from “gelten” which means to compensate or pay. Hence the term “Geld” in our language designates the means of payment as such.[3]

     The great importance of custom[4] in the origin of money can be seen immediately by considering the process, described above, by which certain goods became money. The exchange of less easily saleable commodities for commodities of greater marketability is in the economic interest of every economizing individual. But the actual performance of exchange operations of this kind presupposes a knowledge of their interest on the part of economizing individuals. For they must be willing to accept in exchange for their commodities, because of its greater marketability, a good that is perhaps itself quite useless to them. This knowledge will never be attained by all members of a people at the same time. On the contrary, only a small number of economizing individuals will at first recognize the advantage accruing to them from the acceptance of other, more saleable, commodities in exchange for their own whenever a direct exchange of their commodities for the goods they wish to consume is impossible or highly uncertain. This advantage is independent of a general acknowledgement of any one commodity as money. For an exchange of this sort will always, under any circumstances whatsoever, bring an economizing individual considerably nearer to his final end, the acquisition of the goods he wishes to consume. Since there is no better way in which men can become enlightened about their economic interests than by observation of the economic success of those who employ the correct means of achieving their ends, it is evident that nothing favored the rise of money so much as the long-practiced, and economically profitable, acceptance of eminently saleable commodities in exchange for all others by the most discerning and most capable economizing individuals. In this way, custom and practice contributed in no small degree to converting the commodities that were most saleable at a given time into commodities that came to be accepted, not merely by many, but by all economizing individuals in exchange for their own commodities.[5]

     Within the boundaries of a state, the legal order usually has an influence on the money-character of commodities which, though small, cannot be denied. The origin of money (as distinct from coin, which is only one variety of money) is, as we have seen, entirely natural and thus displays legislative influence only in the rarest instances. Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence. Certain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the state.

     But if, in response to the needs of trade, a good receives the sanction of the state as money, the result will be that not only every payment to the state itself but all other payments not explicitly contracted for in other goods can be required or offered, with legally binding effect, only in units of that good. There will be the further, and especially important, result that when payment has originally been contracted for in other goods but cannot, for some reason, be made, the payment substituted can similarly be required or offered, with legally binding effect, only in units of the one particular good. Thus the sanction of the state gives a particular good the attribute of being a universal substitute in exchange, and although the state is not responsible for the existence of the money-character of the good, it is responsible for a significant improvement of its money-character.[6]

2. The Kinds of Money Appropriate to Particular Peoples and to Particular Historical Periods

     Money is not the product of an agreement on the part of economizing men nor the product of legislative acts. No one invented it. As economizing individuals in social situations became increasingly aware of their economic interest, they everywhere attained the simple knowledge that surrendering less saleable commodities for others of greater saleability brings them substantially closer to the attainment of their specific economic purposes. Thus, with the progressive development of social economy, money came to exist in numerous centers of civilization independently. But precisely because money is a natural product of human economy, the specific forms in which it has appeared were everywhere and at all times the result of specific and changing economic situations. Among the same people at different times, and among different peoples at the same time, different goods have attained the special position in trade described above.

     In the earliest periods of economic development, cattle seem to have been the most saleable commodity among most peoples of the ancient world. Domestic animals constituted the chief item of the wealth of every individual among nomads and peoples passing from a nomadic economy to agriculture. Their marketability extended literally to all economizing individuals, and the lack of artificial roads combined with the fact that cattle transported themselves (almost without cost in the primitive stages of civilization!) to make them saleable over a wider geographical area than most other commodities. A number of circumstances, moreover, favored broad quantitative and temporal limits to their marketability. A cow is a commodity of considerable durability. Its cost of maintenance is insignificant where pastures are available in abundance and where the animals are kept under the open sky. And in a culture in which everyone attempts to possess as large herds as possible, cattle are usually not brought to market in excessive quantities at any one time. In the period of which I am speaking, there was no similar juncture of circumstances establishing as broad a range of marketability for any other commodity. If we add to these circumstances the fact that trade in domestic animals was at least as well developed as trade in any other commodity, cattle appear to have been the most saleable of all available commodities and hence the natural money of the peoples of the ancient world.[7]

     The trade and commerce of the most cultured people of the ancient world, the Greeks, whose stages of development history has revealed to us in fairly distinct outlines, showed no trace of coined money even as late as the time of Homer. Barter still prevailed, and wealth consisted of herds of cattle. Payments were made in cattle. Prices were reckoned in cattle. And cattle were used for the payment of fines. Even Draco imposed fines in cattle, and the practice was not abandoned until Solon converted them, apparently because they had outlived their usefulness, into metallic money at the rate of one drachma for a sheep and five drachmae for a cow. Even more distinctly than with the Greeks, traces of cattle-money can be recognized in the case of the cattle breeding ancestors of the peoples of the Italian peninsula. Until very late, cattle and, next to them sheep, formed the means of exchange among the Romans. Their earliest legal penalties were cattle fines (imposed in cattle and sheep) which appear still in the lex Aternia Tarpeia of the year 454 B.C., and were only converted to coined money 24 years later.[8]

     Among our own ancestors, the old Germanic tribes, at a time when, according to Tacitus, they held silver and earthen vessels in equal esteem, a large herd of cattle was considered identical with riches. Barter stood in the foreground, just as it did among the Greeks of the Homeric age, and cattle again and, in this case, horses (and weapons too!) already served as means of exchange. Cattle constituted their most highly esteemed property and were preferred above all else. Legal fines were paid in cattle and weapons, and only later in metallic money.[9] Otto the Great still imposed fines in terms of cattle.

     Among the Arabs, the cattle standard existed as late as the time of Mohammed.[10] Among the peoples of eastern Asia Minor, where the writings of Zoroaster, the Zendavesta, were held sacred, other forms of money replaced the cattle standard only quite late, after the neighboring peoples had long gone over to a metallic currency.[11] That cattle were used as currency by the Hebrews,[12] by the peoples of Asia Minor, and by the inhabitants of Mesopotamia, in prehistoric times may be supposed although we cannot find evidence of it. These tribes all entered history at a level of civilization at which they had presumably already gone beyond the cattle standard—if one may be permitted to draw general conclusions, by analogy, from later developments, and from the fact that it appears to be unnatural in a primitive society to make large payments in metal or metallic implements.[13]

     But rising civilization, and above all the division of labor and its natural consequence, the gradual formation of cities inhabited by a population devoted primarily to industry, must everywhere have had the result of simultaneously diminishing the marketability of cattle and increasing the marketability of many other commodities, especially the metals then in use. The artisan who began to trade with the farmer was seldom in a position to accept cattle as money; for a city dweller, the temporary possession of cattle necessarily involved, not only discomforts, but also considerable economic sacrifices; and the keeping and feeding of cattle imposed no significant economic sacrifice upon the farmer only as long as he had unlimited pasture and was accustomed to keep his cattle in an open field. With the progress of civilization, therefore, cattle lost to a great extent the broad range of marketability they had previously had with respect to the number of persons to whom, and with respect to the time period within which, they could be sold economically. At the same time, they receded more and more into the background relative to other goods with respect to the spatial and quantitative limits of their marketability. They ceased to be the most saleable of commodities, the economic form of money, and finally ceased to be money at all.

     In all cultures in which cattle had previously had the character of money, cattle-money was abandoned with the passage from a nomadic existence and simple agriculture to a more complex system in which handicraft was practiced, its place being taken by the metals then in use. Among the metals that were at first principally worked by men because of their ease of extraction and malleability were copper, silver, gold, and in some cases also iron. The transition took place quite smoothly when it became necessary, since metallic implements and the raw metal itself had doubtless already been in use everywhere as money in addition to cattle-currency, for the purpose of making small payments.

     Copper was the earliest metal from which the farmer’s plough, the warrior’s weapons, and the artisan’s tools were fashioned. Copper, gold, and silver were the earliest materials used for vessels and ornaments of all kinds. At the cultural stage at which peoples passed from cattle-money to an exclusively metallic currency, therefore, copper and perhaps some of its alloys were goods of very general use, and gold and silver, as the most important means of satisfying that most universal passion of primitive men, the desire to stand out in appearance before the other members of the tribe, had become goods of most general desire. As long as they had few uses, the three metals circulated almost exclusively in finished forms. Later, circulating as raw metal, they were less limited as to use and had greater divisibility. Their marketability was neither restricted to a small number of economizing persons nor, because of their great usefulness to all peoples and easy transportability at relatively slight economic sacrifices, confined within narrow spatial limits. Because of their durability they were not restricted in marketability to narrow limits in time. As a result of the general competition for them, they could be more easily marketed at economic prices than any other commodities in comparable quantities (p. 227). Thus we observe an economic situation in the historical period following nomadism and simple agriculture in which these three metals, being the most saleable goods, became the exclusive means of exchange.

     This transition did not take place abruptly, nor did it take place in the same way among all peoples. The newer metallic standard may have been in use for a long time along with the older cattle-standard before it replaced the latter completely. The value of an animal, in metallic money, may have served as the basis for the currency unit even after metal had completely displaced cattle as currency in trade. The Dekaboion, Tesseraboion, and Hekatomboion of the Greeks, and the earliest metallic money of the Romans and Gauls were probably of this nature, and the animal picture appearing on the pieces of metal was probably a symbol of this value.[14]

     It is, to say the least, uncertain whether copper or brass, as the most important of the metals in use, were the earliest means of exchange, and whether the precious metals acquired the function of money only later. In eastern Asia, in China, and perhaps also in India, the copper standard experienced its most complete development. In central Italy an exclusively copper standard also developed. In the ancient cultures on the Euphrates and Tigris, on the other hand, not even traces of the former existence of an exclusively copper standard are to be found, and in Asia Minor and Egypt, as well as in Greece, Sicily, and lower Italy, its independent development was arrested, wherever it had existed at all, by the vast development of Mediterranean commerce, which could not be carried on adequately with copper alone. But it is certain that all peoples who were led to adopt a copper standard as a result of the material circumstances under which their economy developed, passed on from the less precious metals to the more precious ones, from copper and iron to silver and gold, with the further development of civilization, and especially with the geographical extension of commerce. In all places, moreover, where a silver standard became established, there was a later transition to a gold standard, and if the transition was not always actually completed, the tendency existed nevertheless.

     In the narrow commerce of an ancient Sabine city with the surrounding region, and in keeping with the early simplicity of Sabine customs, when the cattle-standard had outlived its usefulness, copper best served the practical purposes of the farmers and of the city dwellers as well. It was the most important metal in use, certainly the commodity whose marketability extended to the largest number of persons, and the quantitative limits of its marketability were wider than those of any other commodity—the most important requisites of money in the primitive stages of civilization. It was, moreover, a good whose easy and inexpensive preservation and storage in small amounts and whose relatively moderate cost of transportation qualified it to a sufficient degree for monetary purposes within narrow geographical limits. But as soon as the area of trade widened, as the rate of commodity turnover quickened, and as the precious metals became more and more the most saleable commodities of a new epoch, copper naturally lost its capacity to serve as money. With the trade of this people extending over the whole world, with the rapid turnover of their commodities, and with the increasing division of labor, each economizing individual felt more and more the need of carrying money on his person. With the progress of civilization, the precious metals became the most saleable commodities and thus the natural money of peoples highly developed economically.

     The history of other peoples presents a picture of great differences in their economic development and hence also in their monetary institutions. When Mexico was invaded for the first time by Europeans, it appears already to have reached an unusual level of economic development, according to the reports published by eye-witnesses about the condition of the country at that time. The trade of the ancient Aztecs is of special interest to us for two reasons: (1) it proves to us that the economic thinking that leads men to activity directed to the fullest possible satisfaction of their needs is everywhere responsible for analogous economic phenomena, and (2) ancient Mexico presents us with the picture of a country in the state of transition from a pure barter to a money economy. We thus have the record of a situation in which we can observe the characteristic process by which a number of goods attain greater prominence than the rest and become money.

     The reports of the conquistadors and contemporary writers depict Mexico as a country with numerous cities and a well organized and imposing trade in goods. There were daily markets in the cities, and every five days major markets were held which were distributed over the country in such a way that the major market of any one city was not impaired by the competition of that of a neighboring city. There was a special large square in each city for trade in commodities, and in it a particular place was assigned for each commodity, outside of which trade in that commodity was forbidden. The only exceptions to this rule were foodstuffs and objects difficult to transport (timber, tanning materials, stones, etc.). The number of people assembled at the market place of the capital, Mexico, was estimated to have been 20,000 to 25,000 for the daily markets, and between 40,000 and 50,000 on major market days. A great many varieties of commodities were traded.[15]

     The interesting question that arises is whether, in the markets of ancient Mexico, which were similar in so many ways to those of Europe, there had also already appeared phenomena analogous in nature and origin to our money.

     The actual report of the Spanish invaders is that the trade of Mexico, at the time they first entered the country, had long since ceased to move exclusively within the limits of simple barter, and that some commodities had instead already attained the special status in trade that I discussed more extensively earlier—that is, the status of money. Cocoa beans in small bags containing 8,000 to 24,000 beans, certain small cotton handkerchiefs, golds and in goose quills that were accepted according to size (balances and weighing instruments in general being unknown to the Mexicans), pieces of copper, and finally, thin pieces of tin, appear to have been the commodities that were readily accepted by everyone (as money), even if the persons receiving them did not need them immediately, whenever a direct exchange of immediately usable commodities could not be accomplished.

     Eye-witnesses mention the following commodities as being traded on the Mexican markets: live and dead animals, cocoa, all other foods, precious stones, medicinal plants, herbs, gums, resins, earths, prepared medicines, commodities made of the fibers of the century plant, of palm leaves, and of animal hair, articles made of feathers, and of wood and stone, and finally gold, copper, tin, timber, stones, tanning materials, and hides. If we consider not only this list of commodities but also (1) the fact that Mexico, at the time of its discovery by Europeans, was already a developed country with some industry and populous cities, (2) that since the majority of our domestic animals were unknown to them, a cattle-standard was entirely out of the question, (3) that cocoa was the daily beverage, cotton the most common clothing material, and gold, copper, and tin the most widely used metals of the Aztec people, and (4) that the nature of these commodities and the fact of their general use gave them greater marketability than all other commodities, it is not difficult to understand exactly why these goods became the money of the Aztec people. They were the natural, even if little developed, currency of ancient Mexico.

     Analogous causes were responsible for the fact that animal skins became money among hunting peoples engaged in external trade. Among hunting tribes there is naturally an oversupply of furs, since providing a family with food by means of hunting leads to so great an accumulation of skins that at most only a competition for especially beautiful or rare kinds of skins can arise among the members of the hunting tribe. But if the tribe enters into trade with foreign peoples, and a market for skins arises in which numerous consumable goods can, at the choice of the hunters, be exchanged for furs, nothing is more natural than that skins will become the most saleable good, and hence that they will come to be preferred and accepted even in exchanges taking place between the hunters themselves. Of course hunter A does not need the skins of hunter B that he accepts in an exchange, but he is aware that he will be able to exchange them easily on the markets for other goods that he does need. He therefore prefers the skins, even though they also have only the character of commodities to him, to other commodities in his possession that are less easily saleable. We can actually observe this relationship among almost all hunting tribes who carry on foreign trade with their skins.[16]

     The fact that slaves and chunks of salt became money in the interior of Africa, and that cakes of wax on the upper Amazon, cod in Iceland and Newfoundland, tobacco in Maryland and Virginia, sugar in the British West Indies, and ivory in the vicinity of the Portuguese colonies, took on the functions of money is explained by the fact that these goods were, and in some cases still are, the chief articles exported from these places. Thus they acquire, just as did furs among hunting tribes, a preeminent marketability.

     The local money-character of many other goods, on the other hand, can be traced back to their great and general use value locally and their resultant marketability. Examples are the money-character of dates in the oasis of Siwa, of tea-bricks in central Asia and Siberia, of glass beads in Nubia and Sennar, and of ghussub, a kind of millet, in the country of Ahir (Africa). An example in which both factors have been responsi­ble for the money-character of a good is provided by cowrieshells, which have, at the same time, been both a commonly desired ornament and an export commodity.[17]

     Thus money presents itself to us, in its special locally and temporally different forms, not as the result of an agreement, legislative compulsion, or mere chance, but as the natural product of differences in the economic situation of different peoples at the same time, or of the same people in different periods of their history.

3. Money as a “Measure of Price” and as the Most Economic Form for Storing Exchangeable Wealth

     Since the progressive development of trade and the functioning of money give rise to an economic situation in which commodities of all kinds are exchanged for each other, and since the limits within which prices are formed become progressively narrower under the influence of lively competition (p. 201), it was easy for the idea to arise that all commodities will stand, at a given place and at a given time, in a certain price relationship to each other, on the basis of which they can be exchanged for each other at will.

     Suppose that the prices of the commodities listed below (assuming them to be of given qualities), established in a particular market at a given time, are as follows:

     Now if it is assumed that the average price of a commodity is one at which it can be both bought and sold, then 4 hundredweight of sugar appears, in the example, as the “equivalent” of 3 l/3 hundredweight of cotton, this as the “equivalent” of 16 2/3 hundredweight of wheat flour, and of 100 Thalers, and vice versa. We need only call the equivalent (in this sense) of a commodity (or one of its many equivalents) its “exchange value,” and the sum of money for which it can be both bought and sold its “exchange value in the preferred sense of the term,” to arrive at the concept of exchange value in general and of money as the “measure of exchange value” in particular, which dominate our science.

     “In a country in which there is a lively commerce,” writes Turgot, “every kind of good will have a current price in terms of every other good, which means that a definite quantity of one good will be equivalent to a definite quantity of every other kind of good. To express the exchange value of a particular good, it is evidently sufficient to state the quantity of another known commodity that is regarded as its equivalent. From this it can be seen that all kinds of goods that can be objects of trade are measured, so to speak, against one another, and that any one of them can serve as a yardstick for all the others.”[18] Similar thoughts have been expressed by almost all other economists who come, like Turgot in the course of his famous essay on the origin and distribution of national wealth, to the conclusion that money, among all possible “measures of exchange value,” is the most suitable and hence also the most common. The only defect of this measure is said to lie in the fact that the value of money is not fixed, but changeable,[19] and that money therefore provides a reliable measure of “exchange value” for any given moment but not for different points in time.

     In my discussion of price theory, however, I have shown that equivalents of goods in the objective sense of the term cannot be observed anywhere in the economy of men (p. 193), and that the entire theory that presents money as the “measure of the exchange value” of goods disintegrates into nothingness, since the basis of the theory is a fiction, an error.

     When a hundredweight of wool of given quality is sold in a particular transaction on a wool market for 103 florins, it is often found that transactions are taking place at higher and at lower prices on the same market and at the same time, at 104, 103 1/2, and at 102 and 102 ½ florins, for example. Often too, while the buyers on the market declare themselves ready to “take” at 101 florins, the sellers simultaneously declare that they are willing to “offer” only at 105 florins. What, in such a case, is the “exchange value” of wool? Or, to state the same question in an inverse fashion, what quantity of wool is the “exchange value” of 100 florins, for example? Obviously all that can be said is that a hundredweight of wool can be bought or sold on that market at that time between the limits of 101 and 105 florins.[20] But a particular quantity of wool and a particular quantity of money (or any other commodity) that can mutually be exchanged for each other—that are equivalents in the objective sense of the term—can nowhere be observed for they do not exist. There can thus be no question of a measure of these equivalents (a measure of “exchange value”).

     It is true that several economic objectives of practical life have given rise to a need for valuations of approximate exactness, especially valuations in terms of money Where only an approximate correctness of the estimates is required, average prices can properly serve as the basis of valuation, since they are generally most suitable for this purpose But it is clear that this method of valuing goods must prove itself completely in sufficient and even erroneous, even for practical life, wherever a higher degree of precision becomes necessary When an exact valuation of goods is necessary, three things must be distinguished according to the intention of the person making the estimate He must direct his attention to estimating (1) the price at which certain goods, if brought to market, can be sold, (2) the price at which goods of a certain kind and quality can be bought on the market, and (3) the quantity of commodities or the sum of money that is the equivalent, to the particular individual himself, of a good or of a quantity of goods.

     The basis for making the first two estimates follows from what has been said. Price formation, we have seen, always takes place between two extremes, the lower of which may also be called the demand price (the price at which the commodity is asked for on the market) and the higher of which may also be called the supply price (the price at which the commodity is offered for sale on the market).[21] The former will generally be the basis for making the first estimate and the latter the basis for making the second. The third estimate is more difficult since it involves the special position that the good or quantity of goods whose equivalent (in the subjective sense of the term) is under consideration occupies in the economy of the economizing individual. For when he estimates this equivalent, he is also considering whether the good has predominant use value or predominant exchange value to him; when quantities of a good are involved, he is considering what portion has predominant use value and what portion has predominant exchange value to him.

     Suppose that A possesses goods a, b, and c, which have a predominant use value to him, and also goods d, e, and f, which have a predominant exchange value to him. The sum of money he expects he could obtain by selling the first group would not be an equivalent of these goods to him since their use value to him is the higher, economic, form Instead, only a sum of money that would purchase identical goods or such goods as have the same use value to him will be an equivalent of these goods to him. Goods d, e, and f, however, are commodities and hence intended for sale In the ordinary course of events, they will be exchanged for money The price expected for them by economizing individual A is generally indeed the equivalent of these goods.[22] The equivalent of a good can be correctly estimated therefore only with respect to the possessor and the economic status of the good to him. The prerequisite that is necessary for the determination of the equivalent of a complex of goods (a person’s property) is the separate estimation of the equivalent of each consumption good and each commodity in the complex.[23]

     Although the theory of “exchange value” in general, and as a necessary consequence, the theory of money as a “measure of exchange value” in particular, must be designated as untenable after what has been said, observation of the nature and function of money teaches us nevertheless that the various estimates just discussed (as distinguished from measurement of the “exchange value” of goods) are usually most suitably made in terms of money. The purpose of the first two valuations is the estimation of the quantities of goods for which a commodity may be bought or sold at a given time on a given market. These quantities of goods will ordinarily consist only of money if the prospective transactions are actually performed, and knowledge of the sums of money for which a commodity can be purchased or sold is naturally, therefore, the immediate objective of the economic task of valuation.

     Under conditions of developed trade, the only commodity in which all others can be evaluated without roundabout procedures is money. Wherever barter in the narrow sense of the term disappears, and only sums of money (for the most part) actually appear as prices of the various commodities, a reliable basis for valuation in any but monetary terms is lacking. The valuation of grain or wool, for example, is relatively simple in terms of money. But the valuation of wool in terms of grain, or of grain in terms of wool, involves greater difficulties, if for no other reason than because a direct exchange of these two goods never takes place, or only in the rarest exceptional cases, with the result that the foundation for such a valuation, the respective effective prices, is wanting. A valuation of this kind is therefore usually only possible on the basis of a computation involving, as a prerequisite, the prior valuation of the two goods in terms of money. The valuation of a good in terms of money, on the other hand, can be made directly on the basis of the existing effective prices.

     The valuation of commodities in terms of money thus not only answers, as we saw before, the ordinary practical purposes of valuation most effectively, but is also the most convenient and the simplest in practical operation. Valuation in terms of other commodities is a more complicated procedure that presupposes prior valuations in terms of money.

     The same may be said about the estimation of the equivalents of goods in the subjective sense of the term, since again the first two valuations constitute its prerequisites and foundation.

     Thus it is clear why the only commodity in terms of which valuations are usually made is money. In this sense, as the commodity in terms of which valuations are as a rule and most suitably made under conditions of developed trade, money may, if one desires, be called a measure of prices.[24] [25]

     I have explained above the reasons why estimates can generally be most effectively made in terms of a commodity that has already attained money character whenever such a com­modity exists, and thus why estimates are actually made in these terms unless peculiarities of the commodity that has become money prevent it. But this outcome is not a necessary consequence of the money character of a commodity. One can very easily imagine cases in which a commodity that does not have money character nevertheless serves as the “measure of price,” or cases in which only one or another of several commodities that have attained money character serve in this additional capacity. The function of serving as a measure of price is therefore not necessarily an attribute of commodities that have attained money character. And if it is not a necessary consequence of the fact that a commodity has become money, it is still less a prerequisite or cause of a commodity becoming money.

     Actually, of course, money is generally a very suitable measure of price. This is especially true of metallic money because of its high divisibility and because of the relatively greater stability of the factors determining its value. There are other commodities that have attained money character (weapons, plate, bronze rings, etc.) but which have never been used as measures of price. The function of serving as a measure of price is not, therefore, contained in the concept of money. Several economists have fused the concept of money and the concept of a “measure of value” together, and have involved themselves, as a result, in a misconception of the true nature of money.

     The same factors that are responsible for the fact that money is the only commodity in terms of which valuations are usually made are responsible also for the fact that money is the most appropriate medium for accumulating that portion of a person’s wealth by means of which he intends to acquire other goods (consumption goods or means of production). The portion of his wealth that an economizing individual intends to use for purchasing consumption goods attains that form in which he may, at any time, satisfy his needs in the most certain and most rapid manner if it is first exchanged for money. The portion of an economizing individual’s capital that does not already consist of specialized factors of intended production is also, for the same reason, more suitably held in the form of money than in any other form, since any other commodity must first be exchanged for money in order to be further traded for the desired means of production. In fact, daily experience teaches us that economizing men endeavor to convert that part of their store of consumption goods into money which consists of goods that they no longer intend to use for the direct satisfaction of their needs but instead regard as commodities. Similarly, that part of their capital which does not consist of factors of intended production they turn first into money and thereby take a not inconsiderable step in furthering their economic purposes.

     But the notion that attributes to money as such the function of also transferring “values” from the present into the future must be designated as erroneous. Although metallic money, because of its durability and low cost of preservation, is doubtless suitable for this purpose also, it is nevertheless clear that other commodities are still better suited for it. Indeed, experience teaches that wherever less easily preserved goods rather than the precious metals have attained money-character, they ordinarily serve for purposes of circulation, but not for the preservation of “values.”[26]

     If we summarize what has been said, we come to the conclusion that the commodity that has become money is also the commodity in which valuations answering the practical purposes of economizing men and in which accumulations of funds for exchange purposes can most appropriately be made provided that no impediments founded upon its properties stand in the way. Metallic money (which writers in our science always have primarily in mind when they speak of money in general) actually answers these purposes to a high degree. But it appears to me to be just as certain that the functions of being a “measure of value” and a “store of value” must not be attributed to money as such, since these functions are of a merely accidental nature and are not an essential part of the concept of money.

4. Coinage

     From the preceding exposition of the nature and origin of money, it appears that the precious metals naturally became the economic form of money in the ordinary trading relations of civilized peoples. But the use of the precious metals for monetary purposes is accompanied by some defects whose removal had to be attempted by economizing men. The chief defects involved in the use of the precious metals for monetary purposes are: (1) the difficulty of determining their genuineness and degree of fineness, and (2) the necessity of dividing the hard material into pieces appropriate to each particular transaction. These difficulties cannot be removed easily without loss of time and other economic sacrifices.

     The testing of the genuineness of precious metals and their degree of fineness requires the use of chemicals and specific labor services, since it can be undertaken only by experts. The division of the hard metals into pieces of the weights needed for particular transactions is an operation which, because of the exactness necessary, not only requires labor, loss of time, and precision instruments, but is also accompanied by a not inconsiderable loss of the precious metal itself (because of the loss of chips and as the result of repeated smelting).

     A very penetrating description of the difficulties that arise from the use of the precious metals for monetary purposes has been given us by the well-known traveler[27] in southeastern Asia, Bastian, in his work on Burma, a country where silver still circulates in an uncoined state.

     “When a person goes to market in Burma,” Bastian relates,

he must take along a piece of silver, a hammer, a chisel, a balance, and the necessary weights. “How much are these pots?” “Show me your money,” answers the merchant, and after inspecting it determines a price at this or that weight. The buyer then asks the merchant for a small anvil and belabors his piece of silver with his hammer until he thinks he has found the correct weight. He thereupon weighs it on his own balance, since that of the merchant is not to be trusted, and adds to or takes away from the silver on the scales until the weight is right. Of course a good deal of the silver is lost as chips drop to the floor, and the buyer therefore usually prefers not to buy the exact quantity he desires but one equivalent to the piece of silver he has just broken off. In larger purchases, which are made only with silver of the highest degree of fineness, the process is still more complicated, since first an assayer must be called who determines the exact degree of fineness, and who must be paid for this task.

     This description furnishes us a clear picture of the difficulties involved in the trade of all peoples before they learned to coin metals. Frequently repeated experiences with these difficulties must have made their removal seem most desirable to every economizing individual.

     The first of the two difficulties, the determination of the degree of fineness of the metal, seems to have been the one whose removal appeared to be first in importance to economizing men. A stamp impressed by a public official or some reliable person on a metal bar guaranteed, not its weight, but its degree of fineness, and exempted the possessor, when he passed the metal on to other persons who appreciated the reliability of the stamp, from the burdensome and expensive assay test. Metal so stamped still had to be weighed, as before, but its fineness required no further examination.

     In some cases at the same time, and in other cases possibly somewhat later, economizing men appear to have hit upon the idea of also designating the weight of the pieces of metal in similar fashion, and of dividing the metals from the beginning into pieces that were reliably marked with their weight as well as their fineness. This was naturally best accomplished by dividing the precious metal into small pieces corresponding to the needs of trade, and by marking the metal in such a way that no significant part could be removed from the pieces without the removal becoming immediately apparent. This aim was achieved by coining the metal, and it was in this way that our coins came into being. Coins are thus, in their very nature, nothing but pieces of metal whose fineness and weight have been determined in a reliable manner and with an exactness sufficient for the practical purposes of economic life, and which are protected against fraud in as efficient a manner as possible. The fact of coinage makes it possible for us, in all transactions, simply to count out the necessary weights of the precious metals in a reliable manner without irksome assay tests, division, and weighing. The economic importance of the coin, therefore, consists in the fact that (apart from saving us from the mechanical operation of dividing the precious metal into the required quantities) its acceptance saves us the examination of its genuineness, fineness, and weight. When we pass it on, it saves us from giving proof of these facts. Thus it frees us from many irksome, wearisome, procedures involving economic sacrifices, and as a consequence of this fact, the naturally high marketability of the precious metals is considerably increased.

     The best guarantee of the full weight and assured fineness of coins can, in the nature of the case, be given by the government itself, since it is known to and recognized by everyone and has the power to prevent and punish crimes against the coinage. Governments have therefore usually accepted the obligation of stamping the coins necessary for trade. But they have so often and so greatly misused their power that economizing individuals eventually almost forgot the fact that a coin is nothing but a piece of precious metal of fixed fineness and weight, for which fineness and full weight the honesty and rectitude of the mint constitute a guarantee. Doubts even arose as to whether money is a commodity at all. Indeed, it was finally declared to be something entirely imaginary resting solely on human convenience. The fact that governments treated money as if it actually had been merely the product of the convenience of men in general and of their legislative whims in particular contributed therefore in no small degree to furthering errors about the nature of money.[28]

     Originally the money metals were undoubtedly divided into pieces that corresponded to the weights already in general use in commerce. The Roman as was originally a pound of copper. In the time of Edward I, the English pound sterling contained a pound, Tower weight, of silver, of a certain fineness. Similarly, the French livre in the time of Charlemagne contained a pound of silver according to Troyes weight. The English shilling and penny were also weights customarily used in commerce. “When wheat is at twelve shillings the quarter,” says an ancient statute of Henry III, “then wastel bread of a farthing shall weigh eleven shillings and four pence.”[29] It is also known that the German mark, schilling, pfennig, etc., were originally commercial weights. But the repeated debasements of the currency that were brought about by the masters of the mints soon caused the ordinary weights of bullion and the weights according to which the precious metals were used in trade (counted out as coins) to become very different in most countries. This difference in turn contributed not a little toward causing money to be regarded as a special “measure of exchange value,” even though the standard coin in every natural economy is nothing but a unit of weight defined by the weight according to which the precious metals are traded. Frequent attempts have been made in recent times to bring the unit of weight of bullion again into accord with the coinage unit, as in Germany and Austria where the Zollverein pound was chosen as the foundation of the coinage system.

     The principal imperfections of our coins are that they cannot be made in perfectly exact weights, and that even the exactness that could be achieved is not attempted, for practical reasons (because of cost), in the customary manufacturing processes employed in the mints. The imperfections with which the coins originally leave the mint are augmented during their circulation by use, with the result that a perceptible inequality easily arises in the weights of coins of the same denomination.

     Obviously these defects are more pronounced the smaller the quantities into which the precious metals are divided. The coining of the precious metals into pieces as small as retail trade requires would lead to the greatest technical difficulties, and even if it were done with moderate care, it would require economic sacrifices that would be out of all proportion to the face value of the coins. On the other hand, everyone familiar with trade can easily understand the difficulties to which a lack of coins of small denominations would lead.

     “A smaller coin than 2 Annas,” Bastian reports, “did not exist in Siam. Anyone wishing to buy anything below that price had to wait until the addition of a new want justified the expenditure of such a sum or join with other would-be buyers and split the purchase with them. Sometimes small cups of rice served as money substitutes, and it is said that in Sokotra small pieces of ghi, or butter, served as small change.” In Mexican cities Bastian was given pieces of soap, and eggs in the country, as small change. In the highlands of Peru it is the custom of the natives to have a basket ready which they have divided into compartments. In one compartment there are sewing needles, in another spools of thread, and in others candles and other objects of daily use. They offer a selection of these things equal to the amount of small change needed. In upper Burma, lumps of lead are used for the smallest purchases, such as fruit, cigars, etc., and every merchant has a large case full of these lumps in his shop. They are weighed on a larger balance than that used for silver. In villages where one does not expect to get change for silver, a servant must follow with a heavy sack of lead for small purchases.

     In most civilized countries, the technical and economic difficulties of coining the precious metals into very small pieces are evaded by coining pieces of some ordinary metal, usually copper or brass.

     Since, as a matter of convenience if for no other reason, no-one will needlessly keep any sizeable part of his wealth in these coins, they have merely a subsidiary position in trade, and can be coined harmlessly at half weight, or even less, for the greater convenience of the public, provided only that they can, at any time, be exchanged at the mint for coins made of precious metals, or that only such small quantities of subsidiary coin are issued that they remain in circulation. The first is, in any case, the more correct method and at the same time a more certain protection against government abuses arising from the profit accruing to government from the issuance of these coins. Such pieces of money are called subsidiary coin. Their value is greater than the materials from which they are made, the additional value being attributable to the fact that a certain number of the subsidiary coins can be exchanged at the mint for a coin of larger denomination, and to the fact that anybody can use them to discharge his obligations to the issuing government and to any other person up to the amount of the smallest full-weight coin. Because of the greater convenience of subsidiary brass or copper coins, the public in this case readily tolerates the small economic anomaly, since the advantages of easier transportability and convenience are more important than fullness of weight in the case of coins that are never the center of important economic interests. In a similar manner, even lightweight silver coins are minted in many countries. This is not harmful as long as they are limited to denominations for which, for technical or economic reasons, no suitable full-weight coins can be made.



[1]Theodor Mommsen, Geschichte des römischen Münzwesens,Berlin, 1860, pp. v–xx, and 167ff.; Carnap, “Zur Geschichte der Münzwissenschaft und der Werthzeichen,” Zeitschrift für die gesammte Staatswissenschaft, XVI (1860), 348–396; Friedrich Kenner, “Die Anfänge des Geldes in Alterthume,” Sitzungsberichte der Kaiserlichen Akademie der Wissenschaften zu Wien: Philologisch-Historische Classe, XLIII (1863), 382–490; Roscher, op cit., pp. 36–40; Hildebrand, op. cit., p. 5; Scheel, op. cit., pp. 12–29; A.N. Bernardakis, “De l’origine des monnaies et de leurs noms,” Journal des Economistes, (Third Series), XVIII (1870), 209–245.

[2]For obvious reasons, the words “Geld” and “gelten” in this and the following sentence are left untranslated.—TR.

[3]See the first two paragraphs of Appendix I (p. 312) for material originally appearing here as a footnote.—TR.

[4]Custom as a factor in the origin of money is stressed by Condillac, op. cit., pp. 286–290 and by G.F. Le Trosne, De l’intérêt social,Paris, 1777, pp. 43f.

[5]See Appendix J (p. 315) for material originally appended here as a footnote.—TR.

[6]See Stein, op. cit., p. 55; especially also Karl Knies, “Ueber die Geldentwerthung und die mit ihr in Verbindung gebrachten Erscheinungen,” Zeitschrift für die gesammte Staatswissenschaft, XIV (1858), 266; and Mommsen, op. cit., pp. vii–viii.

[7]See the last two paragraphs of Appendix I (p. 313) for material appended here as a footnote in the original.—TR.

[8]August Böckh, Metrologische Untersuchungen über Gewichte, Münzfusse und Masse des Alterthums, Berlin, 1838, pp. 385ff., 420ff.; Mommsen, op. cit., p. 169; Friedrich O. Hultsch, Griechische und römische Metrologie, Berlin, 1862, pp. 124ff., 188ff.

[9]Wilh. Wackernagel, “Gewerbe, Handel und Schifffahrt der Germanen,” Zeitschrift für deutsches Alterthum,IX (1853), 548ff.; Jakob Grimm, Deutsche Rechtsalterthümer, 4th edition prepared by A. Heusler and R. Hübner, Leipzig, 1899, II, 123–124; Ad. Soetbeer, “Beiträge zur Geschichte des Geld- und Münzwesens in Deutschland,” Forschungen zur deutschen Geschichte, I (1862), 215.

[10]Aloys Sprenger, Das Leben und die Lehre des Mohammad, Berlin, 1861–65, III, 139.

[11]Friedrich v. Spiegel, Commentar über das Avesta,Wien, 1864–68, I, 94ff.

[12]Moritz A. Levy, Geschichte der jüdischen Münzen, Leipzig, 1862, p. 7.

[13] Roscher, op. cit., note 5 on p. 309.

[14]Plutarch, Lives, with an English translation by Bernadotte Perrin, London: William Heinemann, 1914, I, 55; Pliny, The Natural History, translated by John Bostock and H.T. Riley, London: H.G. Bohn, 1856, IV, 5–6; Heinrich Schreiber, “Die Metallringe der Kelten als Schmuck und Geld,” Taschenbuch für Geschichte und Alterthum, II, 67–152, 240–247, and III, 401–408.

[15]Francesco Saverio Clavigero, The History of Mexico,Richmond, 1806, II, 188ff.

[16]A beaver skin is still the unit of exchange value in several regions of the Hudson’s Bay Company. Three martens are equal to one beaver, one white fox to two beavers, one black fox or one bear equal to four beavers, and one rifle equal to 15 beavers (“Die Jäger im nördlichen Amerika,” Das Ausland, XIX, no. 21, [Jan. 21, 1846], 84). The Estonian word “raha” (money) has in the related language of the Laplanders the meaning of fur (Philipp Krug, Zur Münzkunde Russlands, St. Petersburg, 1805). On fur money in the Russian middle ages, see the report by Nestor (A.L. Schlözer, translator, Nestor, Russische Annalen, Goettingen, 1802–1809, III, 90). The old word, “kung” (money) really means marten. As late as 1610 a Russian war chest containing 5450 rubles in silver and 7000 rubles worth of fur was taken. (See Nikolai Karamzin, Geschichte des russischen Reichs, Riga, 1820–1833, XI, 183). See also Roscher, op. cit., p. 309, and Heinrich Storch, Handbuch der National-Wirthschaftlehre, ed. by K.H. Rau, Hamburg, 1820, III, 25–26.

[17]Roscher, op. cit., note 13 on pp. 313–314.

[18]Réflexions sur la formation et la distribution des richesses, reprinted in Oeuvres de Turgot, ed. by G. Schelle, Paris, 1913–23, II, 554. See also Roscher, op. cit., pp. 297–303, Knies, op. cit., p. 262.

[19]See on this especially J.A.R. v. Helferich, Von den periodischen Schwankungen im Werth der edeln Metalle von der Entdeckung Amerikas bis zum Jahre 1830, Nürnberg, 1843.

[20]It is perhaps equally obvious that these are not the limits described in Chapter V as those between which price formation must take place. Other interpretations may be possible, but it seems likely that the “limits” of this passage are simply the bids and offers chosen by two bargainers as arbitrary starting points in a haggling process, the seller intending to come down and the buyer to come up. In spite of Menger’s apparent implication in the second paragraph following that “the demand price” and “the supply price” of that paragraph are the limits described in Chapter V, they are evidently of the same character as the wool market “limits” here.—TR.

[21]See note 20 above.—TR.

[22]That is, the subjective equivalent of these goods to A is the price expected by A. The original German passage runs as follows: “der voraussichtlich dafür zu erzielende Preis ist für das wirthschaftende Subject A allerdings der Regel nach das Aequivalent dieser Güter.” —TR.

[23]Although this difference has not yet been sufficiently observed in our science, it has long been the object of detailed investigations on the part of students of the law. This question is of practical interest to them in cases in which there are claims for damages as well as in many other cases (whenever there is substitute fulfillment of a contract, for example). Consider, for instance, the case of someone unlawfully preventing a scientist from using his library. The “market price” of the books would be a very insufficient compensation to the scientist for his loss. But the market price would be the rightful equivalent of the library to the scientist’s heir, to whom, the library would have a predominating exchange value.

[24]Aristotle already observed that money serves as a measure in the trade of men (Ethica Nicomachea V. 5. 1133b, 16; and ix, 1. 1164a, 1). Among the writers who trace back the origin of money exclusively or predominantly to the need of economizing men for a measure of “exchange value,” or of prices, and who regard the money character of the precious metals as due to their special suitability for this purpose, I should like to mention here the following: Carlo Antonio Broggia, Trattato delle monete, (published 1743) in Scrittori classici Italiani di economia politica, Milano, 1803–05, IV, 304; Pompeo Neri, Osservazioni sopra il prezzo legale delle monete, (published 1751) in ibid.,VI, 134ff.; Ferdinando Galiani, Della moneta, in ibid.,XII, 23ff. and 120 ff.; Antonio Genovesi, Lezioni di economia civile, in ibid., XV, 291–313 and 333–341; Francis Hutcheson, A System of Moral Philosophy, London, 1755, II, 55–58; David Ricardo, op. cit., p. 40; Storch, op. cit., I, 45ff.; Lorenz v. Stein, System der Staatswissenschaft, Stuttgart, 1852, I, 217 ff.; Albert E.F. Schäffle, Das gesellschaftliche System der menschlichen Wirthschaft,Tübingen, 1873, I, 221f.

[25]The next two paragraphs appear here as a footnote in the original.—TR.

[26]The chief representatives of this theory are the great English philosophers of the seventeenth century. Hobbes starts with the need of men for conserving perishable wealth that they do not intend to use for immediate consumption, and he shows how this end can be achieved by transformation (“concoctio”) of the perishable wealth into metallic money. He also shows how wealth can thereby be carried about more easily (Leviathan, ed. by A.D. Lindsay, “Everyman’s Library,” London, 1914, p. 133). Locke makes the same point (Two Treatises of Government, and Further Considerations concerning Raising the Value of Money, in The Works of John Locke,12th edition, London, 1824, IV, 364–365 and 139ff.).

Sallustio Antonio Bandini develops a view that has its roots in the work of Aristotle. He begins his exposition by showing the difficulties to which pure barter leads, arguing that a person whose goods are wanted by others was not always in a situation in which he could make use of their goods, hence that a pawn (“un mallevadore”) became necessary whose transfer was to assure future compensation, and that the precious metals were chosen for this function. (Discorso economico in Scrittori classici Italiani di economia politica,Milano, 1803–05, VIII, 142ff.) This theory was further developed in Italy by Giammaria Ortes (Della economia nazionale, in ibid., XXIX, 271–276, and Lettere in ibid.,XXX, 258ff.); by Gian-Rinaldo Carli (Dell’origine e del commercio della moneta, in ibid., XX, 15–26); and by Giambattista Coriani (Riflessioni sulle monete, and Lettera ad un legislatore della Republica Cisalpina, in ibid.,XLVI, 87–102 and 153ff.). In France the theory was developed by Dutot, (Réflexions politiques sur les finances et le commerce, in E. Daire, ed., Economistes financiers du XVIIIe Siècle, Paris, 1843, p. 895). In Germany it was revised by T.A.H. Schmalz, (Staatswirthschaftslehre in BriefenBerlin, 1818, I, 48ff.), and in England recently by Henry Dunning Macleod, (The Elements of Economics,New York, 1881, I, 171ff.).

[27]Menger does not give references to the passages he quotes from Bastian and we were unable to find them in the published works of Adolph Bastian that were accessible to us. It is possible that Menger’s information was based on an unpublished lecture or on a personal communication from Bastian.—TR.

[28]The next paragraph appears in the original as a footnote appended at the end of the previous paragraph.—TR.

[29]See Adam Smith, op. cit., p. 26.

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