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3. The Pattern of Indirect Exchange

4. The Monetary Unit

We have seen that every good is “in supply” if it can be divided into units, each of which is homogeneous with every other. Goods can be bought and sold only in terms of such units, and those goods which are indivisible and unique may be described as being in a supply of one unit only. Tangible commodities are generally traded in terms of units of weight, such as tons, pounds, ounces, grains, grams, etc. The money commodity is no exception to this rule. The most universally traded commodity in the community, it is bought and sold always in terms of units of its weight. It is characteristic of units of weight, as of other metrical scales, that each unit is convertible into every other. Thus, one pound equals 16 ounces; and one ounce equals 437.5 grains, or 28.35 grams. Therefore, if Jones sells his tractor for 15 pounds of gold, he may also be described as having sold the tractor for 240 ounces of gold, or for 6,804 grams of gold, etc.

It is clear that the size of the unit of the money commodity chosen for any transaction is irrelevant for economic analysis and is purely a matter of convenience for the various parties. All the units will be units of weight, and they will be convertible into pounds, ounces, etc., by multiplying or dividing by some constant number, and therefore all will be convertible into one another in the same manner. Thus, one pound of gold will equal 16 ounces and will, of course, exchange for 16 ounces, should such an exchange be desired on the market. The economic irrelevance of the names or sizes of the units may be seen from the following example. Suppose that the residents of Texas use, in their exchanges, a unit known as the Houston, equalling 20 grains of gold, while the residents of Massachusetts use the Adams, equalling 10 grains. The citizens of the respective areas may make their exchanges and calculations in these terms, e.g., Jones sells his car for “2,000 Houstons of gold,” or, more simply, “2,000 Houstons,” or Jones might consider the money price of eggs as being “ 1/2 Houston per dozen.” On the other hand, Smith might buy a house for “10,000 Adamses.” It is obvious that the use of the different names will complicate matters, but it is economically insignificant. The “Houston” is still a unit of weight of gold, and is a shorthand name for “20 grains of gold.” It is clear that, on the market, one Houston will exchange for two Adamses.7

To avoid unnecessary complications and to clarify the analysis, therefore, the names of the monetary units in this work will be in terms of universally acceptable units of weight (such as ounces, grams, etc.) rather than in terms of accidental names of only local significance (such as dollars or francs).

Obviously, the more valuable the units of a commodity are, the smaller the size of the units used in daily transactions; thus, platinum will be traded in terms of ounces, while iron is traded in terms of tons. Relatively valuable money commodities like gold and silver will tend to be traded in terms of smaller units of weight. Here again, this fact has no particular economic significance.

The form in which a unit weight of any commodity is traded depends on its usefulness for any specific, desired purpose. Thus, iron may be sold in the form of bars or chunks, cheese in rectangular or triangular shape, etc. Whereas other commodities will be traded in those forms suitable for production or consumption, money will be traded in forms suitable for exchange or storing until an exchange is made. Historically, the shapes of money have been innumerable.8 In recent centuries large bars of gold or silver have been used for storage or for exchange in larger transactions, while smaller, circular pieces, known as coins, are used for smaller transactions.

  • 7. The names of the units can be, and have been, anything conceivable, depending on custom, language, etc. Such names as dollars, francs, marks, shekels, are examples. The “dollar” originated as the generally applied name of ounce weights of silver coined by the Count of Schlick in Bohemia. The Count, who lived in Joachim's Valley (or Joachimsthal) began coining ounces of silver in 1518, and their uniformity and fineness earned a reputation throughout Europe. They became known as Joachimsthalers, finally abbreviated to thalers. The name “dollar” is derived from “thaler.” Cf. Charles A. Conant, The Principles of Money and Banking (New York: Harper & Bros., 1905), I, 135–40; Menger, Principles of Economics, p. 283.
  • 8. Gold, for example, has been traded as money in the raw form of nuggets, as gold dust in sacks, or as jewelry and other ornaments. One interesting example of a money shape was the iron money of central Africa. Iron was a valuable commodity, in use as hoes. The money form was made to be divisible into two parts, easily shaped into hoes. See Laughlin, A New Exposition of Money, Credit, and Prices, p. 40.