We saw in chapter 3 how one or more very easily marketable commodities were chosen by the market as media of exchange, thereby greatly increasing their marketability and becoming more and more generally used until they could be called money. We have implicitly assumed that there are one or two media that are fully marketable—always salable—and other commodities that are simply sold for money. We have omitted mention of the degrees of marketability of these goods. Some goods are more readily marketable than others.

In previous sections we saw that bills of exchange are not money-substitutes, but credit instruments. Money-substitutes are claims to present money, equivalent to warehouse receipts. But some critics maintain that in Europe at the turn of the nineteenth century bills did circulate as money-substitutes. They circulated as final payment in advance of their due dates, their face value discounted for the period of time left for maturity. Yet these were not money-substitutes. The holder of a bill was a creditor.

MONEY HAS ENTERED INTO ALMOST all our discussion so far. In chapter 3 we saw how the economy evolved from barter to indirect exchange. We saw the patterns of indirect exchange and the types of allocations of income and expenditure that are made in a monetary economy. In chapter 4 we discussed money prices and their formation, analyzed the marginal utility of money, and demonstrated how monetary theory can be subsumed under utility theory by means of the money regression theorem.

Money is a commodity that serves as a general medium of exchange; its exchanges therefore permeate the economic system. Like all commodities, it has a market demand and a market supply, although its special situation lends it many unique features. We saw in chapter 4 that its “price” has no unique expression on the market. Other commodities are all expressible in terms of units of money and therefore have uniquely identifiable prices.

The purchasing power of money is therefore determined by two factors: the total demand schedule for money to hold and the stock of money in existence. It is easy to see on a diagram what happens when either of these determining elements changes. Thus, suppose that the schedule of total demand increases (shifts to the right). Then (see Figure 75) the total-demand-for-money curve has shifted from DtDt to Dt′Dt′. At the previous equilibrium PPM point, A, the demand for money now exceeds the stock available by AE.

In the case of consumers’ goods, we do not go behind their subjective utilities on people’s value scales to investigate why they were preferred; economics must stop once the ranking has been made. In the case of money, however, we are confronted with a different problem. For the utility of money (setting aside the nonmonetary use of the money commodity) depends solely on its prospective use as the general medium of exchange.

A change in the money relation necessarily involves gains and losses because money is not neutral and price changes do not take place simultaneously. Let us assume—and this will rarely hold in practice—that the final equilibrium position resulting from a change in the money relation is the same in all respects (including relative prices, individual values, etc.) as the previous equilibrium, except for the change in the purchasing power of money. Actually, as we shall see, there will almost undoubtedly be many changes in these factors in the new equilibrium situation.