Up to this point we have analyzed the market in terms of a single money and its purchasing power. This analysis is valid for each and every type of medium of exchange existing on the market. But if there is more than one medium coexisting on the market, what determines the exchange ratios between the various media? Although on an unhampered market there is a gradual tendency for one single money to be established, this tendency works very slowly. If two or more commodities offer good facilities and are both especially marketable, they may coexist as moneys.

The basis on which we have been explaining the purchasing power of money and the changes in and consequences of monetary phenomena has been an analysis of individual action. The behavior of aggregates, such as the aggregate demand for money and aggregate supply, has been constructed out of their individual components. In this way, monetary theory has been integrated into general economics.

In the real world, there will be continual changes in the pattern of economic activity, changes resulting from shifts in the tastes and demands of consumers, in resources available, technological knowledge, etc. That prices and outputs fluctuate, therefore, is to be expected, and absence of fluctuation would be unusual. Particular prices and outputs will change under the impact of shifts in demand and production conditions; the general level of production will change according to individual time preferences.

In olden times, before the development of economic science, people naively assumed that the value of money remained always unchanged. “Value” was assumed to be an objective quantity inhering in things and their relations, and money was the measure, the fixed yardstick, of the values of goods and their changes.

The knowledge that the purchasing power of money could vary led some economists to try to improve on the free market by creating, in some way, a monetary unit which would remain stable and constant in its purchasing power. All these stabilization plans, of course, involve in one way or another an attack on the gold or other commodity standard, since the value of gold fluctuates as a result of the continual changes in the supply of and the demand for gold.

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.