The Value of Money

IN the statement of the quantity theory, the proviso is commonly made that all exchanges must be made by means of money, or of money and bank-credit. Barter is excluded by hypothesis. If resort to barter were possible, then people might avert the fall in prices due to scarcity of money, or increase in trade, by dispensing with money in part of their transactions, and the proportional decrease in prices which the quantity theory calls for would be lacking. Is this assumption true? Is barter banished from the modern world, or does it remain reasonably possible, and, to a considerable degree, actual?

Fisher maintains the thesis—the failure of which he admits would spoil the quantity theory1—that barter is practically impossible, and negligible in modern business life. “Practically, however, in the world to-day, even such temporary resort to barter is trifling. The convenience of exchange by money is so much greater than the convenience of barter, that the price adjustment would be made almost at once. If barter needs to be seriously considered as a relief from money stringency, we shall be doing it full justice if we picture it as a safety valve, working against a resistance so great as almost never to come into operation, and then only for brief transition intervals. For all practical purposes and all normal cases, we may assume that money and checks are necessities for modern trade.”2

This contention seems to me untenable. I think it can easily be shown that barter remains an important factor in modern business life, especially if one extends the term barter, a little, to cover various flexible substitutes for the use of money and checks in effecting exchanges. Clearly from the standpoint of the present issue, such an extension of the meaning of barter is legitimate, as any such substitutes would equally spoil the proportionality in the supposed relation between prices and money, or prices and trade.

Where does one find barter? Well, not to be ignored would be the advertisements which fill many columns of such a paper as the New York Telegram in the course of a week: “Wanted: to trade a well-trained parrot for a violin”—a trade that might, or might not, be a wise one! There is a good deal of such simple barter among the people. Then, perhaps more important, is the regular practice of sewing machine, piano, automobile, and other similar companies of taking part of the payment for a new machine, piano,3 or automobile in the similar thing which the owner is discarding. The old machine, piano, etc., are then repaired, repainted, and sold again. This is a very extensive practice. Again, there are companies which combine the business of wrecking old houses and building new ones, who regularly take the old materials as part of their pay. This is a highly important feature of the organized building trade in great cities, and is frequently done in small towns. The building trade is no negligible matter. The “horse-trade” still thrives in rural regions, and barter of various kinds, of live stock, of grain and hay, of fresh and cured meat, and of labor, is an important feature in rural life in many sections. Much of agricultural rent in the South is still paid in kind, under the “share system.” Much labor, especially farm and domestic labor, is still paid for partly in kind. Where payments for labor are made in orders on company stores, we have again what is virtually barter, from the standpoint of the point at issue. Real estate transactions make large use of barter. Farms are exchanged for one another, with some cash (or more usually, a promissory note) “to boot.” The writer has repeatedly heard real estate men say to customers: “I can’t sell it for you very easily, but I can trade it off, and maybe you can sell what you trade it for.” This is perhaps more frequent in rural real estate transactions, and in the smaller cities, than in large cities, but it is very extensive in New York City.4

Again, when corporations are to be combined, various plans are possible. There may be a merger; there may be a holding corporation; there may be a lease. If the money market is easy, one of the former methods will be used,—most frequently, for legal reasons, the holding corporation, if there are any valuable franchises involved. But mergers and holding corporations commonly involve buying out the interests which are to be absorbed, and call for the use of checks. If the money market is tight, therefore, the promoter of the combination may frequently find the lease the more advantageous form of consolidation.5 The great advantage of the lease is that, when the money market is tight, it involves no financial plan, no underwriting, no outlay of “cash.” This is, therefore, an equivalent of barter, so far as the point at issue is concerned. Even where a holding corporation is formed, however, there may be considerable barter: the stockholders of the corporation which is absorbed may receive payment for their stocks, in whole or in part, in the securities of the holding company, rather than in checks. An era of financial consolidation, such as we have been passing through, and through which we have not by any means gone, though the movement toward monopoly has been in great degree checked, presents a great deal of this sort of barter, or equivalents of barter.6 A striking thing to notice here, moreover, is the flexible margin between use of bank-credit and barter, a margin depending primarily upon the condition of the money market, and particularly upon the money-rates.

Not yet has the most important element in modern barter been mentioned. I refer to the “clearing-house” arrangements of the stock and produce exchanges. Under these arrangements, brokers who have sold ten thousand shares of Westinghouse El. and M. Common during the day, and bought seven thousand shares, buying and selling being in smaller lots, with a number of different houses, no longer are obliged to deliver ten thousand shares, receiving therefor $700,000, and to receive seven thousand shares, paying therefor $490,000. Instead, they deliver three thousand shares only to the clearing house, and receive from the clearing house only $210,000 when the transaction is, from the standpoint of the particular broker involved, completed. This is a far remove, in technical perfection, from primitive barter, but it is barter, and it saves the using of a vast deal of bank-credit as between brokers. How important it is, from the standpoint of the stock exchange, may be judged from the following statement in Sprague’s Crises Under the National Banking System: “A much more fundamental change in the organization in the New York money market came with the establishment of the stock exchange clearing house in May, 1892. It led to a very considerable reduction in the clearing-house exchanges of the banks and also, and more important, in the volume of certified checks. [Italics mine.] Over-certification of checks ceased to be a factor of the first magnitude in the banking methods of the city. Had not this arrangement for stock-exchange dealings been set up, it is probable that it would have been necessary to close the stock exchange in 1893 and in 1907, and it is also probable that the volume of business transacted in the years after 1897 could not have been handled.” (P. 152.)

The same arrangements have been widely introduced in other stock exchanges, and in the produce exchanges.7

In general, with reference to barter, this point is significant. The money economy has made barter easier rather than harder. It has made possible a host of refinements in barter, which make it at many points more convenient and cheaper than check or money exchanges. It is common to find our present methods of conducting foreign trade described as a “system of refined barter,” which indeed, from the standpoint of the present issue, it is: bills of exchange are neither money nor bank-credit! Where bills of exchange are used in internal trade extensively—as in Germany, where they pass from hand to hand in several transactions before being discounted at banks8—we have a highly important substitute for money and deposits, which functions as barter,—flexibility of substitutes for money and deposits is strikingly evident. The feature of the money economy which has thus refined and improved barter is the standard of value (common measure of value) function of money.9 This standard of value function, be it noted, makes no call on money itself, necessarily. The medium of exchange and “bearer of options” functions of money are the chief sources of such additions to the value of money as come from the money-use. But the fact that goods have money-prices, which can be compared with one another easily, in objective terms, makes barter, and barter-equivalents, a highly convenient and very important feature of the most developed commercial system. And so we reject another essential assumption of the quantity theory.10

The extent of the offsetting by barter, clearing-houses in the exchanges, and book-credit, though very great, is quite small as compared with Professor Fisher’s 387 billions, and does not nearly offset the overcounting. The writer has obtained some fairly definite data on this point, which will be presented in the chapter on “Statistical Demonstrations of the Quantity Theory,” in discussing the volume of trade.

• 1Social Value, Houghton Mifflin, Boston, 1911.
• 2Cooley, C. H., “Valuation as a Social Process,” Psych. Bull., Dec. 15, 1912; “The Institutional Character of Pecuniary Valuation,” American Journal of Sociology, Jan. 1913; “The Sphere of Pecuniary Valuation,” Ibid., Sept. 1913; “The Progress of Pecuniary Valuation,” Quart. Jour. of Econ,., Nov. 1915. Clark, J. M., “The Concept of Value,” and “A Rejoinder,” Quart. Jour. of Econ., Aug. 1915. Anderson, B. M., Jr., “The Concept of Value Further Considered,” Ibid.; “Schumpeter’s Dynamic Economics,” Pol. Sci. Quart., Dec. 1915. Perry, R. B., “Economic Value and Moral Value,” Quart. Jour. of Econ., May, 1916. Bilgram, Hugo, “The Equivalent Concept of Value,” Ibid., Nov. 1915. Haney, L. H., “The Social Point of View in Economics,” Ibid., Nov. 1913 and Feb. 1914. Johnson, A. S., in American Economic Review, June, 1912, pp. 320 et seq. Carver, T. N., in Jour, of Pol. Econ., June, 1912. Mead, G. H., in. Psych. Bull., Dec. 1911. Ellwood, C. A., in American Jour, of Sociology, 1913. Ansiaux, M., in Archives Sociologiques, Bulletin de l’Institut de Sociologie Solvay, May 25, 1912, pp. 949–55.
• 3Including many whose formal definitions are quite different, and who would repudiate the contentions here advanced! Cf. my article, “The Concept of Value Further Considered,” Quarterly Journal of Economics, Aug. 1915, and Social Value, chs. 2 and 11.
• 4Definitions of wealth differ, and there are few if any definitions of wealth broad enough to make it true that only items of wealth have value. All wealth has value, but not all value is embodied in wealth. Thus, stocks and bonds, and “good will” have value. Few writers would classify them as wealth. The distinction between wealth and property is employed by many writers to meet the difficulty here presented, and it is held that these intangibles have only the value of the wealth to which they give title. In a logical schema, on the assumption of a fluid, static equilibrium, this may serve. It is true in fact, however, that many of these intangibles have value apart from the wealth to which they give title. But these are complications which I reserve for a later part of this chapter, for the chapter on “Statics and Dynamics,” and (in the case of irredeemable paper money) for the chapter on “Dodo Bones.”
• 5The notion of ratio of exchange as a ratio between values is strictly accurate only under static assumptions. Goods, in actual life, are not always exchanged strictly in accordance with their values. Cf. my article, “The Concept of Value Further Considered,” Q. J. E., Aug. 1915, pp. 698–702. In cases where prices, or exchange relations, are not in accord with values, the term “ratio of exchange” is inapplicable, since there are no quantities to be terms of the ratio—except the pure abstract numbers of the commodities, each measured in its own unit, exchanged.
• 6In chapter 17 of Social Value, I have followed the German usage in broadening the term, price, to cover all exchange relations. This has led to misunderstanding on the part of some readers, and it has seemed best to me to return to what appears to be the more familiar usage. It is purely a question of convenience. Practically, ratios of exchange which are not money-prices rarely come in for discussion, outside the preliminary chapter on definition! Professor Fetter, in his article on the “Definition of Price,” in the American Economic Review, Dec. 1912, proposes to broaden the term price in the manner which I am here abandoning, and his count of economists would seem to leave usage about equally divided between the broader and narrower uses of the term. It does not seem to me to be a point worth arguing about, however, and since I am practically convinced that cause of misunderstanding will be removed by using price to mean “money-price,” I shall so use the term in this book, using ratio of exchange, or exchange relation, to express the broader concept.
• 7E. g., Böhm-Bawerk, Grundzüge der Theorie des wirtschaftlichen Güterwerts, Conrad’s Jahrbücher, 1886, p. 478, n.; Carver, “Concept of an Economic Quantity,” Quarterly Journal of Economics, 1907.
• 8This distinction is elaborated infra, in the chapter on the “Origin of Money.”
• 9It is a matter of high importance that the value notion should be extended beyond exchange, if the economist is to be able to apply his theory to such highly important economic problems as socialism. Cf. Schäffle, Quintessence of Socialism, and Clark, J. M., Quart. Jour. of Econ., Aug. 1915, p. 710.
• 10As shown, infra, in the chapters on “Supply and Demand,” “Cost of Production,” “Capitalization Theory,” etc.