The Value of Money

by Benjamin M. Anderson

CHAPTER XXI

THE ORIGIN OF MONEY, AND THE VALUE OF GOLD

This chapter is not concerned with history or anthropology for their own sake. The present writer has made no independent historical or anthropological researches, in connection with the question of the origin of money. The chapter is primarily concerned with giving an exposition of the theories of two writers, Karl Menger and W. W. Carlile.[455] It is not important, for my purposes, whether either writer has presented a theory which anthropology will accept as a correct account of actual origins. The theories do throw light on present functioning, and seem to me to be correct as analytical theories, whether historically adequate or not. There are two main questions with which the chapter is concerned:

(1) How did money come to be?

(2) Why should gold and silver have passed all rival commodities in the competition for employment as money?

Viewing these questions from the standpoint of present functioning, rather than from the standpoint of historical origins, we may restate them as follows:

(1) Why should men accept small disks of metal, or paper representatives of these metal disks, for which, as metal, they have no use, or at all events far in excess of the amount which they can make use of as metal, in return for economic commodities which they can use? The social utility of a money economy may well be granted, without giving an answer to this question. Granting that social economic life works better by far when men do accept these disks of metal in payments, the question still remains not merely as to why the practice started, but also as to why it continues. Granted that it is to the individual, as well as to the social advantage, that each individual should accept these metal disks in excess of his personal need for the metal, if he is assured that he can pass them on to others at will in return for the goods he wishes to consume, the question still remains as to why the individual should have this assurance, as to why the general practice should continue. Menger quotes Savigny as holding that the thing is downright "mysterious," and the Aristotelian answer of social convention (sometimes interpreted as "social contract") is, in effect, a confession that the thing does baffle explanation on the ordinarily understood laws of exchange. The convergence of individual and social advantage, which English economic theory has done so much to emphasize, is less clear by far in connection with money than with the case where A trades a sheep (of which he has a surplus) to B for a quantity of grain (of which B has a surplus), while A has not enough grain, and B has not enough sheep. This exchange is clearly to the advantage of both A and B, and the practice of making such exchanges is clearly to the general advantage. But in the case of money, A trades sheep (of which he may not have an excess, so far as his capacity to consume is concerned) for disks of metal which he probably does not intend to consume at all. The social advantage of a general practice of the sort is easily established, but it is not clear that it is to A's advantage, unless we assume the practice general. But there are many practices which could be shown to be socially advantageous if all men practiced them, and, indeed, individually advantageous, if generally practiced, which can, none the less, not be made a general practice. If thieves would cease stealing, we could dispense with a vast expense now incurred in police and safe deposit vaults and heavy locks, etc., and with a small fraction of the savings could give pensions to the thieves which would surpass by far their present incomes! Individual and social advantage would converge. But for many reasons the practice could not be instituted, and would break down quickly if instituted. Very powerful social pressure indeed is needed to make an advantageous social institution—like morality—work, so long as individuals sometimes find advantage in breaking the general practice, even though the general practice, on the part of other people, is of advantage to every individual. Now it is clear that the institution of money is to the social advantage. It is clear that it is to the advantage of every individual who has money that everyone else should be ready to accept it in unlimited amount, in return for his goods and services. But it is not clear, on the surface, why everyone should be ready to take metal disks in unlimited amount in return for goods and services. People will not take coal or horses or hay or land or white elephants in unlimited amount in return for goods and services. Why should there be such a general practice regarding metal disks or pieces of paper?

This question, to one who has always lived in a money economy, may seem childish. Such questions regarding anything to which we have grown accustomed seem childish to those who have not been used to raising them. Why does the sun rise? Why does seed-corn sprout? But these also are proper scientific questions, the answer to which is of high practical importance! The answer to the question just raised regarding money will go far toward explaining the functions of money, and the theory of the functions of money, together with the general theory of social value, will give an answer to the question as to how the money function adds to the value of money. The answer which I shall give on the first question will in large measure follow the lines laid down by Menger.

(2) The second question needs little revision, when stated from the standpoint of present functioning, rather than of historical origin. We have more recent history to deal with in connection with this question, and Carlile, in his answer, offers substantial historical and anthropological proofs. It is still, however, present functioning that is important, and the question may be restated thus: