I shall not now undertake a history of theories of the functions of money. Many of the points which follow are common property of many writers.[472] The nature of some functions has been more clearly explained than that of others. I have not found in the literature of the subject any very clear statements, moreover, as to the relations of different functions to the value of money. I shall try in what follows, by a series of hypothetical cases, to isolate each function of money, as far as may be, and shall try, by varying my hypotheses, to indicate variations in the influence of the different functions on the value of money.
The functions of money have been variously described and named. The following list seems most satisfactory to me:
1. Common measure of values (standard of value).
2. Medium of exchange.
3. Legal tender for debts (Zahlungs- or Solutions-mittel).
4. Standard of deferred payments.
5. Reserve for credit instruments, including reserve for government paper money.
6. Store of value.
7. Bearer of options.
The common measure of value function rests in the intellectual needs of man. It grows out of the necessity for calculation, for bookkeeping, for understanding what is going on. Any object of value may be used to measure the value of anything else, just as any object of weight—say an irregular mass of iron—may be put in the balance against some other object, and the relation between the absolute weights of the two objects thus more or less definitely ascertained.[473] But it helps little, in getting at the aggregate weight of a collection of objects, to know that A among them is heavier than B, while D is lighter than F. To get a knowledge of the situation adequate for quantitative manipulation, it is best to compare all of the objects with some one object, chosen as the standard of weight, or common measure of weights. Thought is thus immensely simplified. If we may imagine the calculations of a dealer in a rural region, where no common measure of values is used, it will help to make clear the nature of this function. Let us suppose that he deals in nails, wire, cotton cloth, eggs, butter, hams, sugar, and moonshine whiskey, and that his customers also make and use most of these things, using him as a central clearing house in their rude division of labor. Without a common measure of values, it is necessary for him to keep in mind the price of every commodity in terms of every other commodity. If there are twelve commodities, this means 66 ratios which he must remember, according to the formula for permutations and combinations. In general, in such a situation, there would be the following ratios: (n - 1) + (n - 2) + (n - 3) + ... (n - (n - 1)). Let him choose, however, one of his commodities, say eggs, as the common measure of values, and he needs to bear in mind only eleven prices, namely, the prices of each of the other eleven articles in eggs. Thinking is immensely simplified. In general, with a common measure of values, dealers need bear in mind only (n - 1) prices. Suppose that at the end of the day, after considerable trading, our dealer finds the following changes in his stock:
| He has gained | He has lost |
|---|---|
| 8 doz. eggs | 12 lbs. nails |
| 3 gallons whiskey | 8 lbs. wire |
| 4 hams | 13 lbs. butter |
| 5 yards cloth | 10 lbs. sugar |
Has his trading been profitable? How can he tell? Reduce all the items in both columns to their equivalents in eggs, however, and the answer is very easy. No complicated business is possible without this common measure, and common language, of values.
Be it noted that this common measure of values does not necessarily involve the use of a medium of exchange. The practice of thinking in a common measure is what is involved. If the article chosen be eggs, which all are accustomed to use, the service of a common measure might easily be performed without the practice of indirect exchange, assuming that other physical difficulties of barter to which I shall shortly refer, were absent. Indeed, as I have pointed out in the chapter on "Barter" in Part II, a great deal of barter goes on in modern life, made very much easier by the fact that we have a common language of values, a common measure of values. For the easy working of the system, it is important that the common measure of value be an article with whose value the group is well acquainted. The frequent testing of this value in actual exchanges vastly facilitates this. But actual exchange is not necessary for the performance of the measure of value function. We have cases where the measure of values and the medium of exchange are different. Thus, in the Homeric poems, we find indications that cattle served as a measure of values, even though payments were made in gold. The Virginians commonly thought in pounds, shillings and pence, even when using tobacco as a medium of exchange. The need for a common measure of values would manifest itself in any complex socialistic society, even though exchange were largely dispensed with. No systematic plans for utilizing the resources of such a society would be possible, no bookkeeping would be possible, without some such device.
For this function, I prefer the term, "common measure of values," to the term often used instead, "standard of values." The latter term, as used in connection with the expression "standard money," sometimes carries the connotation of "money of ultimate redemption," and its main function is thought of as serving in reserves. The reserve function is a separate function, however. It is common to have money made of the standard metal in reserves. But this need not be the case. I would refer once more to the hypothetical illustration developed in the chapter on "Dodo-Bones": gold, not coined, as the "standard of value"; paper as the medium of exchange; silver bullion, at the market ratio with gold, as the reserve for redemption of the paper. This may suggest that a distinction may properly be drawn between measure of values, and ultimate standard money. The paper money, in this case, would be the thing of which the masses would ordinarily think, so long as the system worked smoothly. And the paper could serve as a measure of values. The case is not unlike the case where a "standard yard," or "standard pound" is kept for ultimate reference in a government bureau, while yardsticks or pound weights in the shops and warehouses do the actual measuring. The cases do not, indeed, run on all fours. The measurement of weights and lengths involves physical manipulation; the measurement of values is an intellectual operation, made by comparing two objects of value. The comparison may be made in actual exchanges; it may be made by an accountant's estimate; it may be made by comparing the results of several exchanges, in sorites form, only one of which involves the ultimate standard measure. The yardsticks actually used may vary more or less, by accident or design, by variations of temperature, etc., from the standard yard. The paper dollars, under a smooth working of the system described, would be held closely to the ultimate standard, and would, in any case, not vary as compared with one another at the same time and place.
When the medium of exchange diverges in value from the ultimate standard, as in the case of the American Greenbacks during the period from 1862 to 1879, we have, sometimes, shifting relations among the functions. The Greenbacks were the measure of value most commonly in use. They were legal tender for debts, except where gold was specified in the contract. They were commonly the standard of deferred payments. To a considerable extent, however, gold was used in reserves, and even as a medium of exchange. People thought in both standards. And finally, gold remained an ultimate standard to which the Greenbacks were referred, and by which variations in their value were measured. The terms, "primary standard" (gold) and "secondary standard" (Greenbacks), have been employed to aid in straightening out this confusion.[474] I think, on the whole, that the term, "common measure of values" describes the function which I wish to emphasize more clearly than the term, standard of values, and I shall, in general, employ it for that purpose.[475]
The medium of exchange function grows out of the physical difficulties of barter, rather than out of intellectual needs. The discussion in the preceding chapter of the origin of money has emphasized the nature of the difficulties which a medium of exchange meets. A has an ox, which he wishes to trade for shoes, sugar, and a coat. Neither shoe-maker, tailor nor grocer cares to take the ox, however, and, besides, no one of them could supply A with all three of the things he wishes to get. Moreover, even if A should meet a man who had all three things, he would not care to give up the ox for them, since the ox is worth more than all three. If there be a medium of exchange, however, A may sell his ox to the butcher, and take his pay in that medium, which will be something easily and minutely divisible, buy coat and sugar and shoes, and take the surplus of his medium of exchange home, waiting for another occasion. The medium of exchange function overcomes the difficulties arising from low saleability of many goods, due to limited number of possible buyers, lack of divisibility, etc., etc.