Anything which freely circulates from hand to hand, in any country, as a common, acceptable medium of exchange, is, in such country, money, even though it ceases to be such, or to possess any value, when passing into another country. In a word, an article is determined to be money by reason of the performance by it of certain functions, without regard to its form or substance.
Francis A. Walker says:
Money is that which freely passes from hand to hand through the community in final discharge of debt and in full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it, and without the intention of the person who receives it, to consume it, or enjoy it, or apply it to any other use than in turn to tender it to others in discharge of debts or in payment for commodities.
It has been contended by certain economists that bank checks and bills of exchange are money, or, at least, that they discharge the money function and act on prices the same as money; but this definition excludes checks and bills of exchange. A bill of exchange or bank check is not accepted without reference to the character or credit of the person who offers it. But Francis A. Walker leaves us in no doubt on this question. On page 123 of his work on “Political Economy” he says:
Money is a medium of exchange. Whatever performs this function, does this work, is money, no matter what it is made of, and no matter how it came to be a medium at first, or why it continues to be such. So long as, in any community, there is an article which all producers take freely and as a matter of course in exchange for whatever they have to sell, instead of looking about, at the time, for the particular things they, themselves, wish to consume, that article is money, be it white, yellow, or black, hard or soft, animal, vegetable, or mineral. There is no other test of money than this. That which does the money work is the money thing. It may do this well; it may do this ill. It may be good money; it may be bad money; but it is money all the same. We said all producers, since it is not enough that a thing is extensively used in exchange, to constitute it money. Bank checks are used in numerous and important transactions, yet are not money. It is essential to money that its acceptability should be so nearly universal that practically every person in the community who has any product or service to dispose of will freely, gladly, and of preference, take this thing money, instead of the particular products or service which he may individually require from others, being well assured that with money he will unfailingly obtain whatever he shall desire, in form and amount, and at times to suit his wants.
It appears from the accepted definitions that bank checks and bills of exchange are not money. They may to some extent, as other forms of credit may to some extent, add to or increase the rapidity of circulation; but, certainly, credit is not money nor does it possess the essential elements of money. I think it is an essential element of money that when used it closes the transaction between the parties to the transaction. In other words, money, when paid in the purchase of a commodity, closes the transaction, and neither party to the transaction has any further claim or demand against the other. Anything which does this (barter, of course, excluded) is money, and anything which fails to do this is not money. If a credit is given or a check received the transaction is not closed until the debt is paid or the check cashed. I do not find that any economist has made this distinction, in so many words, between money and credit, but I am satisfied that it exists.
Does all the money available for use act on prices? It is contended by a certain class of economists that only money of ultimate and final redemption—in other words, gold and silver, in countries where gold and silver are the standard money, and gold only, in countries where gold is the standard money—can act directly on prices, and that other forms of money can only act on prices in an indirect manner, and to the extent only that they may increase the rapidity of the circulation of redemption or standard money; that paper money, whether convertible or inconvertible, covered or uncovered, and token money, can have no direct influence on the general level of prices.
Is this contention true? We have already seen that money is a medium of exchange, a counter for reckoning, an order for goods, and that its value does not depend upon the intrinsic qualities which the material out of which it is made may possess, but depends entirely upon extrinsic qualities which law or common consent may confer, and that anything (barter, of course, excluded) that closes transactions between the parties to the transactions, is money; and also that the value of money, that is, its purchasing power, is fixed and regulated by the amount of money available for use. Why, then, should any part of the money that possesses and discharges all the functions of money be excluded? What peculiar property has money stamped on gold and silver that it only can act on prices?
John Stuart Mill says:
After experience had shown that pieces of paper, of no intrinsic value, by merely bearing upon them the written profession of being equivalent to a certain number of francs, dollars, or pounds, could be made to circulate as such, and to produce all the benefit to the users which could have been produced by the coins which they purported to represent, governments began to think that it would be a happy device if they could appropriate to themselves this benefit, free from the condition to which individuals issuing such paper substitutes for money were subject, of giving, when required, for the sign, the thing signified. They determined to try whether they could not emancipate themselves from this unpleasant obligation, and make a piece of paper issued by them pass for a pound, by merely calling it a pound and consenting to receive it in payment for taxes. And such is the influence of almost all established governments, that they have generally succeeded in attaining this object: I believe I may say they have always succeeded for a time, and the power has only been lost to them after they had compromised it by the most flagrant abuse.—“Political Economy,” Book 3, Chap. 13.