It is a medium of exchange.
It is a means of storing wealth.
As a measure of value money determines in what proportion commodities and services shall be interchanged. The yardstick measures the quantity of fabrics; but some fabrics are more valuable than others. A bolt of silk, for instance, is more valuable than a bolt of muslin—a difference which the yardstick, alone, cannot indicate; it merely measures quantities, not values. Here the money measure becomes necessary. The abstract unit which we call a dollar measures the values of both silk and muslin, and determines how many yards of muslin should be exchanged for a yard of silk.
Money is a medium of exchange. Smith has a horse and buggy which he wishes to exchange for a piano belonging to Brown. Brown is willing to part with the piano, but does not want a horse and buggy; he does want, however, a gold watch. Jones has such a watch, but wants to dispose of it for clothing. Wilson has clothing, but he wants coal. For these four parties to find out each other’s wants and effect an exchange of actual commodities and adjust the difference in value between the articles would involve time and labor and make so many difficulties that the transactions would be greatly delayed, if not defeated. Here money performs its beneficent offices as a medium of exchange. Smith sells his horse and buggy for money, and with it purchases Brown’s piano. Brown buys the watch he wants, and thus money goes from hand to hand, effecting innumerable exchanges, not only in the small neighborhood, but in great commercial circles, thereby bringing the antipodes together and enabling them to supply each other’s wants with the least possible loss of time and labor.
Money is, also, a means of storing wealth. Jackson has a valuable farm, but is getting too old or infirm in health to work it. He might exchange it for a great quantity of food, clothing, and other necessaries sufficient to last him the remainder of his life; but these articles could not safely be stored so as to preserve them for future years, and some representative, that can be stored, must be found. Money is that representative. Jackson sells his farm for money, and with the money purchases from time to time the necessaries required.
From a brief study of these three great functions performed by money may be readily determined what should be the characteristics of a perfect currency, one that would most effectually and justly serve mankind.
As a measure of values and as a means of storing wealth it is clear that money ought to be stable, that is, it should as nearly as possible have the same purchasing power from year to year and in all sections of the country; for when money fluctuates in purchasing power it is obvious that some men will gain and some will lose without any merit or fault upon their part, but simply in consequence of the fluctuations in the value of money. This is particularly true in case of debt, for if a debt be contracted when money is cheap, and paid when money is dear, the debtor will evidently lose by the change, and if the circumstances be reversed the creditor will lose.
To secure such stability or uniformity of purchasing power no measure or method is so effectual as for the government to make all its money a full legal tender for all debts, public and private.
As a medium of exchange the volume or quantity of money in circulation should be sufficiently large to accomplish the transaction of business without waste or delay. In estimating the necessary volume it is proper to take into consideration the numbers of population, the magnitude of business transacted, and, since a nimble dollar will perform the work of several slow ones, the “effectiveness” or rapidity with which money circulates; and, since population and business are, upon the whole, constantly increasing, and the rapidity of circulation (until some swifter method of locomotion be discovered) remains unaltered, the volume of money, clearly, ought to be increased from year to year. Few who have not patiently studied the problems of finance understand the mighty effects of an expansion or contraction of the money volume upon, not only the material, but the moral well-being of mankind.
The very heart of the complex money question, the center of all its divergent issues, is the question of