“The sole fact that credit is today the normal and proper expression of value and of exchange has introduced an element of extreme instability into all contemporary economic systems. Modern economic systems appear to be balanced on a knife’s edge as it were; the tiniest excess or deficiency of national credit can tip the balance in one direction or the other. This system is minutely adjusted, so to speak, to reflect the smallest increment in weight which it can just support, and that is why it is so extremely sensitive.”
What Is Money?
We have already established that money is a device which is indispensable to an economic system founded on exchange and on an intensive division of labor. Consequently, any investigation of the modern economic process remains incomplete without a special chapter on money. It is, moreover, certain that we shall be unable to understand the operation of our economic system so long as we do not have a clear apprehension of the peculiar qualities of money. It is in the deepening of our knowledge of these qualities that economics has made its most notable advances in recent years.1 We can go even further and say that the history of peoples and of civilizations cannot be fully understood if attention is not given to the important role which money has played in history, and in the development of the way of life of different epochs.2
We do not know when money first appeared in human history. Very probably, it was not invented in the same manner as the electric light bulb or the typewriter. What most likely happened is that one day, many thousands of years ago, people suddenly became conscious of the fact that money existed. Only one thing we can say with certainty: to be really money, money must have had to fulfill, thousands of years ago as today, the essential condition of being generally exchangeable and acceptable as a means of payment. We can understand, therefore, why the earliest form which money took was some particularly desirable commodity which could, if need be, serve for real satisfaction. Early money was constituted at times of bars of iron, at times of strips of cloth or of leather, and most often of cattle, proof of which we find in the fossil remains of language, in the Latin word “pecunia” and in the English “fee” which corresponds to the German “Vieh” (= cattle). Eventually, the precious metals, for many and obvious reasons, attained preeminence as money. Thence begins the history, open to our investigation, of money and currency.
We are already familiar with the economic revolution which followed the introduction of exchange based on money. Exchange was henceforth separated into two acts: the act of “selling” one’s own commodity against the receipt of a sum of money, and the act of “buying” another’s commodity by surrendering a sum of money. We can see that each of these two acts is an act of exchange: exchange of commodity against money, and exchange of money against commodity. In place of the original exchange of commodity against commodity, we now have the concatenation: commodity—money—commodity. Simultaneously, money made possible the participation of more than two persons in the act of exchange. The end result of the process of exchange in a money economy is, of course, an exchange of commodities against commodities, but in contrast to the economy of exchange in kind, this result is obtained in an indirect way by a detour passing through several individuals who make use of a general medium of exchange.
If we term a “good” every object or service to which we attach value, then money too is a “good.” Nevertheless, it is a good of a very special kind. We value an ordinary good because it is capable, in some way, of ultimately satisfying a want. In the act of satisfying a want, it renders up its economic soul, so to speak; it achieves the purpose of its existence. In a word, every other good but money serves for “real” satisfaction. From the raw material to the packaged product, chocolate goes through numerous stages and passes through many hands, but its final inglorious destiny is to be eaten. It is not so with money. If commodities providing real satisfaction are by essence and destination mortal, money is essentially immortal because it is not used for real satisfaction but for “circulatory” satisfaction. In other words, we do not derive satisfaction from money by eating it, but by spending it and by making it circulate, intact, from hand to hand. This does not mean that money, insofar as it is constituted of some material substance, may not also furnish real satisfaction. People can collect coins, melt them, or hang them on a watch chain. A man can paper his walls with bank notes, if he is willing to allow himself this extravagance. But money in these cases at once ceases to be money. It becomes a simple commodity, just one more addition to the strongly mixed company of chocolate bars, sugar buns, and phonograph records. It is essential to the concept of money that it circulate, and in a direction opposite to the (finite) circulation of ordinary goods. Whereas chocolate bars, phonograph records, etc. are always leaving the stream of goods in order to be consumed, it is the essential characteristic of money that it remain in circulation as money.
Money accomplishes its mission by enabling us to widthdraw from the huge store of the economy’s goods those which we desire. Ordinarily, we obtain this right by contributing, on our side, to this same store of goods. Money has thus been compared to an admission ticket providing access to the “social product,” that is, to the current stock of goods and services. Money may be compared, if we wish, to a “promissory note” on the social product. Such comparisons are permissible on the condition that we do not forget that money implies neither a qualitative nor a quantitative determination of a right to the commodities, nor any juridical claim on the store of commodities. The determination of the if, the what, and the how much is always subordinated to the market and to the formation of prices, in such a way that the “right” to something is narrowed to a simple possibility. From the purely juridical point of view, money should be defined only as “a final means of liquidating debts,” providing that it has been imbued by law with the quality of being “legal tender for all debts, public and private.” Such money confers on him who is obliged to pay (the debtor), vis-à-vis him who is entitled to receive payment (the creditor), the right to an acceptance which frees him from his debt.3
But if we employ—with this reservation—the comparison of money to a promissory note, we can see at once that it is possible to imagine a money which is incapable of furnishing any real satisfaction and which is thus without material value. But this lack will not negate the functions of money as a general medium of exchange provided that it retains the essential quality of “general acceptability” (F. von Wieser). The lack of a material content offering the possibility of real satisfaction does not exclude the possibility of a circulatory satisfaction, and if we value money according to what we can buy with the monetary unit, money without material value of its own possesses “value” just as well as money with material value. The value of money in the former case reflects the value of the goods which we can buy with the monetary unit; it does not flow from the value of the money material, but arises from the function of money which is to circulate and to be exchanged against commodities. Money in this context has a functional value and not a material value. The belief that it is the very essence of money to be incarnated in a piece of precious metal (metallism) is therewith refuted. The question of what will circulate as money is ultimately determined by the confidence of the people in the possibility of returning money to circulation. This confidence can be strengthened in two ways: either by endowing money with its own material value (coin), or by making it legal tender (nonredeemable paper money of fixed par value). As a general rule, it is necessary to educate the population to accept paper money which is nonredeemable and without material value. In the eastern provinces of Turkey, for example, it was still recently almost impossible to compel the peasants to accept the government’s (then stable) paper money. A Turkish official related to the author that while on an inspection trip, he had succeeded in getting a village wagoner to accept paper money rather than gold only by using his fists (admittedly, a somewhat crude illustration of the concept of fixed par value!). In our case, fisticuffs have been replaced by war which has so accustomed us to the use of paper money that we can scarcely recall a time when paper money was redeemable in gold. Indeed, we find it hard to imagine that our fathers could take their bank notes to the banks and obtain pieces of gold as naturally and as easily as postage stamps. Plainly, then, the connection of money with a precious material is not essential, though this does not exclude the fact that such connection may be very desirable. Normally, there is no need of making theatre tickets out of candy, unless it is feared that the management will sell more tickets than there are places, in which case we can console ourselves a little with the tickets made of candy.
In the case of inconvertible paper money, we see with special clarity the nature of money as a simple but indispensable auxiliary to economic activity, a kind of poker chip as it were. From the point of view of economics, money is a way-station, an item in the national ledger which disappears in the final accounting and which does not itself constitute an integral part of a nation’s wealth. A nation does not become richer or poorer because its supply of money increases or diminishes, but only when the supply of goods of which it disposes grows greater or smaller. If the supply of money in a country increases or diminishes while the supply goods remains the same, it follows that the supply of goods which can be purchased by the monetary unit will become smaller in the first case (inflation) and greater in the second (deflation). If the bank notes of a private individual are destroyed in a fire, his loss, which may be very great, does not necessarily represent a loss for the national economy, apart from the negligible value of the paper and the costs of printing. Indeed, the sum of which this unlucky individual is deprived actually benefits the rest of the population, for the purchasing power of all the other bank notes increases by the fraction corresponding to the amount of the burned bank notes. What has taken place is a sort of miniature deflation.
Pursuing this notion still farther, we see that however we use our money, our conduct will exercise an influence on the whole of the national economy. If we spend it, the way in which we spend it affects, in the fraction corresponding to the amount spent, the way in which goods are produced. If we do not spend it, we can either put it in a bank and thereby give to others the possibility of buying raw materials and machines, or we can pile it up in the cupboard at home. In the latter case, the purchasing power of the money becomes inactive to the profit of all the other members of the payment community who can now buy more cheaply. Whatever we do, we can never escape the responsibility which is imposed on us by the possession of money.
Money is one of those objects whose essence can be explained only in terms of their functions. Thus, the essence of money resides in its function of being a general medium of exchange. Of critical importance, in this connection, is how the broad masses of the citizens will react in a period, say, of hyper-inflation when once they become fully aware that money is no longer “functioning” as it should. Money is so indispensable to the modern economy that where the state-issued currency is rendered worthless, the country’s ongoing trade and business activities, even where they are at a low level, will of themselves bring into existence a substitute means of calculation. Such ersatz money may take the form of stable foreign monies as in the inflationary period following World War I when the dollar, the guilder, etc., supplanted the worthless local currencies in many countries. Or it may take the more unusual form of some scarce commodity such as the cigarettes which did yeoman service in those European countries which were devastated by World War II.
Only money makes possible the satisfaction of the complex pattern of consumer desires by causing the highly differentiated structure of production to shift continuously in response to such consumer desires. Only money makes possible rational economic calculation in that it provides a device for comparing production and consumption, profits and costs, and, as we have already seen, reduces all economic quantities to a common denominator. “Money alone is the absolute good: not merely because it satisfies a want in concreto but because it satisfies want as such, in abstracto” (Schopenhauer). It is, as Dostoievsky once expressed it, “coined freedom.” Finally, money has supplied the foundations for our modern credit system, without which the contemporary economy would be unthinkable. But it can furnish these manifold services only so long as it remains a general medium of exchange and meets the requirements of a “healthy” money.
When we consider somewhat more closely those services which money renders in virtue of its quality of being a general medium of exchange, our attention is drawn especially to the aforementioned attribute of money which enables us to compare all the objects of exchange with one another in such a way that we can express their value as a multiple of the common monetary unit. This is what is meant when we say that one of money’s functions is to be a general measure of value. However, we cannot regard this function of money as being equally important and equally necessary as its function of being a general medium of exchange. It is more accurate to say that because money in its concrete form is a general medium of exchange, the exchange value of marketable goods will inevitably be expressed in units of money. Money as a general medium of exchange consists of the concrete dollar notes or checks which I use to buy goods. Money as a measure of value, on the other hand, is the dollar as an abstract unit of account.
Closely connected with the exchange function of money is another of its functions, that of being a general means of payment. Every money payment need not involve an exchange transaction; payment of taxes, of penalties, of damages, gifts of money and many other examples show that money can also function as a means of unilateral value transfer. But this again is possible only because it is a general medium of exchange.
A further consequence of the exchange function of money is its ability to be an intermediary in capital transactions, i.e., its quality of making possible the emergence of debtor-creditor relationships and the transfer of the ownership of capital from person to person or group to group.
Finally, money’s function as a medium of exchange renders it an appropriate means of capital saving and capital movement. Or to express this idea somewhat differently, money becomes a vehicle of value through time and space (von Mises). Actually, money nowadays—except in periods of distress—no longer serves in any significant degree as a means of capital saving, since the average person is apt to put what is not mere working capital or simple cash reserves into investments which will yield a profit, or he turns over his savings to a bank to administer. It is as a vehicle of capital movement that money has retained a larger measure of significance.
In general, all monetary functions are exercised in a given country at a given time by one and the same monetary system. Indeed, its capacity for assuming all of its functions may be regarded as one of the criteria of a healthy money. It may happen, however, that the different functions are accomplished by different kinds of money. Such a process of division of functions was very well illustrated during the German inflation following World War I. The more worthless the mark became, the more of its functions it had to abandon. The first of its functions which the mark was to surrender was that of being a means of capital saving and capital movement; subsequently, it had to forego its function as go-between in capital transactions. Only an uncommon lack of economic insight could have induced anyone in the year 1923, at the height of the German inflation, to hoard mark bank notes or to buy mark securities. Next to go overboard was its function as a measure of value as more and more people turned to calculation in gold or used the “index” and the multiplier. The government itself was compelled in the end to collect its taxes in “gold marks.” Thus was the mark increasingly restricted to being merely a means of exchange and of payment. It was just about to lose even these last functions when the successful stabilization of the mark was accomplished in November 1923.