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 will hold good of the many objects that have served for monetary use. From denoting coined metal, money has come to include anything that performs the money work; though there has been considerable hesitation in extending the term to those forms of credit that are in modern societies the chief instrument of exchange. It is therefore best to avoid a formal definition; and, instead, to bring out the character of money by describing the functions that it performs in the social system. The most important is, clearly, that of facilitating exchange. It is not necessary to dwell on the great importance of this office. The slightest consideration of industrial organization shows that it is based on the division of employments; but the earliest economic writers saw plainly that division of employments was only possible through the agency of a medium of exchange. They recognized that the result of increasing specialization of labour was to establish a state of things in which each individual produced little or nothing for the direct satisfaction of his own wants, and had therefore to live by exchanging his product for the products of others. They saw, further, that this only became feasible by the existence of an article that all would be willing to accept for their special products; as otherwise the difficulty of bringing together persons with reciprocal wants would prove an insurmountable obstacle to that development of exchange, which alone made division of labour possible. A second function hardly inferior in importance to the one just mentioned is that of affording a ready means for estimating the comparative values of different commodities. Without some common object as a standard of comparison this would be practically impossible. “If a tailor had only coats and wanted to buy bread or a horse, it would be very troublesome to ascertain how much bread he ought to obtain for a coat or how many coats he should give for a horse”; and as the number of commodities concerned increased the problem would become harder, “for each commodity would have to be quoted in terms of every other commodity.” There is, indeed, a good deal to be said for the view that the conception of general exchange value could never have been formed without the previous existence of money; it has certainly support from the evidence of competent observers respecting the methods of exchange followed by savage communities. The selection of some particular article as the criterion makes the comparison of values easy. “The chosen commodity becomes a common denominator, or common measure of value in terms of which we estimate the value of all other goods,” and in this way money, which in its primary function renders exchange possible by acting as an intermediate term in each transfer, also makes exchanges easier by making them definite. Still another function of money comes into being with the progress of society. One of the most distinctive features of advancing civilization is the increasing tendency of people to trust each other. There is thus a continuous increase in relations arising from contract, as can be seen by examining the development of any legal system. Now, a contract implies something to be done in the future, and for estimating the value of that future act a standard is required; and here money which has already acted as a medium of exchange and as a measure of value at a given time, performs a third function, by affording an approximate means of estimating the present value of the future act; in this respect it may be regarded as a standard of value, or as some prefer to say, of deferred payments. Nor does this exhaust the list of services that money renders. In the earlier stages of economic life it acts as a store of value; for in no other way could a large body of wealth be concentrated. Though this is no longer needed by individuals, even at the present day the great banks find that their reserves must take the form of a monetary store. Again, money in its various forms has been the great agency for transmitting values from place to place. Its international function in this respect still continues. The balance of debt between countries is ultimately settled by the passage of bullion from the debtor to the creditor nation. But, though money has these powers, it is nevertheless correct to say that its essential functions are three in number, i.e. it supplies: (1) the common medium by which exchanges are made possible; (2) the common measure by which the comparative

values of those exchanges are estimated; (3) the standard by which future obligations are determined.

2. The Value of Money, its Determining Causes. The Quantity of Money required by a Country.—The value of money is in principle only a special case of the general problem of value; but owing to its peculiar position the medium of exchange has in this respect become surrounded by difficulties that need to be removed. The very phrase “value of money” is employed in two senses, which on the surface seem to have no connexion with each other, and are the cause of much confusion to those who have not looked into the matter. In mercantile phraseology the value of money means the interest charged for the use of loanable capital. When the market rate of interest is high, money is said to be dear; when it is low, money is regarded as cheap. Without entering into the reasons for this use of the term, it is sufficient to state the other and for our present purpose more correct meaning of the phrase. As the value of a thing is what it will exchange for; so “the value of money is what money will exchange for, or its purchasing power. If prices are low, money will buy much of other things, and is of high value; if prices are high, it will buy little of other things, and is of low value. The value of money is inversely as general prices, falling as they rise and rising as they fall.” Now the proximate condition under which value is determined is admittedly the establishment of an equation between demand and supply. In the case of money, however, some explanation as to the nature of both these elements in the problem becomes necessary. In what forms is the supply of, and the demand for, money exhibited? The supply of a commodity is the quantity of it which is offered for sale. But in what shape does the sale of money take place? Plainly, by being offered for goods. The supply of money is the quantity of it which people are wanting to lay out, i.e. all the money in circulation at the time. Demand, in like manner, means the quantity of a commodity desired, or, according to another mode of expression, the amount of purchasing power offered for it. Taking the latter as the more convenient for the case of money, we can say that the demand for it consists in all goods offered for sale. The position of money as the medium of exchange introduces a further novel feature; for the market in its case is world-wide and the demand is unceasing; money is consequently in a constant state of supply and demand. It thus appears that the factors determining the value of money at a given time are: (1) the amount of money in circulation, and (2) the amount of goods on sale. Closer examination reveals other influencing conditions. The mere quantity of money is not the only element on the supply side. The varying circulation of the monetary units must be taken into account. Some coins do not make a single purchase in a year, while others change hands in transactions hundreds of times. By averaging, we may estimate the effect of the rapidity with which money does its work, or, to employ a technical term, the “efficiency of money.” Similarly, the amount of sales rather than the quantity of commodities is the determining element on the demand side. Thus, if the influence of credit be omitted, it is true to say that the value of money varies inversely as its quantity multiplied by its efficiency, the amount of transactions being assumed to be constant. Some additional explanation is required before this formula can be accepted as an expression of the whole truth on the subject. It must be noticed that it is not commodities only that are exchanged for money. Services of all kinds constitute a large portion of the demand for the circulating medium, while the payment of interest on the many kinds of obligations makes a further call on it. The potent influence of credit must also be recognized. The latter force is indeed the chief agency to be considered in dealing with the variations of prices; though so far as it is based on deposits of metallic money it may be regarded as a form of increased monetary efficiency, and therefore as coming within the formula given above. In its wider aspect, credit acts as a substitute for ordinary money, and may be interpreted as equivalent to a system of perfected barter, or, better, as a new currency development. An interesting but paradoxical conclusion should be noticed: it is that increased 