The Genesis of Money
- Money develops naturally through growth of exchanges
- Exchange first of general commodities
- Then of the more convenient commodities
- Then of coin
- Commodity value gradually forgotten
- Illustration of the American trade dollar
- Credit money displaces commodity money
- Intrinsic value and seigniorage
- Meaning of seigniorage
- Paper money's value is seigniorage
- Money for exchange, not consumption
- Proprietary articles as money substitutes
- Debased coinage
- Mutilated coins
- Maintaining circulating value when debasing coins
- Why paper money exchanges equally with metal money
The Science of Political Economy
Book V, Money -- The Medium Of Exchange and Measure of Value
The Genesis of Money
[Showing That the Law of Gratifying Desires With the Least Exertion Prompts the Use From Time To Time of The Most Labor-Saving Medium Available]*
Money is not an invention, but rather a natural growth or development, arising in the progress of civilization from common perceptions and common needs. The same fundamental law of human nature which prompts to exchange, the law by which we seek to satisfy our desires with the least exertion, prompts us with the growth of exchanges to adopt as a medium for them the most labor-saving instruments available.
All exchange is of services or commodities. But as commodities are in reality concrete services they afford from the first the readiest media of exchange, performing that office and serving as measures of value not only for other commodities but for direct services.
But commodities (under which name we include all movable products of labor, which, as such, have value so long as they retain the capacity of ministering to desire) greatly differ in their availability as media of exchange. Those best fitted for that use are those which are least perishable, which can be most easily passed from hand to hand and moved from place to place; which are most uniform in their articles and most homogeneous in their structure, so that they may be estimated with most certainty and divided and reunited with the least waste, and whose value is from their general use best known and most quickly recognized.
In proportion as these qualities are united in one commodity there is a natural tendency to its use as a medium for the exchange of other things, and this use tends again to the wider knowledge and quicker recognition of its value.
In primitive societies, or in the outposts of civilization where better means were not readily obtainable, skins, shells, salt, beads, tobacco, tea, blankets, and many other of the less perishable and more portable commodities, have in an imperfect way and to a limited extent been used as common media of exchange and common measures of value, thus becoming the money of the time and place.*** But the metals, and particularly the precious metals, so well fill all the requirements of a medium of exchange, that wherever they have become well known mankind have applied them to this use. At first they were doubtless weighed, and perhaps tested, with every passage from hand to hand; but as their use for purposes of exchange became more common, the same desire to economize labor which leads the baker to give his bread the form and shape of loaves or rolls, and the tobacconist or tea-dealer to put up his commodities into uniform packages, must soon have led to the running of the metals used as media of exchange into pieces of definite weight and purity, so that they may be passed from hand to hand without the trouble of weighing and testing them. To make these pieces of circular form, since that is the most convenient and the least subject to abrasion in handling, and to afford evidence that they yet retained their original substance by stamping their sides and edges, are obvious devices that seem to have been adopted wherever sufficient skill in the arts had been attained and the metals were in this way used. And thus by a natural development in use, a commodity peculiarly adapted to the purpose becomes, in the shape of coined money, the commodity which serves as a medium of exchange and measure of value for all commodities and services, and which has been in use among peoples of the most advanced civilization for long ages and still remains in use, though not in exclusive use, to our day.
But while the first purpose of coinage is, we may safely assume, to save the trouble of weighing and testing the commodity which has become a common medium of exchange, the general use of these coins as giving evidence of weight and purity must gradually have the effect of transferring the quality of ready exchangeability from the commodity to the coin. The habit of weighing and testing passes away; even the amount of the commodity embodied in the coin is, by the great majority of those who use it, forgotten or not heeded; and the shape, size, color and devices of the coin become the things that give it circulation. An American Eagle, or ten-dollar piece, contains so many grains of gold of a certain fineness, and exchanges at the value of the gold. But not one in ten thousand of those who use this coin, and who know its value in relation to other things that they are in the habit of buying and selling, know how many grains of gold it contains. A man with a ten-dollar gold piece will find no difficulty in the United States in fairly exchanging it for anything he may happen to want, but he would find much difficulty in fairly exchanging the same quantity of gold in the shape of dust or of an ingot, anywhere except at a mint or with a bullion dealer.
A curious evidence of this tendency to accept the sign rather than the substance is given in the history of the American trade dollar. For many years much of the export of silver to China has been in the shape of Mexican dollars, the stamp of which has become known there as evidencing a certain weight of silver. Thinking that it might take the place in China of the Mexican coin the American government in 1874 coined what was called a trade dollar. It was a better finished and handsomer coin than the Mexican dollar, and contained a greater weight of silver. But the Chinese preferred a coin whose look they had become familiar with, to one that was new to them, even though the latter was of greater intrinsic value. The attempt was a failure, and after an instructive domestic experience, which it is not worth while to speak of here, the coinage of the trade dollar was stopped.
Now this transfer of ready exchangeability from the commodity to the coin, with the accompanying relegation of the commodity itself to the same position in exchange held by other commodities, which takes place as a result of the use of coin money, is a matter of great importance, leading ultimately to a complete change in the nature of the money used.
In the coinage of the precious metals the use of commodities as a medium of exchange seems to have reached its highest form. But the very same qualities which of all commodities best fit the precious metals for this use, attach or may attach in still higher degree to something which, having no material form, may be passed from person to person or place to place without inconvenience from bulk or weight, or danger of injury from accident, abrasion or decay. This something is credit or obligation. And as the advance of civilization goes on, the same tendency to seek the gratification of desire with the least exertion, which with a certain advance of civilization leads to the development of commodity money, leads with its further advance to the utilization of credit as money.
Movement in this direction may be distinguished along three lines: 1 -- The admixture in coinage of obligation value with production value. 2 -- The use of obligation or credit as representing an economizing commodity money. 3 -- The use of pure credit money.
We are here considering only money. Not only is credit a facilitator of exchange before money of any kind is developed, but the same social progress which shows itself in the development of money also shows itself in the extension of credit. If the use of money supersedes the use of credit in some exchanges, it is only where the use of credit is difficult and inconvenient; and in facilitating exchanges over wider areas than the use of the primitive forms of credit would have been equal to, it also increases that mutual knowledge and mutual desire to exchange that are necessary to the extension of credit. Although the primary and local function of money is that of affording a common medium of exchange, its secondary function of affording a common measure of values soon becomes of greater importance, and the extension of credits in our modern civilization is far more striking and important than the extensions in the use of money as a medium of exchange. Though the use of any particular money as a medium of exchange is still local, the money of any one country circulating only to a very limited extent in other countries, yet the development of credits has been such that the exchange of commodities to the ends of the earth and among peoples using different moneys as mediums of exchange, is conducted by means of it. But what we are considering now is not this development of commercial credits, but the way in which the use of commodity money passes into the use of credit money; or in other words, the way in which the coinage of production value into a convenient medium of exchange passes into the coinage of obligation values.
The demand for any metal in exchange is at first, like the demand for other things in exchange, a demand for consumption; and its value or rate of exchange, is determined by the cost of producing it in merchantable form. As one or another of the metals began to come into use as a medium of exchange, the largest demand for it would doubtless for some time still be for consumption, and any change in the form of the metal made to fit it for this new use would at first entail little or no greater cost than that of the ordinarily merchantable form. Thus the value of the metal used as money would at first be no greater than that of the same metal intended for consumption. But when coinage fairly began, something more of labor would be required to produce the stamped and finished coin than to produce the mere ingot of merchantable shape.
Hence there are, or may be, two elements in the exchange value of metal coin -- (1) the intrinsic value, or value of the metal itself, which is governed by the cost of producing it in merchantable form; and (2) the cost of changing it from that form into the form of finished coin. This second element, the charge for coinage, is called seigniorage, from the idea that the coining of money has from the earliest times been deemed a function of the sovereign -- the seignior or lord -- as representative of organized society or the state.
There are two different ways in which it has been customary to pay for turning a merchantable material into a finished product. Thus: From time immemorial until the present when machinery has begun to revolutionize industrial methods, it was the custom for the man who wanted a suit of clothes to buy the material, take it to a tailor, and pay him for the work of making it into a suit. The tailor was not presumed to keep any of the cloth, and if he did so it was called "cabbage." During the same time it was, on the contrary, the universal custom for the miller to get his pay by keeping a part of the material brought him for conversion. The farmer or purchaser brought his grain to the mill, receiving back less than its equivalent in meal, the difference being the toll that the miller retained for the service of grinding. The manufacturer who is now succeeding both the old tailor and the old miller buys the material and sells the finished product.
Now the conversion of metal into coin seems always to have been paid for in the same way as the conversion of grain into meal or flour, by a toll or deduction in the return. This toll or seigniorage may be less or more than the actual cost of coinage. It is what the lord or state, who has the sole privilege of coinage, chooses to take for it; the difference between the rate at which metal is received or bought at the mint and the rate at which it is returned or issued in coin.
Had the coinage of metal into money been left to the free competition of individual enterprise, the charge for this conversion would have tended to the lowest point at which coin could be produced in sufficient quantities to supply the demand. But so far as we can see this has never been the case. The primary object of coinage being the certification of weight and fineness, that is obviously best assured by the stamp of the highest and most widely known authority, that of the sovereign or state. Where coinage is thus monopolized in the hands of the sovereign, the element of seigniorage in the value of coin may be eliminated altogether by the agreement or practice of the sovereign to return in coin the full amount of metal brought to his mints, as is today the case in some countries with some metals; or it may be extended so as to become the most important of the two elements in the value of coin by the refusal of the sovereign to coin on other terms and the exclusion or refusal of other coinage. Indeed, by the selection of some very cheap commodity for the material of coinage, it may become practically the only element of value. For, as Ricardo pointed out, the whole exchange value of paper money may be considered as a charge for seigniorage.
The reason of this fact that, the issuance of money being a monopoly, the element of intrinsic value may be partially or entirely eliminated without loss of usefulness, is to be found in the peculiar use of money. The use of other commodities is in consumption. The use of money is in exchange. Thus the intrinsic character of money is of no moment to him who receives it to circulate again. The only question that he is concerned with is as to the readiness of others to receive it from him when he wants in his turn to pass it on. And this readiness where coined money comes into use as the common medium of exchange is associated with coinage, which becomes the badge or stamp of circulation.
There are today certain commodities having a large and wide-spread sale in neatly put up packages under proprietary names, such as Pears' Soap, Colman's Mustard, Royal Baking Powder, and so on. The reputation as to quantity and quality of contents which has been secured for the packages bearing such a trade-mark gives their manufacturers proprietary profits often very considerable that are analogous to seigniorage. For a short time and to a small extent these profits might be increased by decreasing the quality of the goods. Those who bought them to sell again would at first be unconscious of the difference and would buy as before. But as soon as they reached the hands of purchasers for consumption, the difference would be detected and the demand would decline, for the demand of those who buy such things to sell again springs from the demand of those who buy for consumption.
But (and the expedients resorted to in times of sudden and acute monetary scarcity may suggest this) let us imagine some such proprietary packed article to pass into use as the medium of exchange. The increased demand caused by the new and wider use would enable the owners of the trade-mark, by restricting supply of which they would have exclusive control, to carry up the value of the article so far above that of the contained commodity that it would pass out of use for consumption. Yet so long as the demand for it as a medium of exchange continued, it would have use for that purpose, and the owners of the trade-mark could not merely keep up the price, but could with impunity reduce the quantity and quality of the contents of their packages to almost any extent. For since every acceptance of a thing in exchange is in reality a purchase of it, and every transfer of it in payment of an obligation or in return for any other thing is in reality a sale, the entire demand for an article used only as a medium of exchange would be with a view to subsequent sale -- would be a demand of merchants or traders, who are not concerned with the intrinsic qualities of what they buy to sell again, but only with its salability.
In the illustration I have used, the possibility of lessening the quality or quantity of the packages without lessening their value as a medium of exchange, is dependent on their having passed out of use for consumption and the demand for them being entirely the demand for use in exchange. For, so long as any part of the demand was a demand for consumption, the lessening of commodity value would, by checking the total demand, operate at once to reduce value not merely of that part used for consumption, but that part used for exchange.
Now the first coined money being commodity money, the demand for it would be for a long time, in part at least, a demand for consumption. In the simpler stage of the arts, coin would be much more frequently than now beaten or melted into plate, adornments, ornaments, etc. And more important still perhaps, it would continue to be used as a commodity in the exchange with other countries. It is probable that the coinage of the more important sovereigns had a far wider area of diffusion when international commerce was much less than it is now. For, although the area of commerce was more limited than now, there was proportionately more of the area without any coinage of its own, and the development of credit as a medium of international exchanges, the use of coin in them as a conveniently portable commodity, was probably relatively greater than now.
Now, the demand for coin sent abroad, as American gold sent to England, like the demand for coin for use in the arts, is a demand for use in consumption and would quickly show itself in a lessening of aggregate demand and consequently of value, upon a reduction of the commodity value of coin, no matter how strictly the workmen of the mints were sworn to secrecy, as was the device of sovereigns who contemplated deteriorating their coinage.
But still more important is the fact that in order to keep up the value of coin while diminishing its intrinsic value it is necessary that the supply be strictly limited. But the sovereigns, whether princes or republics, who have resorted to the expedient of debasing their coinage have generally done so for the purpose of turning the same amount of metal into more coin, rather than that of keeping the same amount of coin in circulation with the use of less metal, or have been unable to resist the temptation to do this when they found opportunity.
That the circulating value of money need not necessarily depend on its intrinsic value, must have been clear to discerning men as soon as the habitual use of coined money had made its signs and emblems the accepted tokens of value, so that it passed from hand to hand without testing and usually without weighing. The fact that coins that had lost something of their intrinsic value by abrasion continued to pass current, must have made clipping and filling and sweating, early devices of the cunning, which raised figures and milled edges would not prevent, unless supplemented by such mercantile stipulation or legislative enactment as secured common agreement not to accept such coins. This of itself would show that the circulating value of a coin did not as a matter of fact depend upon the value of the material it contained.
Thus to the ministers and advisers of the sovereigns, who seem everywhere to have assumed from the first exclusive privilege of coining, it must have seemed an easy and safe economy to reduce the cost of the coin by substituting for its material some part of cheaper metal. Hence came those numerous and repeated reductions in the value of coins which are a marked feature in all monetary history; which have reduced the English pound sterling to but a fraction of its original equivalence to a pound troy, and in other countries have brought about a still greater difference.
So far as the principal and most important coinage is concerned, these attempts have from time to time ended in disaster, and in the final reunion of circulating value with commodity value, either by the rejection and withdrawal of the debased coin and a recoinage, or more frequently by the lowering of the circulating value to the level of the commodity value.
This, however, is not a necessary result of a debasement of coinage, as is so often assumed. A less valuable metal may be substituted in a coin for a more valuable metal without lessening the circulating value, provided -- and this is the essential condition -- it continues to be as hard for those who use the coin in exchanges to get the one as it was to get the other; or in other words that it continues to represent the same exertion.
For all exchange is really the exchange of labor, and the rate at which all things tend to exchange for all other things is determined by the relative difficulty of obtaining them. That a ten pound note of the Bank of England, having practically no intrinsic value, will exchange for ten gold sovereigns, having an intrinsic value of that amount of gold -- that a five dollar note of the government of the United States, having no intrinsic value; five silver dollars, having an intrinsic value of something like two dollars and a half; and a five dollar piece, having an intrinsic value of five dollars, will exchange in this country for each other or for the same amount of commodities or services of any kind, is because the difficulty of getting these things, the quantity and quality of exertion ordinarily required to obtain them, is precisely the same. Should it become in the slightest degree harder to get one of these things than the others, this will show itself in a change of the rate at which they exchange. In this case we say that the one commands a premium or that the others bear a discount.
The difficulty of procurement which brings to the same value the gold coin, silver coin and notes spoken of, so that they will exchange for each other or for equal quantities of other things, is, though of the same intensity, of different kinds. In the gold coin, it is the difficulty of mining, refining and transporting the metal (for neither in Great Britain nor in the United States does the government make any charge or exact any seigniorage for the coinage of gold). In the silver coin, it is partly the difficulty of obtaining the metal and partly the difficulty imposed by the only terms on which the government will coin silver dollars -- or in other words, by the seigniorage it demands. In the notes, it is the difficulty imposed by the restrictions on the issuance of such notes -- or, as it may be considered, all seigniorage. What in short, gives to the paper notes or coins of small intrinsic value the same exchange value as the gold coin, is that the government concerned, which has the monopoly of coinage in its respective country, will not issue one of them on any less terms than it does the other, thus making them all to the individual equally hard to get.
What has everywhere caused the failure of the innumerable attempts to reduce the intrinsic value of the principal and important coin, without reducing its circulating value, is not the impossibility of the task, but the fact that the sovereigns who have attempted it did not, and perhaps could not, observe the necessary condition of success, the strict limitation of supply. But the purpose of the sovereigns, whether princes or republics, in debasing coinage has been, or under pressure of the temptation has become, not an attempt to make a less value in metal serve for the same quantity of coin, but to issue a greater quantity of coin on the same value in metal. Thus instead of restricting the supply of coin to the point where the demand for its use as a medium of exchange would keep up its exchange value irrespective of the lessening in its intrinsic value, they proceeded at once to increase supply on a falling demand, and met the inevitable depreciation of circulating value by fresh increase of supply, so that no matter how much the intrinsic value of the coin was reduced, its circulating value followed.
- [Principle same as that which caused depreciation in French assignat, Continental money, etc.] ****
It is this fall of circulating value with the fall of intrinsic value where it is not kept up by restriction of supply that has through succeeding depreciations reduced the English pound sterling to but a fraction of its original equivalence to a pound troy, and in other countries has brought about a still greater difference.
- In the rude ages of society, cattle are said to have been the common instrument of commerce; and, although they must have been a most inconvenient one, yet in old times we find things were frequently valued according to the number of cattle which had been given in exchange for them. The armor of Diomede, says Homer, cost only nine oxen; but that of Glaucus cost an hundred oxen.
Although I have hitherto accepted this statement, closer consideration now convinces me that the inconvenience attaching to such a use of cattle never could have permitted them to take the place of money. As for the authority of Homer, the state of the arts assumed in the Iliad would imply the use of metal money, and the Marquis Gainier has contended that the oxen spoken of were really coins. But this supposition is not the only alternative to supposing that the allusions in Homer's poems are to be taken as indicating that cattle were in use as the common medium of exchange and common measure of value. In ordinary speech, and especially in poetry, which eschews the exactness of monetary terms, such things as cattle, lands, slaves, have always been used to convey a vague but striking idea of wealth or value; and it seems far more reasonable so to understand the references of ancient writers than to take them as proof that commodities so inconvenient to divide, preserve and transfer as cattle ever passed from the position of an article of exchange to that of its common medium and measure.