trial groups incur the sacrifices involved in a postponement of marriage or restriction of births after marriage, and in the long run these sacrifices are compensated, and only just compensated, so far as the standard of living controls wages, by the higher earnings which such conduct insures to the class benefited.

A full analysis of the motives that enter into the balancing of utilities and disutilities in industrial society, and of the equilibrium that results from them, belongs to a more advanced treatise on economics. In actual progressive societies changes occur so frequently that an exact balancing is something constantly aimed at, but never secured. In men's efforts to realize it, the ultimate determinants of value and distribution are, however, to be sought.

*

REFERENCES FOR COLLATERAL READING

Mayo-Smith, Statistics and Sociology, Book I., Chaps. V., VI. and VII., and Statistics and Economics, Book I., Chap. V.; * Fetter, Principles of Economics, Chap. XLIII.; * Bullock, Selected Readings in Economics, Chap. IX.; * Clark, The Distribution of Wealth, Chap. XXIV.; * Marshall, Principles of Economics, Book IV., Chaps. IV. and VII., Book VI., Chap. XI.; Böhm-Bawerk, The Ultimate Standard of Value (article in Annals of American Academy of Political and Social Science, Vol. V., pp. 149-208).

CHAPTER XIV

MONEY AND THE MONETARY SYSTEM
OF THE UNITED STATES

118. The Nature and Functions of Money. As has already been pointed out (Section 48) every extension of co-operation and the division of labor, beyond the simple division of tasks possible within the family, must be accompanied by a corresponding development of the system of exchange. The simplest kind of exchange is barter; but this has serious drawbacks, since it can take place only when two traders come together, each having in his possession a commodity preferred by the other. Even this unusual situation will not lead to an exchange unless the parties can agree as to the terms of the bargain. Thus, under the system of barter, the American Indian with a pony to dispose of had to wait until he met another Indian who wanted a pony and at the same time was able and willing to give for it a blanket or other commodity that he himself desired. Even when pony and blanket came together an exchange through barter might be prevented by the fact that one of the owners thought his commodity worth somewhat more than that of the other. Neither pony nor blanket could be divided, and in consequence higgling over the trade would be quite as likely to lead to a quarrel as to a transfer of property.

The inconveniences connected with barter led, at an early period in the history of civilization, to the introduction of a medium of exchange, or money. Although no exact account of the steps preceding this important innovation has been preserved, it is not difficult to reconstruct

in imagination the circumstances which determined the choice of the medium of exchange and caused it gradually to come into general use. Inability to barter surplus products for the exact commodities desired must have suggested the feasibility of bartering them for other products that were in more general demand, more durable or for some other reason more exchangeable. Thus the owner of surplus game who was unable to get for it the arrowheads he desired, would be glad to accept instead some durable ornament generally prized in the community, such as a string of beads. His chance of exchanging the latter for arrow-heads would be excellent, and would certainly be preferred to the prospect of having his game left on his hands. In some such way commodities must have come to be distinguished, even in primitive communities, by reference to their exchangeability, and the most exchangeable commodities must gradually have come into use as the media of exchange.

Quite as important as a medium of exchange to the development of an industrial community is a standard, or common denominator, by means of which the values of commodities may be compared. Without such a standard the value ratio between each commodity and every other dealt in must be remembered by the trader. For example, if he deals in ten commodities there will be forty-five ratios of exchange to be remembered. The use of a standard of value enables him to substitute for these forty-five possible exchange ratios the nine ratios between the value of the selected commodity and the values of the others. The smaller number of ratios under the new system tell exactly the same story as the larger number did before. Thus, instead of remembering that a string of beads is worth four deer, that two deer are worth an arrow-head and that two arrow-heads are worth a string of beads, it suffices for the trader to remember that a deer is worth onequarter, and an arrow-head one-half of a string of beads.

PRICES AND THE VALUE OF MONEY 225

To serve as a standard, or common denominator, of value is a second function of money, and to fulfil it, as to fulfil the first, the commodity selected for the purpose must possess in high degree the quality of exchangeability.

In addition to serving as a medium of exchange and a standard for comparing exchange values, money, or the monetary unit, serves in modern industrial communities as the medium for credit transactions, or deferred payments. Promises to pay in the future for value received in the present are habitually expressed in terms of money. To serve as a standard for deferred payments is thus money's third function.

119. Prices and the Value of Money Vary Inversely. -Price, as already explained, is exchange value measured in terms of money. In the United States and other goldstandard countries prices express the value ratios between the commodities priced and gold. To say that a bushel of wheat is worth $1 is equivalent to saying that a bushel of wheat will exchange for 23.22 grains of pure gold, since this is the standard dollar of the country. If the price of wheat should rise to $1.25 (i. e., to 29.022 grains of pure gold), the value of gold measured in terms of wheat will have fallen correspondingly. One dollar, or 23.22 grains of gold, will now exchange for only fourfifths of a bushel of wheat. Thus every change in price registers a corresponding change in the exchange value of gold measured in terms of the commodity priced. To determine with certainty whether any given change in prices is due to a change in the value of the commodity, or in the value of gold, the standard money, it is necessary to make a general comparison in which all important commodities are included for the two periods. If in the given case it should be found that while the price of wheat rose other prices remained constant or fell, it might fairly be concluded that the value of gold had not fallen and that the change was due to a rise in the value of wheat.

Some writers describe money as the measure of values, but it is evident that it is not a measure to be compared with a foot-rule or a bushel. It is a convenient standard for comparing values or a common denominator to which all values may be reduced; but as a measure of values in any absolute sense it is untrustworthy, since it is itself variable in value. This variability is a source of annoyance and loss to the business community, and hence, as explained in the next section, stability of value is one of the qualities essential to a good money.

120. Qualities of Good Money.-Present-day monetary systems are the result of an historical evolution. In the past, in different countries, nearly every kind of commodty has served as money. The ox is the standard of value referred to in the earliest literature of Greece and Rome. In Africa cubes of salt have been used. Tea was used at one time in parts of Asia. In America the Indians used strings of beads, which they called wampum, and for a time wampum was also used for small payments among the colonists of New England. In Virginia tobacco long served as the standard of value, and efforts were made to fix by law the value ratio between it and the coins which found their way to the colony from Europe. As a result of experiment, all civilized countries have now come to the use of the metals as money, and all of the more important commercial countries have fixed upon gold as their standard and relegated other metals to a subordinate position in their monetary systems. The reasons for the preference for gold become clear from a consideration of the qualities which should be possessed by a good money.

Economists quite generally agree that the commodity selected to serve as money should have the following qualities: (1) value, (2) durability, (3) portability, (4) homogeneity, (5) divisibility, (6) cognizability and (7) stability of value. That the commodity which is to serve as the intermediary between valuable things must itself