The functions which money discharges in the social organism are—at least in the opinion of all writers worth noticing here—clearly manifest. The most important is that of facilitating exchanges. It is not necessary to dwell on the great importance of this office. The mere consideration of industrial organization shows that it is based on the division of employments; but the earliest economic writers saw clearly that division of employments was rendered possible only by the use of a medium of exchange. They saw that the result of increasing specialization of labour was to bring about a state of things in which each individual produced little or nothing directly adapted to satisfy his own wants, and that each one was to live by exchanging his products for those of others. They saw, moreover, that this was not feasible without some object which all would be willing to accept for their peculiar products, for otherwise, the difficulty of getting those together whose wants were reciprocal would be a complete hindrance to the 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 of estimating the comparative value of different commodities. Without some common commodity as a standard of comparison this would be almost 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 to be dealt with increased the problem would become harder, “for each commodity would have to be quoted in terms of every other commodity.” Indeed it may be reasonably maintained that the idea of general value could not be formed without the existence of money, and all that is known of savage races tends to bear out this view. The adoption of some one commodity renders the comparison of values easy. “The chosen commodity becomes a common denominator or common measure of value in terms of which we estimate the values of all other goods,” and thus money, which in its primary function renders exchanges possible by acting as an intermediate term in each exchange, also makes exchanges easier by making them definite. 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. Thus there is a continual increase in relations of contract, as may 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 already acts 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, and in this respect may be regarded as a standard of value, or, if the phrase be preferred, of deferredpayments. ^ Some writers attribute a fourth function to money, inasmuch as they regard it as being a means of easily storing up value. Doubtless it does supply this need, which is a specially pressing one in early civilizations owing to the insecurity which then exists, but with the progress of settled government the need becomes less extreme. Other forms of investment grow up, and the habit of hoarding money becomes unusual. It is therefore better to regard the functions of money as being only three in number, viz., to furnish—(1) the common medium by which exchanges are rendered possible, (2) the common measure by which the comparative values of those exchanges are estimated, and (3) the standard by which future obligations are determined.

2. Causes which Determine the Value of Money. Quantity of Money needed by a Nation.— The problem of the determining causes of the value of money is a particular case of the general problem of values, but there are circumstances which render the inquiry more than usually complicated. Before considering these it will be well to deal with a use of the phrase “value of money” which has led to much confusion. In mercantile phraseology the value of money means the interest charged for the use of loanable capital. Thus, when the market rate of interest is high money is said to be dear, when it is low money is regarded as cheap. Whatever may be the force of the reasons in favour of this use, it is only mentioned here for the purpose of excluding it. For our present subject, “the value of a thing is what it will exchange for; 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 in the general theory of value it appears that the proximate condition which determines it is the equation between supply and demand; and this is clearly the case with reference to money. These terms, supply and demand, need, however, some elucidation. Let us consider what is meant by the supply of, and demand for, money. The supply of a commodity means the quantity of it which is offered for sale. But in what shape does the sale of money take place? By being offered for goods. “The supply of money, then, is the quantity of it which people are wanting to lay out;” or, to put the point more concisely, it is “all the money in circulation at the time.” Again, to take the case of demand,—the demand for a commodity is the purchasing power offered for it. Demand in the special case of money consists of all the goods offered for sale. There is, however, a peculiar feature in the case of money which arises from its position as the medium of exchange, viz., that money is, so to say, in a “constant state of supply and demand,” since its principal service is to act as the means of purchasing commodities. From this it follows that the factors which determine the value of money within a given time are: (1) the amount of money in circulation, and (2) the amount of goods to be sold. On closer examination it will, however, appear that there are other elements to be taken into account. In the first place, the quantity of money is not by itself the sole element on the supply side. In some instances a coin will not circulate more than two or three times in a year, while another coin may make hundreds of purchases. In determining the value of money these varying rates of circulation have to be considered, and by taking an average we may establish the existence of a fresh element to be estimated, namely, the average rapidity with which money does its work, or, to use Mill’s expression, “the efficiency of money.” On the side of demand, again, it is not the quantity of commodities that is the determining element, but the amount of sales, and the same article may, and generally does, pass through several hands before it reaches the consumer. From this it follows that (if the consideration of credit in its various forms be omitted) the value of money is inversely as its quantity multiplied by its efficiency, the amount of transactions being assumed to be constant. This formula requires, however, some further explanations before it can be accepted as a full expression of the 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, while the payment of interest on the various forms of obligation requires a large amount of the circulating medium. The potent influence of credit also must be dwelt on. This latter force is the main element to be considered in dealing with variations of prices; but so far as it is based on a deposit of metallic money it may be looked on as a means of increasing the efficiency of money, and therefore as coming within the formula given above. In its other aspects it lies outside the range of this article. Some interesting conclusions may be deduced from the results we have arrived at. One of these is that the “increased development of trade,” or “expansion of commerce,” of itself tends to lower not to raise prices; for, by increasing the work which money has to do while the amount remains the same, it raises its value. Another consequence is that a large addition may be made to the money in a country without any effect being produced on prices. This is evident, since money only acts on prices by being brought into circulation; therefore, if the money which is added to the national stock is not used in this way, prices will remain unaffected.

We have now sufficiently considered the proximate conditions which determine the value of money; the next step is to inquire: What is the ultimate regulator of its value? The value of freely-produced commodities is—according to the ordinary theory of economists—determined by their “cost of production,” or, where the article is produced at different costs, by the cost of production of the most costly portion. We have now to consider how far this theory applies to the special case of money. Gold and silver, the principal materials of money, are the products of mines, and are produced at different costs; therefore the cost of the part produced at greatest cost ought to determine their value. This theory is, however, true only under certain conditions—namely, that competition is perfectly free, and that there are accurate data for computing the cost of production, and even then it is true only “in the long run.” Moreover, cost only operates on value by affecting supply. “The latent influence,” says Mill, “by which the values of things are made to conform in the long run to the cost of production is the variation that would otherwise take place in the supply of the commodity.” From these considerations it follows that cost of production does not so influentially affect the value of money as some writers have supposed. In former periods it was a common proceeding on the part of the state to either restrict or stimulate coinage and mining for the precious metals. At all times the working of gold and silver mines has been rather a hazardous speculation than a legitimate business. “When any person undertakes to work a new mine in Peru,” says Adam Smith, “he is universally looked upon as a man destined to bankruptcy and ruin, and is upon that account shunned and avoided by everybody. Mining, it seems, is considered there in the same light as here, as a lottery, in which the prizes do not compensate the blanks;” and all subsequent experience confirms this view. With regard to the adjustment of supply to meet an altered cost of production, the difficulties are, if possible, still greater. The supply of money is so large compared with the annual production, that any change can operate but slowly on its value. The total stoppage of fresh supplies from the mines would not be felt for some years in the increased value; and an increased amount of production, though more rapid in its operation, takes some time to produce an effect. “Hence the effects of all changes in the conditions of production of the precious metals are at first, and continue to be for many years, questions of quantity only, with little reference to cost of production.” On these grounds it is apparent that cost of production is not, for short periods, the controlling force which governs the value of money, and even for long periods the speculative nature of the industries connected with the production of money renders the cost of production an element very hard to ascertain. Another consideration which gives a peculiar feature to the problem of moneyvalue is that in the case of other commodities a change in cost of production affects value without any actual change in the supply. The knowledge that a commodity can be produced at a lower cost will cause a reduction in its value. This is not true of money. Either the quantity or the efficiency of money must be altered to change its value. This is, of course, a result of its position as the circulating medium. When all these circumstances are taken into account it becomes clear that the most correct way to regard the question of money-value is that which looks on supply and demand, as interpreted above, as the regulator of its value for a limited time, while regarding cost of production as a force exercising an influence of uncertain amount on its fluctuations during long periods. Where the coinage of a state is artificially limited, the value of its money plainly depends on supply and demand as we have interpreted it.

The next question which arises is: What quantity of money does a nation require? What amount of the circulating medium is necessary for the proper working of the industrial organism? To this puzzling problem the earlier economists gave answers in the shape of definite formulae. Thus, Sir W. Petty was of opinion that the amount of coin required by a country was one-half the rent of land, onefourth the amount of building rent, and one fifty-second part of the annual wages of labour. Locke’s view was that one-fiftieth of labourers’ wages, one-fourth landowners’ revenue, and one-twentieth of traders’ yearly returns, was the proper amount. Modern statisticians, however, though having command of much greater resources, decline to attempt a quantitative answer, and content themselves with indicating the conditions which the problem involves. In fact we must first examine the work which money has to perform, and this depends on several conditions. The first of these is the population; caeteris paribus, twice as many people will want twice as much money. The second is the amount of transactions ; for, if the amount of business done is doubled, the amount of money must be also doubled, unless at the same time some improvement in credit is introduced. The efficiency of money is a third element which affects the quantity needed, and this is largely dependent on the habits of the people and the facilities for communication. Other elements which can be only briefly indicated are—“the degree in which credit exists between man and man; the amount of travelling which takes place; and the commercial and banking organization which exists.” Another factor which requires to be estimated is the extent to which habits of hoarding exist; for all money hoarded is withdrawn from circulation, and therefore increases the total amount needed. The habits of saving in the rural districts of France remarkably exemplify this element in the question. Again, the existence of barter does away with the use of so much money as would be required to carry on the exchanges effected by barter. The custom of paying wages in kind has a similar effect. This bare statement shows how insoluble the question is. When we contemplate the matter from an international point of view, the amount needed, after allowance is made for the cost of transporting goods, is plainly that which will keep a country’s prices at a level with those of the countries with which it has commercial relations. For otherwise the country would have an excess either of importation or of exportation, which would necessitate a flow of money to the country whose prices were lower than the general level.

This, then, is the condition which determines comparative prices between different countries; and, prices being so determined, the quantity of money needed to keep up those prices depends on the conditions above indicated. In the case of England reliable statistics tend to show that the gold in circulation was, in 1872, about £105,000,000, and the note circulation <£43,000,000. In any Continental country the amount would probably be proportionally much greater, owing to the fact that there is in England a greater development of credit.

3. Early Forms of Currency.— Up to the present we have considered money as being fully established and properly adapted to fulfil its various functions. We have now to trace the steps by which a suitable system of currency was evolved from a state of barter. It is important for a right understanding of the question to grasp the fact that exchanges took place originally between groups, and not between individuals. This explains the slow growth of exchanges, as each group produced most of the articles necessary for itself, and such acts of barter as took place were rather reciprocal presents than mercantile exchanges. Such is actually the case at present among modern savages. “It is instructive to see trade in its lowest form among such tribes as the Australians. The tough greenstone valuable for making hatchets is carried hundreds of miles by natives, who receive from other tribes in return the prized products of their districts, such as red ochre to paint their bodies with; they have even got εo far as to let peaceful traders pass unharmed through tribes at war, so that trains of youths might be met, each lad with a slab of sandstone on his head to be carried to his distant home and shaped into a seed-crusher. When strangers visit a tribe they are received at a friendly gathering or cor-robboree, and presents are given on both sides. No doubt there is a general sense that the gifts are to be fair exchanges, and if either side is not satisfied there will be grumbling and quarrelling; but in this roughest kind of barter we do not yet find that clear notion of a unit of value which is the great step in trading.” This vivid description of what is going on at present among lower races enables us to realize the way in which money came into existence. When any commodity becomes an object of desire, not merely from its use to the persons desiring it,, but from their wanting it as being readily exchangeable^ for other things, then that article may be regarded as rudimentary money. Thus the greenstone and ochre are on their way to being promoted to the position of currency,, and the idea of a “unit of value” is all that is needed to complete the invention. “This higher stage is found among the Indians of British Columbia, whose strings of haiqua-shells worn as ornamental borders to their dresses serve· them also as currency to trade with,—a string of ordinary quality being reckoned as worth one beaver’s skin.” These shells, therefore, are in reality money, inasmuch as they discharge its functions.

On a review of existing savage tribes and ancient races of more or less civilization we are surprised at the great variety of objects, which have been used to supply the need of a circulating medium. Skins, for instance, seem to be one of the earliest forms of money. They are to be found at present among the Indians of Alaska discharging this service, while accounts of leather money seem to show that their use was formerly more general. As the hunting stage gives place to the pastoral, and animals become domesticated, the animal itself, instead of its skin, becomes the principal form of currency....