Functions of Money
Putting this book online was underwritten by The Robert Schalkenbach Foundation, publisher of Henry George's works.
The Science of Political Economy
Book V, Money -- The Medium Of Exchange and Measure of Value
Medium of Exchange and Measure of Value
Showing How the Common Medium of Exchange Becomes the Common Measure of Value, and Why We Cannot Find a Common Measure In Labor
Money is most exchanged -- Why not measure value by labor? -- Smith's unsatisfactory answer -- The true answer -- Labor can afford no common measure, and commodities are preferably taken -- Survivals of common measures -- Difference in common measures does not prevent exchange.
I have in the last chapter defined money as whatever is at any time and place used as the common medium of exchange. This is indeed the primary quality of money. But proceeding from this use as a common medium of exchange, money has another and closely conjoined use -- that of serving as a common measure of value.
The reason of this is that the use of money as a common medium of exchange, which causes it to be esteemed for exchange and not for consumption, makes it of all exchangeable things that which in civilized societies is often and most commonly exchanged. A given portion of wood or coal, for instance, may be used by the producer and thus not be exchanged at all; or it may be exchanged once or perhaps even half a dozen times between cutting or mining and its reaching in the hands of the consumer the ultimate end for which it was produced, the combustion that supplies heat. So it is with potatoes or wheat or corn. The majority of horses are probably not exchanged at all during their working days, and it would be a much exchanged horse who should have six owners during his life. Cotton and wool and hemp and silk may pass from one to half a dozen exchanges before they assume the form of cloth or rope, and in that form may pass through from two to half a dozen more exchanges before reaching the consumer. And so with lumber or iron or most of the forms of paper, meat or leather. Not only is the ultimate purpose of the exchanges of such things destructive consumption, but they are mainly composed of things which if not soon consumed will wear out or decay.
Money, on the other hand, is not produced for the purpose of being consumed, but for the purpose of being exchanged. This, not consumption, is its use. And we always seek for its substance materials least subject to wear and decay, while it is usually carefully guarded by whoever for the moment may be in its possession. And further while an article of money may frequently pass through more hands in a single day than ordinary articles of wealth are likely to pass through during the whole period of their existence, the use of money in thought and speech as a symbol of value brings it to the constant notice of those who do not often tangibly use it. Thus it is that the value of the money which is the common medium of exchange in any community becomes to the people of that community better known than the value of anything else, and hence is most readily and constantly chosen to compare the value of other things.
But here may arise a question, which I wish thoroughly to answer: If, as explained in Book II, value is in itself a relation to labor, why can we not find not merely a common measure of value, but an exact and final measure of value in labor itself?
This is a question that perplexes a great many of the monetary theories that have been broached in the United States without finding scholastic recognition, and it is raised but not satisfactorily answered by Adam Smith.
In a passage previously quoted in full* Adam Smith says: "But though labor be the real measure of the exchangeable value of all commodities, it is not that by which their value is commonly estimated." And then goes on to explain the reason of this.
But in the attempt to explain this fact Adam Smith falls into confusion through the slipperiness of his terms and misses the true reason. While he says in effect that the time of exertion will not measure the quality of exertion, he yet, almost in the same breath, uses time as the measure of exertion, saying that "every commodity is ... more frequently exchanged for and thereby compared with other commodities than with labor," that "it is more natural therefore to estimate its exchangeable value by the quantity of some other commodity than by that of the labor which it can purchase," and that "the greater part of the people too understand better what is meant by the quantity of a particular commodity than by a quantity of labor," thus ignoring what he had just shown, that it is the labor (in the sense of exertion) that their possession will save which determines the value of all commodities. His attempted explanation of the fact that the real measure of value is not the common measure of value, amounts to nothing more than that it is more usual to measure value by commodities than by labor. This is no explanation of the fact; it is merely a statement of the fact. We cannot explain a custom or habit by saying that it is natural or showing that it is usual. The very thing to be explained is why it seems natural and has become usual.
Yet in the light of our previous investigation the reason why the real measure of value cannot serve as a common measure of value is clear. It lies in the human constitution. We become conscious of exertion through the "toil and trouble" it involves -- the feeling of effort and at length of irksomeness and repugnance that attends its continuance. Now feeling is an affection or condition of the individual perception or Ego, which can find objective manifestation only through action. Even the mother can know the feelings of the babe only through its actions. If she can tell that it is hungry or sleepy or in pain, or is satisfied and happy, it is only in this way.
As we have seen, labor in the sense of exertion, is the true, ultimate and universal measure of value; what anything will bring in exchange being always based upon an estimate of the toil and trouble attendant upon the exertion which the possession of that thing will save.
But this is an estimate which, though each may make it for himself, he cannot convey to another directly, since the feeling of weariness or repugnance, the dislike of "toil and trouble," which constituting the resistance to, is the measure of, exertion, can, in our normal condition at least, be conveyed to, or expressed by one to another only through the senses.
We make such estimates continually in our own minds, for memory which registers the experience of the individual permits us to compare the exertion it has required to do or procure one thing with what it has required to do or procure another thing. But to express to another person my idea of the amount of exertion required to do or procure a particular thing there must be something that will serve us as a mutual measure of the resistance to exertion, that is to say the "toil and trouble" that exertion involves.
Thus, to convey to one ignorant of swimming some idea of the exertion it requires, I must compare it with some exertion with which we are both familiar, such as walking. Or, if a stranger wishes to know of me what exertion he will have to make to walk to a certain point, I will tell him, if I know it, the distance, and give some idea of the character of the road, for he will have some idea of the exertion required to walk a given distance on an ordinary road. If he be a Frenchman accustomed to meters and kilometers, which neither of us can translate into feet and miles, I will still be able to convey to him my idea by saying, so many minutes' or hours' walk, for all men have some idea of the exertion required to walk for a certain time. If we could find no common nomenclature of time, I could still give him some idea by pointing to the dial of my watch or to the sun, or by finding from whence he had come, and making him understand that the distance he had yet to go was longer or shorter, and the road harder or easier. But there must be some point of mutual knowledge which will furnish us with a common measure, for me to make myself intelligible to him at all.
So reversely, a common experience of required exertion will, in the absence of a more exact measure, give some idea of distance or area, as
A bowshot from her bower eaves,
He rode between the barley sheaves,
They gave him of the corn-land
That was of public right,
As much as two strong oxen
Could plow from morn to night.
Now while exertion is always the real measure of value, to which all common measures of value must refer, yet to get a common measure of value, which will enable us to express from one to another both quantity and quality (duration and intensity) of exertion, we must take some result of exertion, just as to find a common measure of heat, light, expansive force or gravitation we must take some tangible manifestation of those forms of energy. It is because commodities, being the results of exertion, are tangible manifestations of exertion that they are generally and naturally used as common measures of value.
Even where exertion is expressed in time, there is always at least an implied reference to accomplishment or results. Where I hire a man to work for me by the day or week or month in occupations which show tangible result, as in digging or draining, in plowing or harvesting, in felling trees or chopping wood, it is always with a certain idea of the tangible result to be achieved, or in other words, of the intensity as well as of the duration of the exertion. If I find no result, I say that no work has been done; and if I find that the results are not such as should have come from a reasonable or customary intensity of exertion with a reasonable or customary knowledge or skill, I say that what I really agreed to pay for has not been accorded me. And disinterested men would support me.
On going ashore in San Francisco, a shipmate of mine, who could not tell a scythe from a marlinspike, hired out to a farmer in haying-time for $5 a day. At his first stroke with the scythe he ran it so deep in the ground that he nearly broke it in getting it out. Though he indignantly denounced such antiquated tools as out of fashion, declaring that he was used to "the patent scythes that turn up at the end," he did not really feel wronged that the farmer would not pay him a cent, as he knew that the agreement for day's labor was really an agreement for so much mowing.
In fact, the form of measuring exertion by time, at bottom, involves its measurement by result.
This we find to be true even where there is no definite result. If I hire a boatman or cabman to take me to a certain point, the distance, being known, affords a close idea of the exertion required, and it is the fairest, and to both parties usually the most agreeable way, that the stipulation shall be for that result, or as the cabmen in Europe say "by course?" which is a definite payment for a definite result. But even were I to take a boat or a cab without fixed idea of where I want to go, and agree to pay by the hour, there is an implied understanding as to the intensity of the exertion for which I am to pay. Either boatman or cabman would feel that he was not keeping his agreement fairly, and I would certainly feel so, were he, for the purpose of "putting in time," to row or drive at a snail's pace.
So strong is the disposition to take tangible results as the measure of exertion that even where quality is of more importance than quantity, as in literary work, the formal measurement is even in our best magazines and newspapers by the page or column, differences in quality, real or expected, being recognized partly in the readiness with which an article is accepted, and partly in a greater price per page or per column.
In short, while exertion, including both quantity and intensity, is always the true and final measure of value, it is only through the manifestations of exertion that any common measure of value can be had. Thus commodities being tangible expressions of exertion become the readiest common measures of value, and have since the beginning of human society been so used.
While any commodity, or for that matter any definite service, may be used as a common measure of value to the extent to which it is recognized as embodying or expressing a certain amount of exertion and thus having a definite, though not necessarily a fixed value, the tendency is always to use for this purpose the commodity whose value is most generally and easily recognized. And since the commodity which is used as the common medium of exchanges becomes in that use the commodity which is oftenest exchanged and whose value is most generally and easily recognized, whatever serves as the common medium of exchange tends in that to become the common measure of value, in terms of which the values of other things are expressed and compared. In societies which have reached a certain stage of civilization this is always money. Hence we may define money with regard to its functions as that which in any time and place serves as the common medium of exchange and the common measure of value.
It must be remembered, however, that of these two functions, use as the common medium of exchange is primary. That is to say, use as the common medium of exchange brings about use as the common measure of value, and not the reverse. But these two uses do not always exactly correspond.
Thus, in New York and its neighborhood one may still hear of shillings or York shillings (12 1/2 cents) as a measure of small values. There is no such coin, this use of an ideal shilling being a survival from Colonial times. So, in Philadelphia one may hear of fips and levies; in New Orleans of picayunes and in San Francisco of bits, survivals of the Spanish coinage; and in the far Northwest of "skins," a purely ideal measure of value surviving from the time when the Hudson Bay Company bartered with the Indians for furs. During, and for some time after, the civil war two different common measures of value were in co-temporaneous use in the United States -- paper money and gold. But since the resumption of specie payments, though paper money still constitutes the more largely used medium of exchange, gold alone has in this country become the common measure of value. And though gold, silver and paper are all largely, and generally co -- temporaneously, used throughout the civilized world today as supplying the common medium of exchange, the great monetary division is between the countries which use gold as the common measure of value and the countries which use silver.
But it is still evident, as Adam Smith said, that labor (in the sense of exertion) is "the real measure of the exchangeable value of all commodities," -- "the only universal as well as the only accurate measure of value, or the only standard by which we can compare the values of all commodities in all times and in all places." For it is still true, as he said, that "the real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people."
Since labor is thus the real and universal measure of value, whatever any country may use as the common measure of value can impose little difficulty upon the exchanges of its people with the people of other countries using other common measures of value. Nor yet would any change within a country from one common measure of value to another common measure of value bring more than slight disturbance were it not for the effect upon credits or obligations. In this lies the main source of the controversies and confusions with which the "money question" is now beset.
Before going further it would therefore be well, at least so far as pertains to the idea of money, to examine the relations of credit to exchange.
* Book II, Chapter XI, paragraphs 9-11
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