The definition of money is inevitably modified by the point of view from which the author writes. Thus, money may be discussed in the scientific sense with special reference to its work as a standard of value, or from the popular view as a means of pur chasing. The enumeration might well extend thru the figurative, financial, legal and national banking senses of the term. The approach taken in this chap ter will be the analytical. What does money do? 3. Functions of money.—As a matter of conven ience the functions performed by money may be divided into: (1) those which are essential, (2) those derived from the essential functions, and (3) those which are contingent. The use of money brings out its essential functions as a medium of exchange and a standard of value. The derived functions are found in the fact that money acting in the capacities just cited must, as a matter of course, be a standard of deferred payments, transfer values from one person to another, and act also as a store of value. Now and then you hear of a man's buying a diamond in order that he may possess a permanent value that can be re lied upon in time of need. So money, when well es tablished in a scientific way, acts as a store of value. But beyond this, money is constantly doing other things. It acts as a means of distributing social in come, as a basis of the credit system, and as a means of giving capital a mobile form.
4. 3Iedium of exchange.—The simplest duty which money performs is to act as a medium of ex change, the go-between in trade, making. it possible for seller and buyer to obtain what they desire. This it accomplishes by virtue of its universal acceptability. Were there no legally recognized medium of exchange the needs of trade would create one which would by common consent serve its purpose. Many ob jects have in times past served this purpose. Some, it would appear, had a purely conventional value ; but for the g,reater part they were ob jects possessing some inherent utility which made them generally prized. Therefore, as soon as they become the recognized means of mak-ing payments this general acceptability is universal.
Of all the substances which have served as money none has given greater satisfaction than gold and silver. This is due to certain physical qualities, and to certain conditions of their production. They are for the most part easily divisible into parts of uni form quality, and when so divided the sum of the parts is equal to the value of the whole before division took place. They wear well and k-eep their qualities intact for long periods. Moreover, they possess a stability which comes from the regularity of their production. From year to year the product of gold, for example, varies but little. The new product is
added to the stock already in existence and the changes in this stock from year to year are very insignificant.
5. How money effects exchanges.—It is evident that to be an effective instrument of exchange money must be capable of making any payment however small or however large. The wide variety of ex changes which are made in daily life, from the pur chase of a newspaper to the purchase of a railroad, require an instrument nicely adjusted to these vari ous needs.
Many exchanges are not, as we know, made with money but with credit, but money must be of such a nature that it forms a satisfactory reserve for such credits. Money therefore effects exchanges directly and indirectly. These indirect exchanges belong in part to the subject of credit and will be more fully discuSsed under that head. They are mentioned here to make it clear that while all money is a medium of exchange, all media of exchange are not money.
The part played by media. of limited acceptability, such as checks, notes, drafts and other credit instru ments is of the first importance in the modern busi ness world. It does not, however, conduce to clear ness of thought to designate them currency or money of limited circulation, as has been done from time to time. In so far as the function of a medium of exchange is concerned, they are important and use ful substitutes for money, but they are not money.
6. Money as a measure or standard of value.—The commodity used as the medium of exchange becomes naturally the measure or standard of value. -Whether goods are exchanged or not, they are instinctively valued in terms of money. It is the language which everybody understands; and while it might be quite true tbat a certain piece of land is worth so many bushels of wheat, it would be absurd to express its value in the United States otherwise than in terms of dollars and cents.
As a standard of value the chief characteristic which is desired of money is stability. Violent changes in value from day to day or year to year would make money a poor instrument for this purpose. Even changes in-the value of the standard which are grad ually wrought are of far-reaching effect in business relations. The desire for a stable standard has found frequent expression. The mercantile world has ag,reed to use gold as such a standard, and so far as its freedom from fluctuation from day to day or year to year is concerned it meets the situation admirably. Tho gold is the best standard that mankind has yet been able to attain, it is far from perfect; and its changes in value over longer periods of time consti tute one of the distinguishing marks of economic de velopment.