The phrase standard of value, as used in the preceding sections, should be qualified by the adjective primary, in order to distinguish it from standards occasionally used which may be described as secondary. In the United States a secondary standard was in use from 1862 to 1879. In the former year the United States government, in order to assist in paying the expenses incident to the war then in progress, issued its notes promising payment to bearer in denominations suitable for circulation as money and made them legal tender in payments between individuals, i.e., decreed by law that the tender of these notes in the payment of financial obligations would constitute discharge of such obligations.
These notes speedily depreciated. That is to say, the people of the United States, and of other countries as well, did not consider them worth, and would not give for them on the open market, the amounts the payment of which was promised on their faces. As a result of this depreciation these notes took the place of coin in the circulating medium of the country, because people could melt down the coins and exchange the bullion for these notes at their depreciated value and with them meet a much greater volume of financial obligations than they could have met by tendering the coins directly. When everybody thus came to ten der depreciated notes in the payment of all their obligations, prices were universally quoted in these notes instead of in gold, and they thus became the standard of value of the country.
The dependence of prices upon the value of gold was not, however, thereby in any way broken. What the government promised to pay in these notes was dollars, and dollars meant a certain amount of gold carefully speci fied in laws enacted by Congress. The value of the notes themselves, i.e., what people were willing to pay for them on the open market, was daily quoted in terms of the gold stand ard. The notes, therefore, were a secondary standard only, gold continuing to serve as the primary standard. Under these conditions prices fluctuated, not only because of changes in the relative value of gold and of com modities, but also because of changes in the degree of depreciation of these notes.
The phrase medium. of exchange describes the go-between in exchanges now almost uni versally used in place of barter. Instead of ex
changing the good or service we have directly for the one we want, we nowadays exchange it for a third thing which we in turn exchange for what we want and this third thing is called a medium of exchange. A farmer, for ex ample, who comes to market with a load of grain and wants an overcoat does not search for a clothier who not only has for sale the coat he wants, but also wants the grain he has, but he exchanges his grain for coin, or govern ment notes, or bank checks, and transfers these to the clothier in exchange for the coat.
Medium of explanation of the almost universal practice of using a medium of exchange is found in the difficulties of , barter. One of these is to find two persons each of whom has the thing which the other wants and wants the thing which the other has, and is willing to take the precise amount of the thing desired which the terms of the exchange agreed upon would bring him. There would be little commerce if this difficulty could not be overcome, and in overcoming it the medium of exchange has rendered a service essential to the progress of civilization, In a state of barter also the process of saving is so difficult and expensive as to be practically impossible as a general practice and on a large scale. It is that of hoarding surplus products. In such a state the farmer saves by storing his surplus grain and allowing his herds to grow and accumulate, the manufacturer by piling up goods in his warehouse, the wageworker, not being able to accumulate his services, could only save by exchanging them for such commodities as he might desire to consume in the future and hoarding these. In all these cases, however; the risk that the product hoarded would keep during the savings period, that it could be sold at the end of that period, and that the terms of the sale would be such as to render the sacri fice of saving worth while, would have to be assumed. In the vast majority of cases, these risks would be so great as to more than offset the inducement to save. The losses experienced by people who had attempted saving under these conditions would discourage others, and it is safe to say that few would ever make the attempt. A proper medium of exchange re moves all these risks and thus renders saving possible and attractive.