A standard of value is any commodity by means of which people measure and express the value of other commodities. For example, when we say that a pair of shoes is worth five dollars and a coat ten, we measure and express the value of these two commodities by means of another which, for this purpose, we call a dollar. In the United States this standard commodity is gold, and to 23.22 grains of it, many years ago, Congress gave the name dollar. If our ancestors had acquired the custom of comparing the value of everything with that of a bushel of wheat, by always finding out for how many bushels each article would exchange, then wheat would have been our standard of value, and Congress might have decided to call a bushel of wheat a dollar, instead of a few grains of gold.
The acquisition of the habit of using some one commodity as a standard of measurement and a means of expressing the values of all others is characteristic of every people who have advanced beyond the most primitive stages of civilization, and is explained by the need for a common language of value, which made its appearance very early in the history of commerce and which demanded satisfaction before trade could play an important part in economic processes. This need may be best appreciated by imagining ourselves reduced to a state of barter. Each one would then be obliged to trade the commodity or service which is the result of his special activity directly for the various commodities and services which he needs or desires. A shoemaker would needs exchange shoes directly for flour, butter, sugar, meat, etc.; the farmer would have to barter wheat and cattle for groceries, clothes, and agricultural implements; the labourer would have to trade his services for whatever he and his family need, etc., etc. The difficulties which would be encountered under these circumstances are many, but one of the greatest and the most fundamental would be due to the fact that each person would have a language of values peculiar to himself and difficult of comprehension by his fellows. This difficulty may be illustrated as follows: -
Suppose that A is a producer of wheat, B a cattle-breeder, C a shoemaker, D a tailor, and E a manufacturer of sugar. Each, having frequently bartered his product for each of the other commodities, would have an accurate idea of their relative values, but would be able to express that idea only in terms of his own commodity. A, for example, would think and speak of value in terms of wheat. If he had frequently traded 100 bushels of wheat for an ox, 5 bushels for a pair of shoes, 10 bushels for a coat, and 1/10 of a bushel for a pound of sugar, the figures 100, 5, 10, and 1/10 would represent to him the relative values of these and serve as a means of expressing them. If, on other occasions, he were compelled to give no bushels of wheat for the same sort of an ox as before cost him only 100, he would conclude that the value of beef had risen, and would measure the rise by comparing the figures 100 and no. In fact, this method of expressing values would not only be natural to A, but it would be the only one possible. On the assumption that he produces wheat and wheat only, and barters it for whatever else he needs or desires, his knowledge of values would not extend beyond the ratio of exchange of wheat with other commodities.
B, C, D, and E would each likewise have one means and only one of expressing the relative values of commodities, namely, the figures which represent the ratio of exchange of his product with each of the others. B, for example, might express the value of wheat, shoes, coats, and sugar by the fractions 1/100, 1/20, 1/10, and 1/1000, the portions of an ox exchangeable respectively for a bushel of wheat, a pair of shoes, a coat, and a pound of sugar, or by the figures 100, 20, 10, and 1000, representing the number of bushels of wheat, pairs of shoes, coats, and pounds of sugar exchangeable respectively for one ox. C's expression for the relative values of wheat, cattle, coats, and sugar would be the figures 1/5, 20, 2, and 1/50, representing the number of pairs of shoes and fractions of pairs exchangeable respectively for a bushel of wheat, an ox, a coat, and a pound of sugar, or the figures 5, 1/20, 1/2, and 50 representing the amount of wheat, cattle, coats, and sugar equivalent in value respectively to one pair of shoes. Under the same conditions of value, D, who has only coats for trading, would have to pay for a bushel of wheat 1/10 of a coat, for an ox 10 coats, for a pair of shoes 1/2 a coat, and for a pound of sugar 1/100 of a coat; and E, who barters sugar, would pay for a bushel of wheat 10 pounds, for an ox 1000, for a pair of shoes 50, and for a coat 100.
It is thus evident that in a state of barter each man would have an accurate numerical expression for the values of all the commodities on the market, but one peculiar to himself, and consequently unintelligible to others, or at any rate capable of being made intelligible to others only by a mathematical calculation. In describing values A could only give the amount of wheat each commodity is worth; B, the amount of beef or live cattle; C, the number of pairs of shoes; D, the number of coats; and E, the amount of sugar. If a dealer should attempt to establish in this community a store for the purchase and sale of all the goods produced, he would be obliged to quote the price of each article in terms of all the others in order to meet the needs of his customers. Were commerce at all active and large in amount, this would mean an interminable price-list and an amount of calculation which would require more time than all the other business of the establishment, to say nothing of the liability to error and the consequent danger of loss. It is safe to say that under such conditions commerce would never have assumed very great proportions or played a very important role in the world's history. The difficulty which these traders have met is that of a variety of methods of expressing values, and the remedy is the acquisition of a method common to all. The difficulty is similar to that which people speaking different languages would meet in trading, if no one understood the speech of the other. Each trader's language of value is peculiar to himself and not understood by his fellows. What is needed is a common language intelligible to all.
The acquisition of such a language is accomplished through the use of a single commodity as the standard for comparing and reckoning values. In our hypothetical community, for example, any one of the five commodities could be used for this purpose. On the assumption that sugar is consumed by every one and consequently frequently bartered for every other commodity, each person would know the value of his product in terms of this one, and would be able to express that value in a form intelligible to others. If A should always describe the value of his wheat by stating the number of pounds of sugar a bushel would buy, and B, C, and D in the same manner should express the value of cattle, shoes, and coats, each would readily understand the other, and comparisons and calculations of values would be easy and simple. The figures in which such comparisons and calculations were expressed would always refer to multiples or subdivisions of a pound of sugar, and would constitute a language of value understood by every member of the community. If, in discussions of value, for convenience or any other reason, a special name were given to a pound of sugar, for example, the name dollar, franc, mark, or pound sterling, the language of value would' become that employed in the United States, France, Germany, or England at the present day.
The capacity to serve as a standard of value is possessed by all commodities which are widely used and consequently frequently bought or sold. In primitive societies custom has usually caused the selection of that commodity as the standard which is most widely known and most highly esteemed among the people who have occasion to trade with each other, and in more highly civilized communities considerations of convenience and economy have usually dictated the selection of one among several articles which might conceivably be employed for this purpose. Whatever the commodity may be, however, and by whatever process selected, its function as a standard is simply that of furnishing the community with a means of measuring, expressing, comparing, and recording the values of the various articles of commerce.