Closely linked with the service of money as a medium of exchange is its function as a measure of value. In its earliest forms money was a commodity desired by everyone, something that all were glad to accept because it could be exchanged at any time for the necessaries of life. The article which came to be agreed upon as best fitted to serve as a medium of exchange was also used as a measure of value. Accustomed to exchange things for money, people gradually learned to appraise all commodities in terms of money, and to adjust all exchanges by comparing the money values of the articles exchanged. Thus money came to be the common denominator, the standard by which the value of all other commodities is measured. Not only commodities, but rents, wages and all kinds of payments are expressed in terms of money.
Some writers insist that a wide distinction must be made between the function of money as a standard and its function as a medium of exchange.1 A standard is used to measure value; a medium of exchange is used to transfer value. It is quite possible, of course, that one kind of money may be used as a medium of exchange while another serves as the standard or measure of value. In colonial days the values of commodities, labor and rent were expressed in terms of English money - pounds, shillings and pence; but Spanish coins formed the bulk of the actual circulating medium.2 At the present time the gold dollar is the money standard of this country, yet no gold dollars are coined or used in our circulation; our actual medium of exchange comprises a variety of coins, made from different metals, several kinds of paper money, and credit instruments, such as the cheek and the draft. Indeed the whole history of money is marked by the development of money substitutes to economize the use of standard coin. To-day over 90 per cent of the large transactions of this country are performed by means of bank credits without the actual use of money. Yet while we may measure in terms of one thing and make payments in terms of another, the two functions are mutually dependent. "The medium of exchange would be useless unless some common medium of giving effect to it practically is adopted."1 All parts of our circulating medium are in practice interchangeable, and are exchangeable directly or indirectly for gold coin, the legal standard. In speaking of money as a measure of value it should be noted that it is not an unvarying measure like a foot rule or a bushel. It is only a convenient standard for comparing the values of other commodities, a "common denominator to which all values may be reduced."
1 Scott: Money, p. 35; Laughlin: Principles of Money, p. 14.
2 Money which serves as a measure of value, but which is not actually in use is called "money of account."