The danger of confusing primary and secondary standards renders desirable a more detailed account of the characteristics of the former. Among these the most important are the following: -

A. A high degree of utility for purposes of ordinary consumption. - No commodity can serve as a primary standard of value which is not highly prized for purposes of ordinary consumption, so highly prized indeed that it is or may easily become an object of universal desire. The truth of this proposition rests upon two facts which become self-evident the moment one grasps the real nature of a standard. The first is that people can get into the habit of quoting the values of their commodities in terms of some one commodity only after they have learned the ratios of exchange between said commodities and the one in question by means of frequent exchanges. It is manifestly impossible to express a ratio which you do not know, and there is no conceivable way of knowing a ratio of exchange except by actually making exchanges and observing the terms in which they are made. It is equally evident that such knowledge could become common only after practically everybody had frequently traded his products for the one in question. For convenience of expression we shall hereafter speak of a commodity for which people generally are anxious to trade their products and services as one possessed of a high degree of exchangeability.

The second fact upon which the truth of the proposition we are defending rests is that such general and frequent trading of all sorts of goods for some one commodity as is necessary to fit it for the work of a standard implies the possession by said commodity of very great utility for purposes of ordinary consumption. That every person in a community should frequently trade his products or services for a commodity which to him is useless it is impossible to conceive. It is neces-ary, however, to emphasize this truth at the very beginning of our study, because the failure to grasp it is responsible for a great deal of fallacious reasoning and a number of monetary heresies.

B. Serviceability as a medium of exchange. - In primitive communities the same commodity serves both as a standard of value and a medium of exchange, for the reason that a high degree of exchangeability fits it for both services. With the growth of commerce, however, the credit method of conducting exchanges, explained in the first chapter, has come into extensive use, and nowadays the medium of exchange everywhere consists of credit instruments and a number of different commodities besides that which serves as the standard. Nevertheless it is still important that the standard should constitute an element of the medium of exchange. This becomes evident when we recall the regulations necessary to maintain in concurrent circulation several varieties of coins and paper currency. As explained in the preceding chapter, subsidiary coins and paper currency must be redeemable directly or indirectly in standard coins, and it is best that these latter coins should be made from the commodity which serves as the standard of value. The statements on the faces of the coins and notes in circulation always refer to the standard commodity. A five-dollar government note or bank-note is a promise to pay a specified amount of this commodity; and while the statements on the faces of the coins do not formally constitute promises to pay, the figures always refer to specific amounts of this same commodity; and if they circulate at the value indicated by these figures, it is because they are either directly exchangeable for that specified amount of the standard commodity or redeemable in an amount of some other commodity exactly equivalent to this in value. The difficulty connected with the redemption of the various elements of the medium in other commodities than the standard is the fact that the quantity of such commodities receivable in payment for a ten-dollar note or a dollar or fifty-cent coin would vary with the price of the commodities. Suppose, for example, that all elements of the medium were made redeemable in silver, gold being the standard of value. When silver was worth a dollar an ounce it would take ten ounces to pay a ten-dollar note, and when its price was fifty cents an ounce it would take twenty ounces to redeem the same note. It would always be necessary to determine the price of silver in gold before the payment of the note or the redemption of the coins could be accomplished.*

When all forms of currency are made redeemable in the standard commodity, on the other hand, the quantity payable for a ten-dollar note is unchangeable, since ten dollars mean ten times the unit of value called the dollar, and this unit is defined by law to be a certain number of grains of gold. If, then, the standard commodity be put up in coins of convenient sizes and denominations, it constitutes as nearly perfect a material for redemption as it is possible to obtain. It follows that a good standard of value must be a commodity which possesses the qualities needed in the manufacture of coins, such as durability, divisibility, homogeneity, malleability, etc.

* The student must not allow himself to be deceived by indirect systems of redemption. We may make notes redeemable in silver dollars at their face value without reference to their intrinsic value, and no difficulty will be experienced provided the silver dollars are themselves directly or indirectly redeemable in gold. Under such a system the notes are really redeemable in gold, but by an indirect or roundabout process.

C. Capacity to be easily and cheaply hoarded and transported. - The extensive use of the standard commodity as material for redemption renders important its capacity to be easily and cheaply hoarded and transported. The commodity used for the payment of notes and the redemption of coins must be frequently transported between different countries and different parts of the same country, and the question of expense of transportation thus becomes an important matter. If the redemption material is bulky and of low value, the expense of transportation must be high; if it is very valuable, that is, possessed of a good deal of value in small bulk, these expenses are much lower, indeed may be relatively insignificant. In subsequent chapters we shall explain the necessity of paying balances between banks in the same and different countries in the standard commodity, and consequently the need many banks, and sometimes the national treasury, feel for keeping large amounts of this commodity on hand in their vaults. A bulky commodity is much more expensive to store than one of high value. It thus becomes evident that of two commodities otherwise equally well fitted to serve as a standard of value, the more valuable one has the advantage in the particulars just described. Great financial institutions which are obliged to handle large quantities of the standard commodity possess great influence in the determination of what that commodity shall be, and, for the reasons mentioned, among others, are quite certain to favour the more valuable commodity.