This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 1. Money and evaluation. § 2. Origin of money. § 3. The use of money and money-prices. § 4. The standard price unit. § 5. Representative quality of money. § 6. The sale at auction. § 7. Bids in relation to valuations. § 8. Effect of multiplicate units of supply. § 9. Successive price levels through uncertainty. § 10. Auctions with reserve valuations. §11. Origin of markets. § 12. Transportation and the extent of markets. § 13. Communication and markets. § 14. One price in a market. § 15. Imperfect market conditions.
§ 1. Money and evaluation. In the last chapter it was seen why a process of delicate price fixing can not go on in a state of true barter. The lack of correspondence between the amounts of the two goods, makes very exact estimates of the value of goods in barter difficult and often impossible. Therefore, in the earlier stages of society, no careful estimate of value is made by the individual. Children do not make it. The typical trade of the small boy is a "trade even"; Johnny exchanges his gingerbread for Jimmie's jack-knife. It marks an epoch in the industrial development of the boy when he begins to keep store with pins, and no longer trades candy for apples, but both for pins, which have become the means of trade in his boy world. He then can express values in much more exact terms. In our society most children begin early to grow familiar with this conception of some thing used as a means of trading other goods; but travelers find some savage tribes still in the earlier childish stage of development, unable to grasp the thought, or understand the use, of money. When through lack of money there is a failure to adjust valuation, there is a loss of the possible advantage in each trade. There is a further waste of time and of effort to find something that will be accepted in barter, and the loss offsets a large part of the gain even when the barter is effected.
§ 2. Origin of money. These difficulties are met by the use of money. Some kind of good in general use comes to be accepted as a medium of trade. Money is simply one kind of wealth which is taken, not for itself, but to pass along. Each person takes it in the belief that it will enable him to distribute | his purchasing power in a more effective way. Money was not an invention, as are some mechanical devices, suddenly hit upon, but it was invented in the sense that the use as money of this or that object grew into a social custom as its convenience was tested by practice. Money is used in some degree everywhere except in the most primitive tribes. Historically viewed, the money first used in any community seems in every case to have been an object capable of giving immediate enjoyment to its possessor: salt, furs, rare feathers, bronze for weapons, silver and gold for ornaments, etc. This valuable good then gradually comes to be used as money, adding to its value-in-use this quality of value-in-exchange.
§ 3. The use of money and money-prices. A money-economy is a social organization, or an economic community, where money is generally used as the means of payment, in contrast with a barter-economy where trade is carried on without the use of money. In either case it is a matter of degree, and actually both methods are found in use in any modern community in varying proportions. The numerous problems arising with the use of money in a money-economy make up an important sub-division of economics, which must in the main be reserved for later study. Our present purpose, however, is merely to get in mind a few fundamental ideas regarding the use of money as a standard of current prices.
Goods had value long before such a thing as money was known in the world. All the essential features of the valuation process are possible without reference to money. But the great bulk of the trade of the world is effected through the instrumentality of money (and credit), and prices are nearly always quoted in money terms. So, altho there may be valuation and even a certain amount of trade (and therefore prices) without the use of money, it is natural for us to look for concrete illustrations of trade and of price to the money transactions which are taking place around us all the time -the familiar purchase of a good for money. Moreover, while the explanation of the more complicated problem of market prices without reference to money is quite possible, it is simplified by having these prices expressed in money terms.
§ 4. The standard price unit. In every civilized country to-day, some one valuable metal, either gold or silver, is selected as the standard money material, and a certain number of grains of the metal, of a certain degree of fineness, duly stamped by governmental authority, is the standard coin or monetary unit. This unit in the United States is called a dollar, consisting of 23.22 grains of "fine gold" (or 25.8 grains of "standard gold" nine tenths fine); in Great Britain it is the pound, containing 113.001605 grains of fine gold; in Germany it is the mark, containing 5.5312 grains; and in France it is the franc, containing 4.4803 grains. The coinage of the dollar gold piece was discontinued in the United States in 1890, and gold is coined in multiples of a dollar in quarter and half eagles, eagles ($10.00), and double eagles. Other pieces of metal and paper, properly stamped, are also called dollars, but the value of each of those is always now maintained practically equal to the value of the gold dollar.1 When we discuss market prices to-day in America in terms of money, we may think, therefore, of the price as being a quantity of gold, some multiple of a piece weighing 25.8 grains.
§ 5. Representative quality of money. Buying and selling by means of money is not essentially different from a case of barter in which gold (or other standard money) is one of the two goods in the trade. Except in the rarest cases, the price-good, money, is taken by the seller for its power-in-ex- change for other goods, not as metal to be used in the arts. The money is taken for its representative quality (see above, section 2) ; it represents to the trader the desirability of the things that it can be expected to buy. Money becomes in the thought of the traders something like an algebraic symbol, but it stands for different things and groups of things to different traders, and to each its significance changes from one moment to another, according as he chooses to use it in buying different goods.
1 By proper safeguards regarding their quantity and their ready exchangeability for gold.
When numerous things are bartered, the ratio in one transaction is unrelated with that in another. Tho there might be at the same time and place a hundred acts of barter, as sheep for cloth and wheat for shoes, etc., in large part each act of barter stands by itself in the thoughts of men. There is no common unit of comparison for prices. But if sheep, cloth, wheat, and shoes are each in turn sold and bought with the money unit, money becomes a common unit of expression not only for prices on the market, but for the various individuals' valuations of goods. The habit of comparing goods in terms of money grows, and for convenience men frame their own valuations in monetary terms, as they approach a trade to bid and ask, and buy and sell.