Having discussed at length the fundamental principles on which exchange and value rest, we pass naturally to consider the nature of the complex mechanism by which exchange is effected. At the very centre of this mechanism stands money, the medium of exchange. We have already in our historical study explained how from the custom of making gifts men passed to regular exchange by barter, and how from barter everywhere grew up the regular use of some one thing or some few things as means of making exchanges. With the handicraft stage men had come to use the precious metals for this purpose, and money, in the modern sense of the word, thus became a regular institution.

The Definition of Money. But what is money ? When we come to define the word, we find that usage is by no means uniform. It is often convenient to use the popular meaning of the term, according to which money is anything that passes freely from hand to hand, as a medium of exchange, and is generally received in final discharge of debts. But there is a narrower conception based upon the functions which money fulfils in the modern economy. In the first place, (1) we find that money everywhere serves as a medium of exchange. This, the first function to be developed, is everywhere the principal function of all kinds of money. Our present civilization would be impossible without money as a medium of exchange. Without such a medium, a man with a horse who wanted a coat would be obliged to hunt for a tailor who wanted a horse, and even after finding him, he might be unable to effect an exchange owing to the inequality in values of the things to be exchanged. In the second place, (2) we find that money serves directly and immediately as a measure of values. It is frequently said that money is a " denominator " of values, and usually this means the same thing. This second function springs naturally from the first, for as men make exchanges commonly for some one commodity, that commodity comes to serve as a standard by which the exchange values of all exchangeable things are measured. That this function may be best fulfilled there is needed a definite, concrete, money unit like our gold dollar, which consists of 25.8 grains of gold and silver, in the proportion of 9 to 1. When, having such a unit, we say that a commodity is worth $10, we mean that the exchange value of the commodity, or its power of commanding other commodities in exchange, is ten times that of the monetary unit. It sometimes happens that men name values, not in terms of the money actually used, but in terms of some money which has been in earlier days the regular medium of exchange. Thus, throughout our Eastern States one often hears values reckoned in shillings, though it is long since there was any money coined of that denomination. Such money is called "money of account." In the third place, (3) money serves the function of a standard of deferred payments. If I wish to sell commodities or services to-day to one who can pay me only at some future time, it is of the utmost importance that we should have some agreed standard according to which the payment should be made. This function of money is usually facilitated by having a legal tender quality attached to it, though such a legal tender quality is by no means necessary to the fulfilling of the function. By the use of the term "legal tender" we mean simply that the legislature has declared that any one having a debt to pay may discharge his debt through the "tender" or offer of the prescribed commodity, and that in case of a suit at law the courts will declare such a tender to have been a legal one. Money has a fourth function, (4) that of serving as a store or receptacle of value, so that the value may be transferred from place to place and from time to time. Thus Roman gold money, preserved for two thousand years, has brought its value down to our own time; and gold money taken across the Atlantic bears with it its stored-up value.

And now we may sum up what has gone before in a formal definition of money in the narrower sense of the word. Money is any commodity that serves as a medium of exchange, as a measure of values, as a standard of deferred payments, and as a store of value. The meaning given to the word in the following pages will in each case be evident from the context.

Qualities Desirable in the Material of our Money. Many things have been used as money at one time or another in the world's history : cattle nearly everywhere ; furs, especially in the Northern countries ; oil; wampum, among the early New Englanders ; tea, at Russian fairs; tobacco, as in Maryland and Virginia; all the baser metals; and the two precious metals, gold and silver. Of all the metals, gold and silver have in civilized nations been found best adapted to money uses. Of the two, gold has shown a special fitness, and now bids fair to survive as the money metal of the future. Nevertheless, silver is still everywhere used in large quantities, though among advanced nations it generally occupies a subordinate position. The qualities which have given gold and silver their predominance for use as money are precisely those qualities which we may readily recognize as the qualities that all money should have. In the first place, they are very generally desired, independently of their money use, since they can be used in the arts as well as for ornament. This fact gives them security and stability of value. Whenever their value begins to fall, the demand for them for other uses than that of money increases and so prevents the fall in value from being as great as it otherwise would be. Moreover, this stability of value is further secured by the fact that the annual production of these metals bears so small a proportion to the entire amount in existence. Gold and silver are almost imperishable. The gold in coin and bars and the silver in coin, now existing, are estimated to be worth between eight and nine thousand millions of dollars. Compared with this amount, even the present large yearly production of about $400,000,000 is small. Changes in the value of gold, therefore, so far as these changes are due to conditions affecting the supply, proceed very slowly and gradually. The high specific value of the precious metals that is, their high value in proportion to their weight and bulk adapts them to use for money by making them a convenient store or receptacle of value. Because of their high specific value, the cost of transporting them from place to place is slight, and therefore their value varies little from place to place. Their durability and indestructibility are also valuable qualities, while their extreme divisibility without loss of value makes it possible to secure a medium of exchange of any-desired value, however small. Their malleability renders coinage easy, as does also their homogeneity, by virtue of which one ounce or pound is always just as valuable as any other ounce or pound. Moreover, the metals and the coins made from them are readily recognizable on account of their peculiar ring and their other attributes, and are therefore well adapted to popular use.

Let us now sum up these qualities which are found especially desirable in money: they are (1) commodity value, (2) high specific value, (3) stability of value, (4) uniformity of value, (5) cognizability, (6) durability, (7) portability, (8) malleability, (9) homogeneity.