Source: High School Subjects Self Taught, Vol. 1, Chapter: Economics for Everybody, Lewis Copeland, Copyright 1967 (US is still on the gold standard)
“MONEY..........When the exchange of goods is frequent, it is possible to evaluate one commodity in terms of another. If, for example, an ordinary principle of exchange is to barter two oranges for three apples, then each orange is worth one and a half apples. In this fashion every commodity could be evaluated in terms of any other commodity. For ease of reference, it becomes useful to state the value of any commodity in terms of one preferred commodity. This preferred commodity, used to evaluate all the others, is “money”.
Money may thus be defined as any commodity which is readily accepted in exchange for goods and services. Any commodity could be used as money. However, only those commodities which have the following qualities make good money:
(1) Uniformity – Every piece of the commodity must be the same as every other piece. This would eliminate diamonds, for example, because the quality of diamonds varies.
(2) Portability – It must be easy to carry from place to place.
(3) Small bulk – It must have high value in small bulk. This would eliminate coal, for example, because it takes a good deal to make it an appreciable value.
(4) Recognizability – It should be easy to recognize and should not require the services of an expert to see whether or not it is genuine.
(5) Divisibility – It should be readily divisible into smaller units.
(6) Stability – Its price should not change frequently.
(7) Durability – It should be able to stand long, hard ware without losing its identity.
In highly commercial communities, whatever commodity is used as money is largely withdrawn from other uses in favor of its use as currency; hence it is advantageous to use as money a commodity which is intrinsically of no great importance to the community.
Gold, which has been the basis of our monetary system for thousands of years, has all these advantages. It lasts practically indefinitely; although, of course, when gold coins are passed from hand there is wear on the coin; it is no commoner in winter than in summer, and no more valuable at any time than at any other; it is useful for no practical purpose of importance, other than the one for which it was originally desired, namely, for personal adornment; so that no loss is incurred by its withdrawal from practical service. For if gold utterly disappeared from the world today, mankind would be no worse off, except, of course, for whatever disruption of the monetary system would ensue. In this respect gold differs notably from silver, which, but for its monetary value, would be widely used in electrical instruments.
Some critics of our monetary system consider this lack of real value in gold to be a disadvantage rather than an advantage of the system, and have suggested the substitution of electrical power or human labor as the standard. But such standards would be actually much inferior to gold. They fluctuate more than gold does; they would be subject to a certain amount of seasonal variation; their value might change from generation to generation, as, in fact, the value of electrical energy has changed with the development of new methods of producing it; and it would be almost impossible to preserve them as an indication of savings, while gold can be preserved in the vaults of banks and governments..........
The use of money is governed by two laws. One, Gresham’s Law, points out that when two kinds of money with the same face value but different commodity value circulate under a bimetallic system, the cheaper money will tend to drive the more valuable money out of circulation. This indicates simply that if one of two pieces of money, each legally worth the same amount, is more valuable because it is backed by and represents a larger commodity value in gold or silver, individuals will naturally prefer to spend the cheaper money and save or keep out of circulation the more valuable money. The other law, the quantity theory of money, holds that other things being equal, (1) prices vary directly with the quantity of money in circulation; (2) the value of money varies inversely with the quantity in circulation. This law points out the fact that money is more valuable when it is scarce; it is less valuable – since prices rise – when a great deal of it is in circulation. Money, like any commodity, is subject to the law of supply and demand..........
SAVING..........There is a further problem, however, which arises because of the variations in the standard of living within relatively short periods, periods of prosperity and of depression. Quite apart from any governmental tinkering with the currency, the real value of money and the real value of labor, both expressed in terms of what they will buy, are considerably higher in one of these periods than the other. The value of money may thus be expressed in terms of a more fundamental standard of living, which itself is the most real index of prosperity and standard of wealth. Many economists have therefore sought to achieve a monetary basis, other than gold, which would be subject to less fluctuation in terms of the standard of living; that is to say, in terms of what the monetary wealth will buy. There would obviously be a real advantage in being able to save with a definite knowledge of exactly what one’s savings would buy at a future time, instead of being to some extent engaged in speculation as to the future value of one’s monetary wealth; but there are serious practical difficulties in the creation of any such monetary system.”
