The money price of commodities is final criterion of relative values

Money is often said to be a medium of exchange and a measure of value. Taken loosely, these descriptive phrases are not objectionable, but when we use them we should try to see back of them into the actual facts they loosely summarize or describe. Otherwise we are likely to forget that after all the “values” of things are their money prices. We do not, in actual fact, determine the relative values of different kinds of commodities and services, and then bring in money as a means of “measuring” the different values or of reducing them, as General Francis A. Walker preferred to say, to a common denominator. The general exchange values of the commodities that are bought and sold in modern markets are, in fact, merely relations that we derive or infer from their money prices. The money price of a commodity is the fundamental original fact with which the economic scientist must deal. Interpreted generously and understood, however, there is no real difference between the two functions of serving as a medium of exchange and as a measure of value.

It is only in the actual exchange of goods for money, or in deciding whether or not to make such exchanges, that we really use money as a “measure of value.” In the same way, of course, it is proper to say that a yard-stick is both a measure of length and an instrument used in measuring. Anyone would say at once that these two alleged functions of the yard-stick are really but one function. Precisely so with money: measuring values and serving as a medium of exchange are only one function, not two.

It is better to avoid these word-wasting controversies over the meanings of terms by recognizing money for just what it is, namely, a means of payment. The prices of goods and services are stated in terms of money and we pay for them with money. Debts are promises to pay money, and we pay our debts with money.

Money is sometimes said to serve also as a standard of deferred payments. Properly understood, again, there is nothing objectionable in this statement. It merely emphasizes the fact that debts which run for many years, like short-time debts, are usually made payable in money. The farmer who borrows money on mortgage security and agrees to pay off the loan at the end often years, will gain or lose according as prices in general, especially the prices of agricultural products, move upward or downward during the ten-year period. If prices move downward, he has to pay his creditor in money which costs more, which will buy more, and which therefore is worth more than the money he borrowed. If the debt had been contracted in terms of bushels of wheat, the relative positions of the creditor and debtor at the end of the transaction would have been very different. If prices move upward, rather than downward, it is, of course, creditors who lose and debtors who gain. In saying that money serves as a standard of deferred payments we are really doing little more than calling attention to the importance of this particular problem. As a matter of fact, this function of money, like the others, is really covered by the simple statement that money is the ordinary means of payment.

It would be possible, of course, to divorce the standard of deferred payments from the ordinary means of payments. Thus, the law might prescribe that debts stated in terms of money should be increased or decreased according as the general purchasing power of money declined or advanced. In such case, although money would remain the means of payment, the standard of deferred payments would really consist of the list of goods whose prices were taken and compounded to measure the general purchasing power of money. Or, as some have proposed, the cost of money, or the amount of labor required at different periods to earn a specified amount of money, might be made the basis of a standard of deferred payments. The problem of the standard of deferred payments has had in the past a very large political as well as economic importance, as we shall see when, in a later chapter, we examine some of the outstanding facts in the monetary history of the United States.