It is in the highest degree important that the reader should discriminate carefully and constantly between the four functions which money fulfils, at least in modern societies. We are so accustomed to use the one same substance in all the four different ways that they tend to become confused together in thought. There is evident convenience in selecting, if possible, one single substance which can serve all the functions of money. It will save trouble if we can pay in the same money in which the prices of things are calculated.

116. THE RÔLE OF MONEY IN ECONOMIC ORGANIZATION1

The institution of money is inseparably linked with the whole complex of our social arrangements. Its part in facilitating market operations is so direct and evident that it is generally conceived of as a mere medium of established exchanges or a mere measure of predetermined values. Yet a little reflection shows that it permeates every aspect of economic life, conditions all economic activity, and brings to all things economic mutual commensurability.

1. It facilitates economic calculation. In an isolated agrarian community, composed of people possessing limited resources and loving the "simple life," few commodities will be produced. Crudely measuring costs against returns, and goods against goods, the people will not formulate with any exactness a unit in terms of which values can be gauged. Such crudeness in calculation will find its counterpart in an economic order wherein the family is the economic unit, where there is little division of labor, where natural resources and personal talents are little developed, and where production and consumption are interdependent. But if resources and talents are to be developed, if goods are to be produced to satisfy a larger range of wants, if tasks are to be distributed between individuals and communities, and if these are to be organized into a larger and more complex whole, a rather precise instrument for the calculation of values must be found. And, as the economic entity becomes larger, its uses of resources more intensive, its products more varied, and its agencies more interdependent, values must be calculated with more and more precision.

Adapted by permission from W. H. Hamilton, "The Rôle of Money in Economic Organization," in Moulton's Money and Banking, Part I, pp. 39-44(The University of Chicago Press, 1916.)

2. It encourages rational economic judgment.-If one's economic world contains but a handful of tasks and goods, he can, quite rationally and without complex calculations, choose this rather than that. But in a world in which his judgment is confronted at every point by a number of alternatives, and every activity has pecuniary connections with a large number of others, a decision is fraught with difficulties. To be rationally compared the alternatives must be reduced to quantitative terms. Since their differences are likely to be small, the determination of their values requires precision. Salvation is to be found in the "magic ritual of calculation" based upon the "pecuniary unit." The presence of such a unit, further, encourages the developing of the "calculating mind," which the mediaeval man would have regarded as an intellectual curiosity but which the modern business man esteems a priceless treasure. It also stimulates the development and use of more exact accounting systems and the exclusion from economic judgments of non-pecuniary considerations.

3. It permits the organization of consumption.-Where an individual or a group consumes its own products, it is a slave to its limited resources and its technical limitations. But under an organized pecuniary system this thraldom is broken. Individual or group, no longer compelled to satisfy all its wants, can choose the tasks which resources or technical efficiency suggest as most advantageous. For his labor the individual receives, not the wheat or the pig iron or the shoes which he has produced, but "generalized purchasing power." For his consumption he chooses freely, spending his purchasing power upon a large number of goods, quite oblivious to his lack of technical versatility. For him consumption is thus differentiated from production and organized upon the basis of a rational calculus. Since other individuals are acting likewise, the consumption of wealth by society is elaborated into a highly complex system.

4. It permits the organization of production.-In an economic order without the division of labor, the "pecuniary unit" is unnecessary to the organization of production; but where specialization appears it is far otherwise. The single establishment uses divers kinds of laborers, a medley of raw materials, and quite varied industrial equipment. The costs of these and their proportions must be accurately gauged. Likewise the "production system" is a coordinated collection of specialized establishments that defies diagrammatic presentation. The individual establishment receives its "raw materials" from many sources; its finished products become the raw

materials of many goods. The correlation of business with business is so close that "margins," which represent allowances for "friction," are very small. The organization and maintenance of the single establishment, and the integration of these into a properly co-ordinated "productive system," are alike dependent upon careful calculation and accurate pecuniary judgment, the basis of which is the "pecuniary unit."

5. It articulates productive and consumptive activities into an organic system.―The pecuniary unit enables adjustment to be made with sufficient precision. It enables each good and the satisfaction of each want to have placed upon it a "price" or a quantitative expression of its value in terms of the pecuniary unit. Price is a flexible medium through which demand and supply are adjusted to each other. As we have learned elsewhere, an increase in demand raises the price and stimulates increased production, and an increase in supply lowers price and discourages production; while decreases in demand and supply have antithetical effects. Thus the pecuniary unit, through "price," brings the demand and supply of a particular article into harmony. But as, impelled by its price, the demand or supply of an article is changed, it becomes more or less advantageous economically to produce or consume other articles. Accordingly, through price-changes, the demand and supply of other articles are affected. They, likewise, in the end, will harmonize, though likely at new prices and in changed amounts. Thus the demand for and supply of each article are intimately associated through price with those of a large number of other articles. Hence a larger view reveals an extremely complex and intricately organized system for the "production and consumption of wealth," supported by a vast and harmonious complex of pecuniary values. At the basis of this intricate and gigantic, yet orderly, "price-structure" lies the pecuniary unit.

6. It gives stability to the economic order.-If the economic order were a gigantic mechanism, composed of unchangeable elements, a static price-structure would preserve it. But the elements of our system are quite variable; population may increase, the technical system may change, industrial equipment may be augmented, the nature of institutions may vary, or popular caprice may affect new wants. Confronted by one of these contingencies, a static scheme of prices would introduce elements of disintegration into the system. But the pecuniary unit, stable itself, allows prices to change in response to changed circumstances. Thus it induces the necessary

adjustments between production and consumption and leaves the price-structure capable of sustaining a society as highly integrated as before.

The organizing function of the pecuniary unit is not confined to the present economic order. The pecuniary unit is a fit companion for such institutions as private property, free contract, pecuniary competition, and individual initiative. But its service would be equally indispensable in a society quite unlike ours. Under socialism, for instance, even though the state took the initiative in production, to guide its economic judgment it would require a means for determining the quantities in which its varied goods were to be produced. This would require a means for exact valuation, such as could be found only in a proper accounting system, for which the pecuniary unit must furnish the basis. Accordingly we may conclude that the pecuniary unit, the principal manifestation of money, is an agency of prime importance in establishing and maintaining a complex economic order.

117. MONEY AND CAPITAL ACCUMULATION1

First, calculations on the basis of the "pecuniary unit" are necessary to an appreciation of future values. In a non-calculating society few future values will stand out. There is no way of measuring values of varying degrees of futurity. But the pecuniary calculus easily resolves these. Not only does it place definite values upon future goods, but it estimates with considerable accuracy their cost. Because of their association with the "roundabout" method of production, the latter are varied and numerous. The determination of their values is further complicated by such technical facts as replacement, depreciation, and obsolescence. Consequently an accurate accounting system, based upon a precise unit, is necessary to an appraisal of the costs and values of future goods.

Second, a pecuniary calculus is necessary to a rational comparison of present and future values. Such an instrument enables future, as well as present, needs to be translated into "prices," in which form both can, in competition, make their appeals to the economic motives of man. The whole aggregate of uses, present and future, to which goods can be put is reduced to an intelligible scheme. Thus rational thought can be taken both for today and for tomorrow.

Taken by permission from W. H. Hamilton, "Money and Capital Accumulation," in Moulton's Money and Banking, Part I, pp. 32-34. (The University of Chicago Press, 1916.)

Third, accumulation and production of capital goods are organized, as aggregates, into a comprehensive system. Under a nonexchange system many, lacking means, will wish to invest; others, having means, will lack opportunity for investment. But the system provides no instrument for bringing accumulations and opportunities together. But under the pecuniary system the processes of saving and technical investment are separated. The uses to which capital can be put are gathered together into a nicely arranged scheme. Likewise, potential savings are aggregated into a similar scheme. Through competition the two aggregates are brought into harmony at a "price" or a "rate of interest."

Fourth, the pecuniary calculus makes possible an intricate mechanism, which brings savings and investments into a nicer adjustment. There is created a complex structure of savings and investment banks, trust and mortgage companies, insurance associations, investment companies, and underwriting syndicates, which together bridge the gulf separating the two.

In these several ways an organization of society, based upon the "pecuniary unit," furnishes both the incentives and the means for capital formation.

118. QUALITIES OF A SATISFACTORY MONEY-METAL1

To decide upon the best material for money is a problem of great complexity because we must take into account at once the relative importance of the several functions of money, the degree in which money is employed for each function, and the importance of each of the physical qualities of the substance with respect to each function. In a simple state of industry money is chiefly required to pass about between buyers and sellers. It should, then, be conveniently portable, divisible into pieces of various sizes, so that any sum may readily be made up, and easily distinguishable by its appearance or by the design impressed upon it. When money, however, comes to serve, as it will at some future time, almost exclusively as a measure and standard of value, the system of exchange being one of perfected barter, such properties become a matter of comparative indifference, and stability of value, joined perhaps to portability, is the most important quality.

I

Adapted by permission from W. S. Jevons, Money and the Mechanism of Exchange, pp. 30-39. (D. Appleton & Co., 1898.)