1. Utility and value.-Since money has to be exchanged for valuable goods, it should itself possess value, and it must therefore have utility as the basis of value.

In order that money may perform some of its functions efficiently, especially those of a medium of exchange and a store of value to be carried about, it is important that it should be made of a substance valued highly in all parts of the world, and, if possible, almost equally esteemed by all peoples.

2. Portability. The material of money must not only be valuable, but the value must be so related to the weight and bulk of the material that the money shall not be inconveniently heavy on the one hand, nor inconveniently minute on the other. The portability of money is an important quality, not merely because it enables the owner to carry small sums in the pocket without trouble, but because large sums can be transferred from place to place, or from continent to continent, at little cost. The result is to secure an approximate uniformity in the value of money in all parts of the world. A substance which is very heavy and bulky in proportion to value, like corn or coal, may be very scarce in one place and overabundant in another; yet the supply and demand cannot be equalized without great expense in carriage. Substances may be too valuable as well as too cheap, so that for ordinary transactions it would be necessary to call in the aid of the microscope and the chemical balance. Diamonds, apart from other objections, would be far too valuable for small transactions.

3. Indestructibility.-If it is to be passed about in trade, and kept in reserve, money must not be subject to easy deterioration or loss. It must not evaporate like alcohol, not putrefy like animal substances, nor decay like wood, nor rust like iron. Destructible articles, such as eggs, dried codfish, cattle, or oil, have certainly been used as currency; but what is treated as money one day must soon afterward be eaten up. Thus a large stock of such perishable commodities cannot be kept on hand, and their value must be very variable. The several kinds of corn are less subject to this objection, since, when well dried at first, they suffer no appreciable deterioration for several years.

4. Homogeneity.-All portions of specimens of the substance used as money should be homogeneous, that is, of the same quality, so that equal weights will have exactly the same value. In order that we may correctly count in terms of any unit, the units must be

equal and similar, so that twice two will always make four. If we were to count in precious stones, it would seldom happen that four stones would be just twice as valuable as two stones. Even the precious metals, as found in the native state, are not perfectly homogeneous, being mixed together in almost all proportions; but this produces little inconvenience, because the assayer readily determines the quantity of each pure metal present in any ingot. In the processes of refining and coining, the metals are afterward reduced to almost exactly uniform degrees of fineness, so that equal weights are then of exactly equal value.

5. Divisibility.-Closely connected with the last property is that of divisibility. Every material is, indeed, mechanically divisible, almost without limit. The hardest gems can be broken, and steel can be cut by harder steel. But the material of money should be not merely capable of division, but the aggregate value of the mass after division should be almost exactly the same as before division. If we cut up a skin or fur the pieces will, as a general rule, be far less valuable than the whole skin or fur, except for a special intended purpose; and the same is the case with timber, stone, and most other materials in which reunion is impossible.

6. Stability of value.-It is evidently desirable that the currency should not be subject to fluctuations of value. The ratios in which money exchanges for other commodities should be maintained as nearly as possible invariable on the average. This would be a matter of comparatively minor importance were money used only as a measure of values at any one moment, and as a medium of exchange. If all prices were altered in like proportion as soon as money varied in value, no one would lose or gain, except as regards the coin which he happened to have in his pocket, safe, or bank balance. But, practically speaking, as we have seen, people do employ money as a standard of values for long contracts: and they often maintain payments at the same invariable rate, by custom or law, even when the real value of the payment is much altered. Hence every change in the value of money does some injury to society.

7. Cognizability. By this name we may denote the capability of a substance for being easily recognized and distinguished from all other substances. As a medium of exchange, money has to be continually handed about, and it will occasion great trouble if every person receiving currency has to scrutinize, weigh, and test it.

Under cognizability we may properly include what has been aptly called impressibility, namely, the capability of a substance to receive such an impression, seal, or design as shall establish its character as current money of certain value. We might more simply say that the material of money should be coinable, so that a portion, being once issued according to proper regulations with the impress of the state, may be known to all as good and legal currency, equal in weight, size, and value to all similarly marked currency.

119. A TYPICAL MONETARY SYSTEM1

In the beginnings of money-exchange, the money used was little more than official ingots of one or more precious metals. But with the evolution of an elaborate commercial order, the primitive money has developed into a complicated system consisting of several different kinds of money each adapted to a special sort of work, but all embodying a common unit and based upon a common standard.

The first thing to be noted in such a monetary system is the unit or principal denomination and the subordinate denominations related to the unit as multiples or fractional parts thereof. In our system, the unit is a dollar; subordinate denominations are the cent, dime, half-eagle, eagle, and double eagle. In Great Britain, the unit is a pound or sovereign; in France, a franc; in Germany, a mark; in Russia, a rouble; and so on.

Next after the different denominations of a monetary system comes the standard, which is properly defined as that which fixes the value of the unit. In the United States, the ultimate standard is a lump of gold weighing 23. 22 grains pure or 25.8 grains when alloyed. Whatever value such a lump of gold has, the dollar also has. If the value of the lump goes up, so also does that of the dollar. The relation of the monetary standard to the system is closely analogous to that of the standard of liquid measure to that system. That is, just as 8.33 pounds of pure water determines what shall be the volume of a gallon measure, so 25.8 grains of gold determines what shall be the value of a dollar.

The monetary stock-the actual money-consists of standard money and several subordinate moneys. Standard money is the kind which immediately fixes the value of the unit, and in terms of which other moneys are reckoned. In a typical modern system, its most

Taken by permission from F. M. Taylor, Principles of Economics, pp. 131-32. University of Michigan, 1916.

distinctive marks are the legal prerogatives of free coinage and full tender for debts. The chief subordinate moneys are, in our system, legal-tender treasury notes, bank notes, silver dollars and their certificates, and subsidiary coin-fractional silver, nickels, and coppers. The legal-tender treasury notes are a quasi-standard money, i.e., they do more or less fully the work of standard money. Without them all institutions needing to keep reserves of money to pay demand obligations would have to keep standard money for this purpose. As it is, such reserves largely consist of these treasury notes (in England, Bank of England notes).

Bank notes, silver dollars, silver certificates, and subsidiary coin constitute the major part of the ordinary circulating money, the money actually directly used in the conduct of business. Subsidiary coin has the following characteristics: (1) being made of metal different from that which is the standard, (2) being short in weight, (3) having its coinage limited, (4) having its legal tender limited, and (5) being redeemable. The first characteristic is necessary to secure convenience in size; the second, to keep this kind of coin from being melted; the third, to keep it at par; the fourth, to hinder it from displacing the standard and to shut out forcing excessive quantities of it on creditors; and the fifth, to relieve the public of any excess, as also still further to insure the parity of this kind of money. The silver dollar is more or less of an anomaly in our system, having full legal tender but not being freely coined. In effect, it acts as a subsidiary coin of large denomination.

It is often stated that modern industrial society is a credit society, the implication being that credit is the most significant factor in the present-day organization of industry and commerce. "Credit is the life-blood of commerce," "Credit is the heart and core of the modern business structure," are other common statements emphasizing the tremendous importance of this phenomenon that is called credit.

While credit may be readily enough defined, an understanding of its real nature and significance is not so easily gained. It is a concept 1 Adapted by permission from H. G. Moulton, Principles of Banking, pp. 12–13. (The University of Chicago Press, 1917.)

rather than a visible something; or perhaps one might better say that it is incorporeal rather than tangible. It is therefore an elusive phenomenon: "Now you see it and now you don't see it." At any rate, the student usually has at first no little difficulty in grasping its essential nature. In particular, credit is very often confused with the instruments of credit. One can see a check or a promissory note, and such instruments are therefore likely to appear as the very essence of credit. They are, however, merely evidences of the antecedent credit process or transaction and as such are quite irrelevant to credit itself.

The subject may best be understood through a study of the reasons for giving and receiving credit and an analysis of the many ways in which it manifests itself in our everyday business activities. It will be found that, whatever the particular classification, all credit operations involve at bottom a common principle; though there has been much discussion as to just what this basis of credit is—a discussion, however, which appears to have been largely due to a loose or differing use of words.

But while the granting of credit always involves a similar sort of analysis, there emerges, in the use of the funds or goods borrowed on credit, a sharp differentiation, one that is fundamental to the entire study of banking: namely, the distinction between commercial and investment credit. The one is related to the process of manufacturing and marketing consumers' goods, converting raw materials into finished products in the hands of their final consumers; the other, to the creation of capital goods, machinery, tools and equipment, stores, factories, railroads, etc. The former usually gives rise, because of the very nature of the operations, to short-time credit instruments, notes, drafts, checks, etc.; the latter as a rule to long-time credit instruments, stocks, bonds, mortgages, etc.

The fundamental notion in credit, as the name implies, is trust or confidence, but this characteristic obviously needs limitation; for the buyer of an article must always repose some confidence in the dealer even when the transaction is for cash, and the practical rule is caveat emptor. There emerges then as the second principal characteristic the idea of deferred payment, taking payment in the widest

Adapted by permission from J. S. Nicholson, "Credit," in Palgrave's Dictionary of Political Economy, I, 451-52. (Macmillan & Co., Ltd., 1910.)