Money, institutions
and the choices behind them.

There is a phenomenon which has from of old and in a peculiar degree attracted the attention of social philosophers and practical economists, the fact of certain commodities (these being in advanced civilizations coined pieces of gold and silver, together subsequently with documents representing those coins) becoming universally acceptable media of exchange. It is obvious even to the most ordinary intelligence, that a commodity should be given up by its owner in exchange for another more useful to him. But that every economic unit in a nation should be ready to exchange his goods for little metal disks apparently useless as such, or for documents representing the latter, is a procedure so opposed to the ordinary course of things, that we cannot well wonder if even a distinguished thinker like Savigny finds it downright “mysterious.”

It must not be supposed that the form of coin, or document, employed as current-money, constitutes the enigma in this phenomenon. We may look away from these forms and go back to earlier stages of economic development, or indeed to what still obtains in countries here and there, where we find the precious metals in a uncoined state serving as the medium of exchange, and even certain other commodities, cattle, skins, cubes of tea, slabs of salt, cowrie-shells, etc.; still we are confronted by this phenomenon, still we have to explain why it is that the economic man is ready to accept a certain kind of commodity, even if he does not need it, or if his need of it is already supplied, in exchange for all the goods he has brought to market, while it is none the less what he needs that he consults in the first instance, with respect to the goods he intends to acquire in the course of his transactions.

Thus far it can hardly be claimed for the results of investigation into the problem above stated, that they are commensurate either with the great development in historic research generally, or with the outlay of time and intellect expended in efforts at solution. The enigmatic phenomenon of money is even at this day without an explanation that satisfies; nor is there yet agreement on the most fundamental questions of its nature and functions. Even at this day we have no satisfactory theory of money.

The idea which lay first to hand for an explanation of the specific function of money as a universal current medium of exchange, was to refer it to a general convention, or a legal dispensation. The problem, which science has here to solve, consists in giving an explanation of a general, homogeneous course of action pursued by human beings when engaged in traffic, which, taken concretely, makes unquestionably for the common interest, and yet which seems to conflict with the nearest and immediate interests of contracting individuals. Under such circumstances what could lie more contiguous than the notion of referring the foregoing procedure to causes lying outside the sphere of individual considerations? To assume that certain commodities, the precious metals in particular, had been exalted into the medium of exchange by general convention or law, in the interest of commonweal, solved the difficulty, and solved it apparently the more easily and naturally inasmuch as the shape of the coins seemed to be a token of state regulation. Such in fact is the opinion of Plato, Aristotle, and the Roman jurists, closely followed by the mediaeval writers. Even the more modern developments in the theory of money have not in substance got beyond this standpoint.

In primitive traffic the economic man is awaking but very gradually to an understanding of the economic advantages to be gained by exploitation of existing opportunities of exchange. His aims are directed first and foremost, in accordance with the simplicity of all primitive culture, only at what lies first to hand. And only in that proportion does the value in use of the commodities he seeks to acquire, come into account in his bargaining. Under such conditions each man is intent to get by way of exchange just such goods as he directly needs, and to reject those of which he has no need at all, or with which he is already sufficiently provided. It is clear then, that in those circumstances the number of bargains actually concluded must lie within very narrow limits. Consider how seldom it is the case, that a commodity owned by somebody is of less value in use than another commodity owned by somebody else! And for the latter just the opposite relation is the case. But how much more seldom does it happen that these two bodies meet! Think, indeed, of the peculiar difficulties obstructing the immediate barter of goods in those cases, where supply and demand do not quantitatively coincide; where, e.g., an indivisible commodity is to be exchanged for a variety of goods in the possession of different person, or indeed for such commodities as are only in demand at different times and can be supplied only by different persons! Even in the relatively simple and so often recurring case, where an economic unit, A, requires a commodity possessed by B, and B requires one possessed by C, while C wants one that is owned by A—even here, under a rule of mere barter, the exchange of the goods in question would as a rule be of necessity left undone.

These difficulties would have proved absolutely insurmountable obstacles to the progress of traffic, and at the same time to the production of goods not commanding a regular sale, had there not lain a remedy in the very nature of things, to wit, the different degrees of saleableness (Absatzfahigkeit) of commodities. The difference existing in this respect between articles of commerce is of the highest degree of significance for the theory of money, and of the market in general. And the failure to turn it adequately to account in explaining the phenomena of trade, constitutes not only as such a lamentable breach in our science, but also one of the essential causes of the backward state of monetary theory. The theory of money necessarily presupposes a theory of the saleableness of goods. If we grasp this, we shall be able to understand how the almost unlimited saleableness of money is only a special case,—presenting only a difference of degree—of a generic phenomenon of economic life—namely, the difference in the saleableness of commodities in general.

It is an error in economics, as prevalent as it is patent, that all commodities, at a definite point of time and in a given market, may be assumed to stand to each other in a definite relation of exchange, in other words, may be mutually exchanged in definite quantities at will. It is not true that in any given market 10 cwt. of one article = 2 cwt. of another = 3 lbs. of a third article, and so on. The most cursory observation of market phenomena teaches us that it does not lie within our power, when we have bought an article for a certain price, to sell it again forthwith at the same price. If we but try to dispose of an article of clothing, a book, or a work of art, which we have just purchased, in the same market, even though it be all once, before the same juncture of conditions has altered, we shall easily convince ourselves of the fallaciousness of such an assumption. The price at which any one can at pleasure buy a commodity at a given market and a given point of time, and the price at which he can dispose of the same at pleasure, are two essentially different magnitudes.

This holds good of wholesale as well as retail prices. Even such marketable goods as corn, cotton, pig-iron, cannot be voluntarily disposed of for the price at which we have purchased them. Commerce and speculation would be the simplest things in the world, if the theory of the “objective equivalent in goods” were correct, if it were actually true, that in a given market and at a given moment commodities could be mutually converted at will in definite quantitative relations—could, in short, at a certain price be as easily disposed of as acquired. At any rate there is no such thing as a general saleableness of wares in this sense. The truth is, that even in the best organized markets, while we may be able to purchase when and what we like at a definite price, viz.: the purchasing price, we can only dispose of it again when and as we like at a loss, viz.: at the selling price.

The degree to which a commodity is found by experience to command a sale, at a given market, at any time, at prices corresponding to the economic situation (economic prices), depends upon the following circumstances.

1.  Upon the number of persons who are still in want of the commodity in question, and upon the extent and intensity of that want, which is unsupplied, or is constantly recurring.

2.  Upon the purchasing power of those persons.

3.  Upon the available quantity of the commodity in relation to the yet unsupplied (total) want of it.

4.  Upon the divisibility of the commodity, and any other ways in which it may be adjusted to the needs of individual customers.

5.  Upon the development of the market, and of speculation in particular. And finally.

6.  Upon the number and nature of the limitations imposed politically and socially upon exchange and consumption with respect to the commodity in question.

It has long been the subject of universal remark in centres of exchange, that for certain commodities there existed a greater, more constant, and more effective demand than for other commodities less desirable in certain respects, the former being such as correspond to a want on the part of those able and willing to traffic, which is at once universal and, by reason of the relative scarcity of the goods in question, always imperfectly satisfied. And further, that the person who wishes to acquire certain definite goods in exchange for his own is in a more favourable position, if he brings commodities of this kind to market, than if he visits the markets with goods which cannot display such advantages, or at least not in the same degree. Thus equipped he has the prospect of acquiring such goods as he finally wishes to obtain, not only with greater ease and security, but also, by reason of the steadier and more prevailing demand for his own commodities, at prices corresponding to the general economic situation—at economic prices. Under these circumstances, when any one has brought goods not highly saleable to market, the idea uppermost in his mind is to exchange them, not only for such as he happens to be in need of, but, if this cannot be effected directly, for other goods also, which, while he did not want them himself, were nevertheless more saleable than his own. By so doing he certainly does not attain at once the final object of his trafficking, to wit, the acquisition of goods needful to himself. Yet he draws nearer to that object. By the devious way of a mediate exchange, he gains the prospect of accomplishing his purpose more surely and economically than if he had confined himself to direct exchange. Now in point of fact this seems everywhere to have been the case. Men have been led, with increasing knowledge of their individual interests, each by his own economic interests, without convention, without legal compulsion, nay, even without any regard to the common interest, to exchange goods destined for exchange (their “wares”) for other goods equally destined for exchange, but more saleable.

With the extension of traffic in space and with the expansion over ever longer intervals of time of prevision for satisfying material needs, each individual would learn, from his own economic interests, to take good heed that he bartered his less saleable goods for those special commodities which displayed, beside the attraction of being highly saleable in the particular locality, a wide range of saleableness both in time and place. These wares would be qualified by their costliness, easy transportability, and fitness for preservation (in connection with the circumstance of their corresponding to a steady and widely distributed demand), to ensure to the possessor a power, not only “here” and “now” but as nearly as possible unlimited in space and time generally, over all other market-goods at economic prices.

When the relatively most saleable commodities have become “money,” the great event has in the first place the effect of substantially increasing their originally high saleableness. Every economic subject bringing less saleable wares to market, to acquire goods of another sort, has thenceforth a stronger interest in converting what he has in the first instance into the wares which have become money. For such persons, by the exchange of their less saleable wares for those which as money are most saleable, attain not merely, as heretofore, a higher probability, but the certainty, of being able to acquire forthwith equivalent quantities of every kind of commodity to be had in the market. And their control over these depends simply upon their pleasure and their choice. Pecuniam habens, habet omnem rem quem vult habere.

On the other hand, he who brings other wares than money to market, finds himself at a disadvantage more or less. To gain the same command over what the market affords, he must first convert his exchangeable goods into money. The nature of his economic disability is shown by the fact of his being compelled to overcome a difficulty before he can attain his purpose, which difficulty does not exist for, i.e., has already been overcome by, the man who owns a stock of money.

The commodities, which under given local and time relations are most saleable, have become money among the same nations at different times, and among different nations at the same time, and they are diverse in kind. The reason why the precious metals have become the generally current medium of exchange among here and there a nation prior to its appearance in history, and in the sequel among all peoples of advanced economic civilization, is because their saleableness is far and away superior to that of all other commodities, and at the same time because they are found to be specially qualified for the concomitant and subsidiary functions of money.

There is no centre of population, which has not in the very beginnings of civilization come keenly to desire and eagerly to covet the precious metals, in primitive times for their utility and peculiar beauty as in themselves ornamental, subsequently as the choices materials for plastic and architectural decoration, and especially for ornaments and vessels of every kind. In spite of their natural scarcity, they are well distributed geographically, and, in proportion to most other metals, are easy to extract and elaborate. Further, the ratio of the available quantity of the precious metals to the total requirement is so small, that the number of those whose need of them is unsupplied, or at least insufficiently supplied, together with the extent of this unsupplied need, is always relatively large—larger more or less than in the case of other more important, though more abundantly available, commodities. Again, the class of persons who wish to acquire the precious metals, is, by reason of the kind of wants which by these are satisfied, such as quite specially to include those members of the community who can most efficaciously barter; and thus the desire for the precious metals is as a rule more effective. Nevertheless the limits of the effective desire for the precious metals extend also to those strata of population who can les effectively barter, by reason of the great divisibility of the precious metals, and the enjoyment procured by the expenditure of even very small quantities of them in individual economy. Besides this there are the wide limits in time and space of the saleableness of the precious metals; a consequence, on the one hand, of the almost unlimited distribution in space of the need for them, together with their low cost of transport as compared with their value, and on the other hand, of their unlimited durability and the relatively slight cost of hoarding them. In no national economy which has advanced beyond the first stages of development are there any commodities, the saleableness of which is so little restricted in such a number of respects—personally, quantitatively, spatially, and temporally—as the precious metals. It cannot be doubted that, long before they had become the generally acknowledged media of exchange, they were, amongst very many peoples, meeting a positive and effective demand at all times and places, and practically in any quantity that found its way to market.

Money has not been generated by law. In its origin it is a social, and not a state institution. Sanction by the authority of the state is a notion alien to it. On the other hand, however, by state recognition and state regulation, this social institution of money has been perfected and adjusted to the manifold and varying needs of an evolving commerce, just as customary rights have been perfected and adjusted by statute law. Treated originally by weight, like other commodities, the precious metals have by degrees attained as coins a shape by which their intrinsically high saleableness has experienced a material increase. The fixing of a coinage so as to include all grades of value (Wertstufen), and the establishment and maintenance of coined pieces so as to win public confidence and, as far as possible, to forestall risk concerning their genuineness, weight, and fineness, and above all the ensuring their circulation in general, have been everywhere recognised as important functions of state administration.

The difficulties experienced in the commerce and modes of payment of any country from the competing action of the several commodities serving as currency, and further the circumstance, that concurrent standards induce a manifold insecurity in trade, and render necessary various conversions of the circulating media, have led to the legal recognition of certain commodities as money (to legal standards). And where more than one commodity has been acquiesced in, or admitted, as the legal form of payment, law or some system of appraisement has fixed a definite ratio of value amongst them.

Menger challenges readings that collapse classical political economy into an uncompromising laissez-faire doctrine. He presents Smith as concerned with the position of the poor and the weak. The short quotation below is Menger’s characterisation of Smith, not an independent verdict on all of Smith’s writings.

Menger points to restrictions on workers and to institutions serving the public. He treats the removal of privileges and some positive public action as compatible with the classical tradition. The translators also flag places where his reading of Smith is contestable; this is a historical argument to examine.

In the second part, Menger argues that classical economists and contemporary social reformers can share concern for workers while emphasising different measures. He relates those differences to changing circumstances and existing restrictions, rather than treating the schools as simple moral opposites.