seriously interfere with his prosperity. In an advanced industrial community there are always people quite competent successfully to carry on industrial operations, who do not possess the requisite capital, and many people, on the other hand, who have capital but do not wish to engage in industry. Facilities for borrowing and lending are needed to bring these two classes together for their mutual profit and that of the community. This need might equally well be illustrated by the case of a really sound business man who has temporarily met with misfortune, or by that of a young man capable of profiting by an education but lacking the funds necessary for its acquisition, or by many other situations which will readily occur to the student upon reflection.

Let us now inquire how a medium of exchange satisfies these wants. Our assumed case of the farmer and the shoemaker will assist us. It will be remembered that these two persons found difficulty in exchanging their products on account of the wide difference in value between the farmer's ox and a pair of shoes. If, in the community to which these two traders belonged, there had been some one durable commodity which was an object of universal desire and consequently daily bought and sold and sure to be in general demand in the future, the way out of their difficulty would have been easy. Even though he might not have wanted it for his own consumption, the farmer would have been quite willing to accept this commodity in payment for the balance due him from the shoemaker, simply because he would have been able to trade it at any time for anything he might chance to want. The shoemaker, likewise, would not have been seriously inconvenienced by the surplus beef, provided he had been able to sell it to his neighbors for this highly exchangeable commodity. By way of illustration let us suppose that gold

is a commodity well known and highly valued by every member of the community and considered so very precious that no one doubts the continuance of its value and high estimation through future generations. Being very durable and possessing great value in small bulk, it can be easily kept for any length of time, and, on account of the belief in the continuance of its value, every one feels safe in keeping it by him, and is confident that at any time in the future he can dispose of it for whatever he may desire or need. Being also readily divisable, it is easy to arrange for equivalents of almost any value. Under these circumstances, then, the farmer would have been quite willing to sell his ox for the pair of shoes and the balance in gold, and the shoemaker would have been willing to sell to his neighbors in exchange for gold the beef which he did not want, neither one perhaps intending to consume the gold itself, but being confident of his ability to exchange it at any time for whatever he might chance to desire. Since other traders under similar circumstances would follow the example of the farmer and the shoemaker, all the members of the community would speedily acquire the habit of taking gold in exchange for their produce, even when they did not need it for consumption, because they could exchange it for whatever they might chance to want at any time more easily than their own product. When any commodity comes to be generally used in this way, it becomes by that fact a medium of exchange.

In our illustration the medium of exchange obviated the difficulty of exchanging two commodities of unequal value, namely, an ox and a pair of shoes. It is evident that it might also be used as a means of accumulating wealth, and also for facilitating borrowing and lending. Being by its very nature a commodity which every person is willing to take at any time in exchange for his goods, no risk would

be involved in hoarding it; and people who had succeeded in accumulating it could loan it to others who needed for any purpose to make immediate purchases and lacked the means. The people discussed in our illustration would naturally keep their savings in the form of a hoard of gold. The various commodities of their own production or manufacture being perishable and, perhaps, of uncertain value and consequently incapable of being hoarded, would be exchanged for gold, which could be kept without loss and readily sold for other commodities whenever desired. This hoarded gold could also be loaned to others who need to make immediate purchases but lack the means. In this case, of course, some guarantee that the gold would be returned when wanted would have to be given, but, granted the requisite degree of confidence between man and man, the gold would make possible the loan with all of its conceivable advantages to both borrower and lender.

3. Credit as a medium of exchange.-The three wants which we have been considering are frequently, and at the present time commonly, satisfied by means of credit instruments in one form or another. The methods of employing these instrumentalities as a medium of exchange are various, but only the simplest one can be appropriately explained at this point. Modern commercial processes are conducted by means of a large class of middlemen who intervene between exchangers and relieve them of the greater part of the work involved in trading their products. Among these are shopkeepers who purchase goods, giving the sellers credit on their books for the value of their sales, and sell them again at such times and in such amounts as are desired, debiting buyers with the amounts of their purchases. Inasmuch as the buyers and the sellers are frequently the same persons, these merchants are a means of overcoming the difficulties of barter discussed in the preceding section,

and their book accounts serve as a medium of exchange.

By way of illustration let us suppose that a primitive community has already acquired a standard of value, and that some very reliable person, in whose integrity and wealth everybody has perfect confidence, establishes a general store, and agrees to buy from the producers everything they have for sale and to sell these same commodities to others at such times and in such quantities as are desired. After the harvest A brings his wheat to the store and receives credit on the books of the storekeeper for the amount agreed upon, this amount being stated in terms of the prevailing standard. Subsequently he purchases various commodities, such as sugar, shoes, coats, meat, etc., and is debited by the storekeeper with the amounts of his purchases, these amounts being likewise stated in terms of the standard. It is evident that the difficulty involved in exchanging commodities of unequal value is not here met, because it is not necessary that A's account should balance on the occasion of every purchase or sale. It is also evident that A could accumulate his savings in the form of credit on the storekeeper's books, and could borrow by overdrawing his account; that is, by accumulating an uncovered debit balance. In this case the book account serves precisely the same purposes as the gold in our previous illustration. It obviates the difficulty of exchanging commodities of unequal value, and it furnishes a means of making savings and of borrowing and lending.

At first sight there does not seem to be much resemblance between this primitive storekeeper and the great merchants and bankers of the present day. But as a matter of fact they are performing the same functions as he, and by means of more complicated machinery they are using credit of substantially the same sort as he. Like his, their book accounts satisfy the three fundamental wants which we

have been discussing and which are felt by all traders however primitive or advanced.

4. The relation between the standard of value and the medium of exchange.-Though the functions of the standard of value and the medium of exchange are quite distinct, they may be performed by the same commodity. In a primitive community this is usually the case, because universal exchangeability, a quality essential to both, is rarely possessed by more than one commodity, and that one, therefore, must necessarily serve in both capacities. At the present time, however, the standard of value is only one element of a very complex medium of exchange, consisting of several commodities and a considerable number and variety of credit instruments. Why this is so will be made clear in the two following chapters.

REFERENCES

The topics included in this chapter are discussed in most textbooks under the head "The Functions of Money," but they are rarely treated in such a way as to show the true relation between money and the fundamental wants of traders, and to emphasize the distinction between the functions of the medium of exchange and that of the standard of value. The following references are typical of the usual method of treating the subject: Mill, Political Economy, bk. 111, ch. vii; Walker, Money, ch. i, and Money Trade, and Industry, chs. i, ii, and iii; Jevons, Money and the Mechanism of Exchange, chs. i, ii, and iii; Nicholson, Money and Monetary Problems, pt. 1, ch. ii. In Laughlin, The Principles of Money, ch. i and in Menger's article entitled, "Geld" in the Handwörterbuch der Staatswissenschaften, the subject is well treated. See also Kinley, Money, ch. v; Taylor, Some Chapters on Money, ch. i; Johnson, Money and Currency, chs. i and ii; Knies, Das Geld; Knapp, Staatliche Theorie des Geldes, ch. i; and Nasse, "Das Geld und Münzwesen" in Schönberg, Handbuch der politischen Oekonomie. For a collection of definitions of money see Roscher, Principles of Political Economy, Lalor's translation, v. 1, bk. II, ch. iii, note 5, and Hildebrand, Theorie des Geldes, p 5.