The Theory of Money and Credit

The existence of an exchange ratio between two sorts of money is dependent upon both being used side by side, at the same time, by the same economic agents, as common media of exchange. We could perhaps conceive of two economic areas, not connected in any other way, being linked together only by the fact that each exchanged the commodity it used for money against that used for money by the other, in order then to use the acquired monetary commodity otherwise than as money. But this would not be a case of an exchange ratio between different kinds of money simply arising from their monetary employment. If we wish successfully to conduct our investigation as an investigation into the theory of money, then even in the present chapter we must disregard the nonmonetary uses of the material of which commodity money is made; or, at least, take account of them only where this is necessary for the complete clarification of all the processes connected with our problem. Now the assertion that, apart from the effects of the industrial use of the monetary material, an exchange ratio can be established between two sorts of money only when both are used as money simultaneously and side by side, is not the usual view. That is to say, prevailing opinion distinguishes two cases: that in which two or more domestic kinds of money exist side by side in the parallel standard, and that in which the money in exclusive use at home is of a kind different from the money used abroad. Both cases are dealt with separately, although there is no theoretical difference between them as far as the determination of the exchange ratio between the two sorts of money is concerned.

If a gold-standard country and a silver-standard country have business relations with each other and constitute a unitary market for certain economic goods, then it is obviously incorrect to say that the common medium of exchange consists of gold only for the inhabitants of the gold-standard country, and of silver only for those of the silver-standard country. On the contrary, from the economic point of view both metals must be regarded as money for each area. Until 1873, gold was just as much a medium of exchange for the German buyer of English commodities as silver was for the English buyer of German commodities. The German farmer who wished to exchange corn for English steel goods could not do so without the instrumentality of both gold and silver. Exceptional cases might arise, where a German sold in England for gold and bought again with gold, or where an Englishman sold in Germany for silver and bought with silver; but this merely demonstrates more clearly still the monetary characteristic of both metals for the inhabitants of both areas. Whether the case is one of an exchange through the instrumentality of money used once or used more than once, the only important point is that the existence of international trade relations results in the consequence that the money of each of the single areas concerned is money also for all the other areas.

It is true that there are important differences between that money which plays the chief part in domestic trade, is the instrument of most exchanges, predominates in the dealings between consumers and sellers of consumption goods, and in loan transactions, and is recognized by the law as legal tender, and that money which is employed in relatively few transactions, is hardly ever used by consumers in their purchases, does not function as an instrument of loan operations, and is not legal tender. In popular opinion, the former money only is domestic money, the latter foreign money. Although we cannot accept this if we do not want to close the way to an understanding of the problem that occupies us, we must nevertheless emphasize that it has great significance in other connections. We shall have to come back to it in the chapter which deals with the social effects of fluctuations in the objective exchange value of money.