MONEY AND BANKING PART I. MONEY CHAPTER I MEDIUM OF EXCHANGE 1. Division of labor and exchange.-The study of money credit and banking is a division of the science of economics. Economics is the science which treats of the production, distribution, consumption and exchange of wealth. In other words, it is the science which deals with man in his business relations. Wealth is the general economic term used to include all things which satisfy human wants or which, as the economists say, have the quality of utility. In the production of wealth three primary factors are involved-land (including all natural resources), labor and capital. Economists now generally recognize a fourth factor, the entrepreneur or enterpriser, who brings together the other factors in the productive process. The coöperation of these factors through the division of labor is a fundamental characteristic of modern industrial society. The progress of civilization, especially since the Industrial Revolution of the latter part of the eighteenth century with its introduction of machinery and power, has been marked by an ever increasing subdivision of labor and by greater specialization of employment. In a primi tive society each family or community provided for itself" the simple necessaries of life-food, clothing, shelter. But to-day it would be hard to find among civilized peoples either a family or a community that attempts to supply all its own needs. In earlier days the village shoemaker made with his hands and a few simple tools a complete pair of shoes, but now he buys shoes for himself and his family made in a factory where many machines, operated by scores of workmen, each performing a special operation, turn out several hundred pairs of shoes a day. Like subdivision of labor and specialization obtains in all lines of modern industry. Even the farmer, the most nearly self-sufficient of all producers, sells grain and buys flour, sells cattle and buys meat, and depends upon others to supply most of his needs. Indeed very few of the world's workers are engaged nowadays in producing things for their own use or consumption. Most of the wealth produced is intended to be exchanged. Our whole economic structure is based upon the exchange of goods and services. This process of exchange involves the economic phenomena of value, price, money, and the whole mechanism of exchange. 2. Barter. Division of labor and exchange of goods have existed in some form almost from the beginning of organized society. In a very early stage people found by experience the advantage of each worker devoting himself to the production of certain things in which he was most skilled. The primitive fisherman whose preference or skill led him to follow fishing would frequently have a surplus of fish. Another man might be particularly adept in making spears, but as he did not need for his own use all that he 'could make he was glad to exchange his surplus for other things he needed, such as fish or skins. This system of exchange, known as barter, was crude and clumsy. The man with a surplus of fish had to find someone with a surplus of spears or furs which he was willing to exchange for fish. Even then the terms of the trade were difficult to arrange. A spear was worth more than a fish, but it could not be divided; so to effect a trade the owner of the spear would be compelled to take more fish than he needed. Under a system of barter the difficulty increases with the number of articles to be exchanged. Without any common measure of value each trader would have to remember the value ratio between each article and all others offered in trade. Thus if he dealt in ten commodities he must remem ber forty-five ratios of exchange, but with a standard of value only nine ratios would be involved. 3. Money. In the course of time it appeared that among the numerous articles exchanged, there was one which nearly everybody wanted-shells, furs, grain, tobacco, or metals. Gradually men recognized that this commodity was the best thing to accept in exchange for what they had to sell, for it could be exchanged later on for other products or services. In the case of our Indian tribes, for example, shell beads were admired and prized by all. It is easy to understand how some members of the tribe might devote most of their time to hunting for the shells and making them into strings of beads which were in universal demand for personal adornment. A part of their stock of beads would be exchanged for food and other needs. A man who had a surplus of food would gladly exchange it for beads even though he had no particular desire for more beads. He would be better off with a surplus of beads than with a surplus of perishable food, for beads were always in demand. Thus, by unconscious selection, certain commodities came to be recognized as best fitted to serve the purpose of a go-between in making exchanges. In some such way the use of money began. Exchange, then, may assume either of two forms: direct exchange, called barter, where commodities or services are directly exchanged one for the other; and indirect exchange by means of some article of general acceptability and convenient subdivision called money. Money is a commodity, to be sure, but when it is exchanged for other commodities or services the process is not called barter. We term this process buying and selling. It is an exchange of goods for goods by the use of an intermediary. Thus, money represents an incomplete or suspended exchange. We willingly accept money for goods, not because the money itself gives us pleasure, but because we know we can exchange it in turn for the various things that will satisfy our wants. 4. Credit. We have seen how money came to displace the crude and clumsy barter system, making possible that division of labor and specialization which marks modern industrial society. In time, however, as exchanges increased in number and magnitude, the carrying and counting of money became burdensome. Men who had frequent dealings with one another began to keep accounts and to sell goods without demanding immediate payment of money, agreeing rather to settle balances at certain intervals. Thus credit was introduced. Credit is a postponed money payment. It is a promise to pay money or its equivalent at some future time. Fundamentally money and credit are not two different things; credit is merely the name given to a common and important use of money, a deferred payment of money. A steel manufacturer sells a machine to a customer and agrees to give him sixty days in which to pay for it. The implication here is that it will be paid in money, and the promise to pay is regarded as the full equivalent of the thing being sold. If the promise to pay is put in the form of a promissory note, it immediately becomes a valuable medium of exchange. The manufacturer can transfer ownership in the note or title to it to a banker or someone else, and so it may pass from hand to hand in satisfaction of many exchanges. But credit has value as a medium of exchange only as it is convertible into money or its equivalent. It must not be inferred from this brief statement of the evolution of exchange that nations or peoples have consciously passed through these three economic stages, barter, money and credit. Some of the very early civilizations used money and even credit of a simple kind as well as barter in their trading. On the other hand, the economies of money and credit have not wholly displaced barter in our own day. In many rural sections of the United States the custom still obtains of taking such farm products as butter and eggs to the country store to be "traded" for groceries and other domestic supplies, and payment of labor "in kind" is still quite common. But in a general way it may be said that the evolution of society from a primitive to a higher civilization has been accompanied by an evolution of the system of exchange from simple barter to the complex credit system of to-day. 5. Evolution of money.-Various commodities have been used as money in different stages of economic development. In early times, the article which came to have wide acceptability and use as a medium of exchange was sometimes a necessity of life-rice, tea, tobacco; sometimes an ornament, like beads; or, again, a weapon. Among savage people, most of whom have an extravagant love for ornament, rare shells, beads and skins have served as money. When the first settlers came to America they found the Indians using "wampum" or "peag" as a medium of exchange. It consisted of strings of beads made from sea shells. The beads were of two colors, black and white, the black beads being worth twice as much as the white. These beads were polished and made into strings or belts to be worn as ornaments. A fathom of wampum consisting of 360 white beads was worth 60 pence, or three beads to a penny. In carrying on the fur trade with the Indians, the colonists found it convenient to use this wampum as money. It was always exchangeable for beaver belts, which in turn found ready sale in Europe. Owing partly to the decline of the beaver trade and partly to the practice which grew up of dyeing the white beads black, wampum gradually fell into disuse. This form of money lingered in some of the colonies, however, until the beginning of the eighteenth century. In the pastoral stage of civilization, sheep and cattle, or their products, hides and skins, performed some of the functions of money. The origin of such words as capital, pecuniary, chattel and fee is probably traceable to those early times when cattle were used as money. The ancient Hebrews and their contemporaries reckoned their wealth by the ownership of flocks and herds. It is probable, however, that sheep and cattle served as a measure of value rather than as a medium of exchange. Jevons notes that in the poems of Homer "oxen are distinctly and repeatedly mentioned as the commodity in terms of which other objects are valued." Classical writers record the use of leather |