THE MONEY PROBLEM

Chapter VI.

STANDARD OF VALUE



AFTER the previous definition of value, the reader will be at a loss to comprehend the meaning of the expression “standard of value.”  Value being a relation between two powers or quantities expressed by a numerical ratio, what possible connection can there be between the words “ standard ” and “ ratio ” ?  What sense is there in the term “ standard ratio ” ?  Let us first see what is popularly understood by the term.  Professor Jevons says :  “ It is essential, in the first place, to decide clearly what we mean by a standard unit of value.  This must consist of a fixed quantity of some concrete substance, defined by reference to the units of weight or space.”  Macleod also says “ Those economists who want an invariable standard of value want to discover and fix upon some single commodity by which they can compare the value of other things in all countries and ages.”

Edward Atkinson, in a recent article entitled “ The Unit of Value in all Trade,” says :  “ The higher law of commerce, laid deep in human nature, has established gold and gold only as the unit or standard of value.”  And again :  “ There is a unit of value.  It exists without regard to legislation, treaty or agreement.  It is gold.  To that standard of value the monetary system of every commercial state must be adjusted.  A given weight of gold is the standard of value everywhere, etc.”1  The so-called standard unit of value of this country2 is a certain weight, viz., 23.21997 grains of gold contained in a dollar.

A standard of value, as above defined, is therefore essentially a material substance.  Now we have already seen that value is a relation between two powers expressed by a numerical ratio, and is therefore immaterial.  We have seen also that value is not the property of anything.  How, then, can a “ fixed quantity of some concrete substance ” be a standard or measure of the immaterial ?  Professor Bowen remarks that “ a measure must be homogeneous with the thing measured.”  In order to be consistent in his advocacy of a standard of value, he is forced to assume that value is a natural property of things.  He says :  “ As that which measures length or capacity must itself possess length and capacity, so that which measures value must have value in itself, or intrinsic value.”  It must follow, as the night the day, that since value is an “accidental relationship between two things,” and is not the property of any thing, no single thing can be a standard of value.

A difference should here be noted between the terms “standard” and “measure.”  The two are frequently used synonymously.  A standard is something fixed, invariable, established by law or custom.  A standard of measurement is necessarily a measure, but a measure is not necessarily a standard.  There may be many measures, but there can only be one standard.  Several writers acknowledge the impossibility of the existence of a standard, but recognize the existence of a measure of value.  Thus Macleod says :  “ But though a standard of value is impossible by the very nature of things, there may be a measure of values.”3

What has been said relative to the absurdity of the term “ standard of value ” applies with equal force against a “ measure” of value, if by measure is meant “ a fixed quantity of a certain concrete substance.”  Gold is no more a measure of values than it is a standard of values.  Gold is not homogeneous with that which it is said to measure.  The unit weight of gold can function as a measure of other quantities of gold, but it cannot measure iron, or silver or wheat, or any other commodity.  Again, Professor Jevons states that the value of gold fell 46% between 1789 and 1809 ;  that from 1809 to 1849 it appreciated 145%, while between 1849 and 1874 it fell again at least 20%.  To talk of a standard, subject to such fluctuations, is the height of absurdity.  “ So palpable is this objection ” writes Francis A. Walker, “that some writers, who still cling to the term ' measure of value,’ abandon that of a standard of value.”  And again he says :  “ Value is a relation and, therefore, cannot be measured, but only expressed or stated.”4

Macleod says :  “ It is as well to explain what these economists mean who are searching for an invariable standard of value.  If we had a British yard and any foreign measures of length before us, we could at once perceive the difference between them ;  and if we were told the measurement of any foreign buildings, however remote in age and country, we could, by a very simple calculation, reduce them to the standard British measurement, and compare them with the size of our own buildings.  Those economists who want an invariable standard of value, want to discover and fix upon some single commodity by which they can compare the value of other things in all countries and ages.”

“ But the least reflection will show that such a standard is absolutely impossible by the very nature of things. . . . If a quantity of gold were placed beside a number of other things, no human sense could discern what their value would be.  And the most violent changes in their values might take place in the market without there being any visible sign of such a thing.”

“ Values are not perceptible by ocular demonstration, but they must be declared by the communication of minds.  Moreover, it is not possible to ascertain the different values of different quantities of gold obtained in different ages and countries.” ... “ The only test of value is an exchange, and unless we can effect an exchange there can be no value.  How can we exchange an ounce of gold in the year A.D. 188 with one in the year A.D. 1588, or with one in the year A.D. 1888 ? ”5

Bailey also says :  “ Value is a relation between contemporary commodities, because such only admit of being exchanged with each other ;  and if we compare the value of a commodity at one time with its value at another, it is only a comparison of the relation in which it stood at these different times, to some other commodity.  It is not a comparison of some intrinsic, independent quality at one period with the same quality of another period, but a comparison of ratios, or a comparison of the relative quantities in which commodities exchanged for each other at two different epochs. . . . It is impossible for a direct ratio of value to exist between A in 100 and A in 1800, just as it is impossible for the relation of distance to exist between the sun at the former period and the sun at the latter period.”6

Macleod further observes :  “ An invariable standard of value . . . is in itself absolutely impossible by the very nature of things.  Because value is a ratio, and a single quantity cannot be the measure of a ratio.  A measure of length or capacity is a single quantity, and measures other single quantities such as different lengths, or bodies of capacity.  But value is a ratio, and it is impossible in the nature of things that a single quantity can measure a ratio.  It is impossible to say that a : b :: x.  It is manifestly absurd to say that 4 : 5 :: 8 : without saying as 8 is to what, just as it is absurd to say that a horse gallops at the rate of twenty miles without saying in what time.”

But the question may be asked, “ How do you account for the very general employment of the term ' standard of value’ ? ”  The answer, Macleod thinks, is to be found in the cause that gave rise to the use of the unfortunate term “ intrinsic value,” viz., a belief that value is a property or quality of commodities.  It is, he says, owing to the general acceptance of the erroneous doctrine that labor is the cause of value, and that the value of a thing is, therefore, the quantity of labor contained in it, or exerted in obtaining it.  To quote once more :  “ That unfortunate confusion of ideas between value being the quantity of another commodity which any quantity will purchase, and the quantity of labor embodied as it were in the commodity itself, which is chiefly due to Smith and Ricardo, has not only led to that mischievous expression ' intrinsic value,’ the source of endless confusion in economics, but also to the search for something which very slight reflection would have shewn to be impossible in the very nature of things, viz., an invariable standard of value.”7  A commodity when considered alone and apart from all others, gives no idea of value, nor can any conception of value arise until it is confronted with another commodity ;  just as a point in space can convey no idea of distance until a second point is taken.

Now since there can in reality be no such thing as a standard of value, and since a relationship exists among commodities, the question arises in what way is this relationship shewn, defined and expressed ?  I have said that the arguments used to prove the absurdity of a “ standard of value ” apply with equal force against the term “ measure of value,” if by measure is meant “ a fixed quantity of a certain concrete substance.”  No substance can “ measure ” values.  Commodities present themselves to us under two aspects—of quality and quantity.  The primary distinction between commodities is a qualitative one, such as the material of which they are composed, iron, wood, wheat, gold, etc., or their shapes or forms, such as tables and chairs ;  or their physical properties, such as glass, sugar, salt, etc.

Now it is these various properties possessed by commodities that make them useful to mankind and serve to create in the minds of men a desire to possess them.  It is physically impossible to bring the properties of things to the terms of one denomination.  No common denominator for the physical qualities of things has yet been discovered.  Whatever the relationship among commodities may be, it is impossible to express it in terms of their qualities.  Gold is a qualitative term, designating a certain substance possessing certain characteristics.  No relationship of dissimilar commodities can, therefore, be expressed in terms of gold.  Values being relations or ratios, are only capable of numerical expression and cannot be expressed by any substance.  But commodities are also definite quantities of things, and it is with these quantities that the science of economics deals.  It treats of the laws which govern the relations of exchangeable quantities, and has nothing whatever to do with the qualities of things.  These furnish matter for a separate and special study entirely apart from economics.

Now, whilst no meaning can be attached to such an expression as silver = gold, by affixing definite quantities before each term the equation becomes perfectly intelligible, thus :  2o oz. silver = 1 oz. gold. The value relationship is expressed by the numbers 2o and 1, thus 1 oz. of gold is to 1 oz. of silver as 20 is to 1.

Or again.  Consider the expression 15 bushels of wheat=2 yards of silk.  The value relationship is expressed by the numbers 15 and 2, thus 1 bushel of wheat is to 1 yard of silk as 2 is to 15.  The only form of expression for the relationship between commodites is that of two or more numbers representing exchangeable quantities in terms of their respective units.  It will be noticed that each commodity is designated by three terms :  first, SUBSTANCES, as wheat, silk ;  second, the UNITS OF QUANTITY, as bushel, yard ;  and thirdly, THE NUMBERS of such units as 15, 2.  The only term common to both is that of number.  No relationship is expressible in terms of the substance, wheat or silk, nor in such dissimilar units of measurement as bushels and yards.  Therefore the only language in which commodities can give expression to their social relationship is that of numbers.  Suppose, for instance, the following commodities to exchange in these proportions :—

Five pounds butter=three bushels wheat ;  one coat=twelve bushels wheat ;  two pairs shoes=one coat ;  three and one-half gallons whiskey=one pair shoes ;  one cow=sixty bushels wheat ;  fifty ounces silver= one cow ;  and one ounce gold=twenty ounces silver.

We can readily express their relationship numerically by putting them all on an equality.

From the exchange values above given we may conveniently tabulate the commodities as follows :—


Butter in lbs.Wheat in bush.Coats.Whiskey in gals.CowsSilver in oz.Gold in oz.Shoes in pairs.
1006053515010

The common language through which butter, wheat, coats, shoes, etc., express to us their relationship, is by the numbers 100, 60, 5, etc.  The number of pounds of butter of equal exchange power to bushels of wheat, is expressed by these numbers directly, thus, 100 : 60 ;  whilst that of butter in pounds in terms of wheat in bushels is inversely as the numbers, thus 60 : 100, and so on with the remaining commodities.  The relation of butter to whiskey as 35 : 100 ;  of cows to gold in ounces as 2½ : 1, etc.  This is the only expression of values possible.

But it may be argued that since the above commodities are all of equal exchange power, they may all be expressed in terms of one.  Thus :—


100 lbs. butter,
60 bush. wheat,
5 coats,
10 pairs shoes, etc.,
= 2 % oz. gold.

This is said by economists to be bringing commodities to their money form.  Gold is thus said to be the money form of commodities.  In this way it is argued that gold becomes a “ measure of value ” because all commodities can be equated into definite quantities of gold, and the standard unit of gold is a standard with which to measure these quantities.  John Stuart Mill says :  “ We may define a measure of value to be something by comparing with which any two other things, we may infer their relation to one another.”

But a moment’s thought will lead to the conclusion that the exchange relations are expressed not in terms of gold, but in the numbers indicating the quantities that are equally exchangeable.  To say that gold is the measure is as sensible as declaring the material boxwood to be the standard or measure of length—because yard-sticks are made of it.

Suppose one horse exchanged for ten ounces of gold, and one mule for one ounce of gold ;  then the value of horses to mules is as ten to one.  It is, therefore, not the gold that expresses the value, but the ratio of the numbers of ounces.  In other words, it is the relation of the two quantities irrespective of the substance.8  The price of horses in terms of mules can never be determined by bringing a unit of gold near them.  It is obvious that the function here served by gold can be served by anything else, providing it is exchangeable.  Thus, in place of ten ounces of gold, we might write three hundred bushels of wheat, and in place of one ounce gold, thirty bushels.  The value of horses to mules is then expressed, not in terms of wheat, but by the numbers 300 : 30.

The use of a commodity such as gold, is convenient merely in arranging other commodities one above another at a particular time.  But this does not constitute gold a “ standard of value.”  It is merely a standard commodity at the time at which the arranging occurred.  No commodity can continue to act as a standard commodity for long without disorganizing from time to time the entire range of prices, since no commodity is or can be itself free from fluctuations.  Hence a comparison of prices at two different periods gives no indication whether the commodity—in terms of which prices are expressed—has fluctuated, or the commodities whose prices are compared.

The mistake economists make, is in supposing that the commodity which was selected for comparing at a particular time all others, is a perpetual standard at all times and places.  What was originally required of a standard commodity was to enable society to express values numerically.  Thus, when it was found that commodities would exchange for certain weights of gold, it was extremely easy and convenient to express the relations of commodities, and range them one above another, using the numbers representing weights of gold merely as their arithmetic.  But having once accomplished this, gold became no longer necessary.  The language of commodities was created as soon as their relationship was ascertained in terms of the quantities (either by weight or volume) of any one commodity, whether gold, silver, wheat, or what not ;  and if from that instant prices had been reckoned without retaining the standard commodity for successive comparisons and valuations, we should have had an accurate method by which the variations in the prices of each and every commodity would have been correctly registered, including the variations in the standard commodity itself.

A commodity can only be considered as a standard at one particular instant.  Between this hour and the next, a change in its supply or demand may occur, and consequently its relation to all others changes.  An illustration will serve to make this clearer.  Imagine a number of balloons moving upward and forward, their motions being irregular, so that their relative positions are constantly changing.  If we desire to trace the respective movements of each, we must do so from some fixed point on the earth’s surface.  If we attempt to describe such movements from a moving standpoint—a railroad car for instance—it would be impossible to do so with any degree of accuracy ;  and if we were in one of the balloons and made this the standard of observation, we should be doing practically what the commercial world is now doing, in tying money to a particular commodity.  We should be unable to determine whether our balloon was advancing, or another receding.

It has been thought by many that a fixed standard of exchange power is impossible.  Gold having been selected, economists imagined that the evils of a fluctuating currency were reduced to the lowest possible point by adopting that commodity which was least subjected to variations ;  but the mistake, as I have said, was in supposing it was necessary to have a commodity that should be per se at all times a standard.

If gold was taken as the standard commodity on December 31st, 1894, the exchange powers of commodities would all be expressed in numbers which represented so many grains of gold on that particular day.  No inatter how gold might fluctuate thereafter, it could not possibly affect the prices of other commodities.  Its own fluctuations would be registered in money based upon such a system.

The question at issue with the advocates of a “standard of value,” may be thus stated :  “ Is value an inherent property of commodities, or is it merely an abstract relation between them and human desires ? ”  If the former, gold may rightly be considered a “ standard of value.”  If it be true—as all economists assert—that value is merely a relation between exchangeable things established by human wants and desires, then it can be expressed only in terms of the abstract, viz., numbers.

To sum up, then, a material standard or measure of values is a physical impossibility.  First, because values are ideal, and can only be expressed in terms of the ideal.  Second, because value can only be expressed by two numbers representing quantities.  A single number or quantity is, therefore, incapable of expressing the relation.  Third, value being the exchange relation between commodities, and this relation being a quantitative one, values can only be expressed by numbers, and not by substances.

In spite of the already too-lengthy discussion on the subjects of “standard and measures of values,” I must, at the risk of taxing the reader’s patience to the utmost, touch once more on a phase of the question which some may be still in doubt over.  Recent experience upon the platform convinces me that the fallacy underlying the specie basis is not to be destroyed by a sudden or unexpected assault, nor by an exposure of merely one phase of the question.  It must be exposed from all sides in order to destroy it in both root and branch.

In the writings of the most advanced thinkers, I find the statement made again and again, that money is inconceivable unless based upon some commodity selected as a permanent “standard of value,” as it is called ;  and there seems to be a general agreement regarding gold as the “ natural standard.”

In order to demonstrate the difficulty under which these writers labor, I will repeat an illustration previously given ;  but before doing so let us fully comprehend what the money problem is.  Economists often fall into an error by supposing a society in which commerce and exchanges are about to commence and where the exchange relations of commodities, being unknown, must be discovered by selecting one commodity and comparing all others with it, i.e. “measuring” them by the standard selected.  This I have already shewn to be impossible.  Exchange relations are not discovered by bringing one thing alongside another.  It is the wants and desires of society that establish these relations, and no single commodity can possibly do so.

We must remember that the system of barter existed prior to the use of money, and this invention is to get rid of the difficulties attending barter.

We must suppose that at the time money is introduced, the exchange relations of commodities are already established through the system of barter.  The prime function of money is to express these relations as it finds these and to intervene merely as a medium of exchange.  Suppose, then, we find the following goods exchanging in the proportions named :—

Five quarts milk for one pound butter.
One yard cloth for twenty-five quarts milk.
Two ounces silver for one yard cloth, and so on.

The advocates of a standard assert that these commodities must all be brought to the terms of the denomination of some one commodity in order to ascertain and express their values.  On the contrary, I assert that it is physically impossible to bring commodities themselves to terms of any common denomination.  It is merely their exchange relations that can be expressed in terms of a common language, and that language is numbers, and numbers only.  Standard advocates fall into the error of supposing value to be “possessed by” or to “inhere in” commodities, and imagine that all goods contain various quantities of this thing or substance called “value,” of which a given weight of the standard contains a fixed amount ;  and yet, when defining value, they are careful to speak of it as being only a relation between two quantities or powers.  But let us see what the use of a standard commodity achieves.  From the relations of the goods given above, we may raise them to an equality with the highest, viz., one yard cloth, thus :—

Twenty-five quarts milk = five pounds butter = one yard cloth = two ounces silver.

Now let us select silver as our standard of comparison.

Then we have :—


25 quarts Milk
5 pounds Butter
1 yard Cloth
= 2 ounces Silver

If we imagine one ounce silver divided into 100 equal parts, we have the following prices for our commodities :—


1 quart Milk = 8 cents.
1 pound Butter = 40 cents.
1 yard Cloth = 200 cents.

All that we have accomplished by this comparison is to find a common denomination for the exchange relations of these goods ;  and this we see is a numerical expression.

Now the dividing line between ourselves and the add the advocates of a commodity standard begins at this point.  The latter contend that these numbers stand for certain pieces or weights of silver ;  and hence a certain definite weight of silver or gold may constitute a permanent standard of value or purchasing power.  On the other hand, I contend that these numbers represent merely the purchasing powers contained by, or rather conferred upon certain weights of silver at the particular time the comparison is made.

Suppose that in place of the silver we substitute a commodity that is not like silver, divisible—say a vase or a painting.  The exchange relations will then be expressed as follows :—


25 quarts Milk
5 pounds Butter
1 yard Cloth
= 1 Vase

Hence—


1 quart Milk = 1/25th Vase = 8 cents.
1 pound Butter = 1/5th Vase = 40 cents.
1 yard Cloth = 1 Vase = 200 cents.

It will surely not be contended that the material of which the vase is made is in any sense a “standard of value,” or that these numbers refer to portions of the vase.  To attempt to divide it into fragments would destroy its worth ;  and yet this vase which cannot be divided and which may not even be duplicated has as much to do with expressing values as silver.  The fractions 1/25th and 1/5th, do not mean fractional portions of the vase, but fractional parts of its exchange or purchasing power.

Neither an ounce of silver nor an ounce of gold contain a fixed quantity of value.”  They merely have conferred upon them, by reason of their utilities, powers of purchasing other commodities, but these powers vary continually according as their marginal utilities vary from time to time.

Referring to our former example :  Suppose we regard the term dollar as the equivalent of the purchasing power of one ounce of silver at the time this comparison or price list was arranged, but make it in no wise dependent upon the commodity, silver, thereafter ;  the dollar becomes an absolutely invariable unit of purchasing power, viz., the equivalent of that exchange power which happened to be attached to an ounce of silver at one particular time and place.  And no matter how silver may fluctuate thereafter it cannot affect the purchasing power of this ideal unit—the dollar.

My contention is that the purchasing power of a definite quantity of any commodity, say 25 grains of gold on a given day, say January 1st, 1894, may be taken as equal to the unit of purchasing power, from which to start prices, but the purchasing power of this quantity of gold cannot, scientifically speaking, be recognized as the unit in July, 1894, or January, 1895, or in fact at any time thereafter, since definite and invariable powers are not associated with definite weights or quantities of commodities.

Purchasing powers, like values, are abstract relations not concrete magnitudes.  They are purely ideal, and vary as our wants and desires regarding all objects of utility vary.  To measure our desires for things generally, seems at first sight impossible, yet it is possible to give numerical representation to them by the differences in the quantities of the things we are willing to give for those we desire.  A desire for a certain thing at one particular time may be represented by 1, and for some other thing at the same time by 2, and so on.  Thus we may establish a numerical relationship among all commodities, our unit being the desire we had for a given thing at a given instant of time.  But the desire is not possessed by the thing itself, nor is the intensity of the desire for the thing the same for all time.  The numerical relationship being once established, our monetary system should be such that prices can be affected only by changes in the demand for and supply of commodities themselves, and not by reason of any change in money.

In asserting the necessity for connecting the clement of time with any concrete standard that may be chosen as the unit of purchasing power, we are only asserting what everybody recognizes as an essential condition with all standard units of measurement, viz., invariableness.  The English standard of length, for instance, is the distance between the centres of two gold plugs in a certain bronze bar, the bar being at a particular temperature, viz., 62 F.  The one element or condition to which metals are unavoidably exposed which causes variations in their volume, viz., temperature, must be taken at some arbitrarily fixed point.  Similarly with purchasing powers.  These fluctuate in the course of time from supply and demand, and as we are unable to fix the conditions under which values remain invariable, all we can do is to make our unit or standard the equivalent of the purchasing power of a certain quantity of some commodity at a given time from which to start prices, as previously explained.  The introduction of this element of time abolishes the permanent commodity-standard at once, and gives us an invariable ideal unit, in terms of which the fluctuations of all commodities can be registered or expressed with mathematical exactness.




1 “ Engineering Magazine.”

2 United States.

3 “ Theory of Credit.”

4 “ Money, Trade and Industry.”

5 “ Theory of Credit.”

6 “ Theory of Credit,” Macleod.

7 “ Theory of Credit.”

8 “ But the theory of money has proved that, far from being the measure of values, specie is only their arithmetic, and a conventional arithmetic at that.”—“ System of Economic Contradictions,” PROUDHON.