7: The Concept of the Value of Money
The notion of the "value" of money involves an estimation of its purchasing power. This remains true whether the money itself has no intrinsic value (state-issued coinage), or where commodity money is used (which has some intrinsic value, but less than its exchange value) In either instance, money is valued for its ability to be exchanged for goods.
The inherent problem is that the value of goods that may be obtained in exchange for money is also subjective: each person who seeks to obtain an item does so in response to his own needs and desires at the time he seeks to enter into an exchange.
This is more in the nature of psychology than mathematics. As such, the economist can and must refrain from consideration of the subjective use-value of a good and focus entirely on its objective exchange value. For example, it is not the task of the economist to consider why a man might value corn, but merely accept that he does value it, and the degree to which it is valued is reflected in the value he is willing to exchange to obtain it.
It is also noted that the value of any commodity (including money) is dependent on its being available in limited quantity. An individual with an unlimited supply of a good does not consider it to be of value, and puts no thought into the quantity he gives in exchange for something else. However, this is not the condition of the majority of mankind who, having limited resources, must place careful consideration into the value he must provide to an exchange.
Exchange Value of Money
The objective exchange value of a good is defined as their capacity to procure other goods as an equivalent in exchange. While each individual transaction is the product of a subjective individual valuation of the items involved, it can be observed that if transactions are considered in aggregate, the individual valuations of the items are drawn to the collective average.
For example, an individual who approaches a market unaware of trading activity has in mind a price he will pay for a given item. But when that individual learns the price that others have recently paid for that item, he will adjust his expectations accordingly.
This is not the same as the empirical value of goods as suggested by classical economic theory: nothing intrinsic to salt or wheat that "makes" a certain quantity of salt worth a certain quantity of wheat - the market price, which an aggregate that tends toward a stable ratio, is a reflection of subjective valuation - and, as such, is subject to change.
The author addresses the notion of pricing, suggesting that it is not the same as exchange value. It represents the demand of a seller, prior to negotiation with the buyer. Hence, the price of an item precedes the exchange, whereas the exchange value of the item is established when the terms of exchange are agreed upon. However, prices tend to follow exchange value closely, as the seller's future price demands reflect his previous trading experience.
Problems in Evaluating Money
There is a distinct difference in the way in which the exchange value of money and the exchange value of a commodity are considered. Primarily, money has only exchange value whereas commodities have both exchange value and a subjective use-value.
As an example, the seller who proposes to offer meat to the market has the ability to consider keeping the meat and consuming it himself, and would logically be motivated to do so if he is not offered an amount that exceeds this use-value. Meanwhile, the buyer who proposes to offer money in exchange for goods can do nothing with the money but exchange it for other goods.
The notion that money has use-value remains true in terms of precious-metal coinage. A goldsmith might melt down coinage to create artifacts for sale when the use-value of metal exceeds its exchange value, or melt down artifacts into coins when exchange-value exceeds use value. Gold and silver both have industrial use-purposes as well as market exchange values.
(EN: This point is largely moot in the modern day, when coinage contains no metal of value. But it is not entirely moot, as in the case of the copper penny, at a point where the value of copper contained in the penny exceeded the monetary value of the coin.)
Under the present economic system, producers of goods do not work directly on their own behalf, but produce goods that they have no intention of using (either because they have no need of the good at all, or because they produce in significant excess of their own needs) and are hence motivated by the exchange value rather than the subjective use-value of the items they produce. Consequentially, the effect of this production eliminates the seller's motivation to consider the subjective use-value of the vast majority of goods in the marketplace, and rely entirely upon their perceived exchange value.
However, it remains true that the buyer is motivated to consider the subjective use-value of a good in determining the exchange value he will give in order to obtain it, in light of the opportunity cost of foregoing the use-value of other items he might have obtained for the same amount in exchange. That is, even though the money itself has no subjective use-value, it represents the use-value of the items it might be used to obtain.
The value of credit money or fiat money is particularly problematic, as the money's value is based not on the content of the money, but in the ability of an external entity to guarantee its value. When a bank or a government collapses, its money becomes worthless - specifically, it loses all exchange value - because the holders of the currency have no hope of redeeming it. The same is true of credit money, when the money was originally backed by the believe that a commodity would eventually back it, and the commodity is not produced, the currency loses all exchange value.
As a side-note, if gold had never been used as money, it would have little value - it would be just another metal, useful perhaps for ornamental purposes. It is only by virtue of its use as money, i.e., a commonly-accepted medium of exchange, that the metal has any value. It is further noted that the value of a metal decreases sharply when it is disused as money: the silver crash of 1873 resulted when nations took themselves off of the silver standard - and during the same year, the English mint noted that the demand for nickel for coinage had drastically increased the market value of that metal.
But outside of exceptional circumstances, money is not valued for any intrinsic use-value, but for its exchange value in the markets, to which matters of economic consideration should be limited.