The Value of Money

Value always implies a comparison in value between two things. We cannot say what bread is worth without suggesting what may be exchanged for it. If a loaf of bread can be obtained for two pennies, then the bread is worth two pennies. There is no concept of value that does not involve such a comparison. (EN: This is slightly imprecise, because an exchange involves a gain to both parties - the person who sells bread for two pennies values the pennies more than his bread, and his buyer values the bread more than his pennies - because the exchange is for something one would rather have than what is given in exchange.)

Since price expresses the value of all things against a single numeric standard, we can then measure and record the values of all merchandise by means of their prices. A certain amount of milk, a certain quantity of eggs, a certain amount of wheat are all worth various amounts of money. And in that way, a buyer with money can determine which goods he would like to have in exchange by comparing their prices: when two things cost the same, the buyer decides which he would rather have, but he can also assess his desire for things that have different prices.

However, this makes it difficult to express the value of money, because it is exchanged for so many things. A given amount of money is "worth" various amounts of various goods. Where money is not a consumable good, its value is only in its ability to obtain things that are desired. A copper coin has no intrinsic value, but the bread it might purchase delivers a benefit the consumer values.

It is observed that the price of goods changes from day to day in the market - the more sellers bring the same good to the market, the lower they must price their goods to sell them (given the same number of buyers). But it is seldom considered that prices also depend on the value of money (the less money buyers have to spend, the harder they negotiate for lower prices, and the more goods they can fetch for less money).

This "double set of causes" causes difficulty and risk in long-range planning, but is inevitable. One cannot regulate or ascertain that the exact same quantities of the exact same goods will be produced and consumed every day, which is the only means by which prices and the value of money can remain fixed.

In the theoretical scenario in which the quantity of goods remains fixed, the value of money would be determined entirely by its supply and demand. And as is the case with any good, the general rule is that an excess of demand over supply causes the value of money to rise whereas an excess of supply over demand causes it to fall. This is easier to conceive where money is a commodity (such as salt), but less obvious when money is merely a token of exchange.

However, unlike other goods in the market, which are carried off once they are obtained, money remains in circulation and is passed from one hand to the next as an array of goods and services are bought and sold for the same physical coins and bills. In this sense, the value of money is influenced by the rapidity of its circulation as well as its overall supply.

Another factor in the supply of money is its independence of the physical commodity on which it is based because in addition to coins, money consists of notes and bills in circulation. A note that entitles the bearer to redeem it for specie remains in circulation, and the guarantor of the note does not necessarily need to have the coin in his vault to redeem all the notes that are outstanding. Bills of credit also circulate as money, and they clearly cannot be redeemed until their redemption date. So the amount of currency in circulation is greater than the amount of specie that actually exists in the market.

This ability to trade in paper currency affords significant elasticity in the supply of currency in a given market, as it is commercial transactions that create paper currency, so an increase in the number of transactions will create an increase in the number of notes and bills without the requirement of having more specie to redeem them (so long as they remain in circulation and are not redeemed).