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Meaning Of Money

( Originally Published 1909 )


THE meaning of Money is not a question of economic theory. The object of this volume is to explain a matter of plain, positive, practical fact, which is very important, very dull and very little understood ; and to do so as clearly as may be, and with the least possible use of the alarming apparatus which generally affrights the casual reader who opens a book on a monetary subject. No columns of statistics will be paraded and deployed, the use of diagrams will be sedulously avoided, and as far as possible figures will be ruled out.

The word Money is associated with much confusion and difficulty in the minds of those who have not been obliged to think the matter out, because of the different senses in which it is used.

In one sense it is perfectly simple, without the least reflection or examination. Everybody understands money in the sense of the pounds, shillings, and pence that we pay in the shape of coin, notes, cheques for everyday wants. But the other most common use of the word leads to complication, because in its second sense money means not money, but the loan of money. This is the sense in which the word is used when we: speak of a money market or a price of money, phrases which are wholly incomprehensible to those to whom this difference of meaning is not made clear. Any one who defines money roughly as a sovereign in his pocket, with which he can buy whatever he wants up to the extent of its purchasing power, does so quite naturally, for this is its most obvious meaning. But having got this meaning into his head, he is unable, and again quite naturally, to understand strange expressions in the newspapers which tell him that money is cheap or that the money market is tight. He knows that the price of a thing is the number of sovereigns, or fractions of a sovereign, that it will fetch. He also knows that no one will give him more than a sovereign for the sovereign that he has in his pocket, and he is equally convinced that the most cunning sophistries of the most skilful dialectician would never induce him to part with it for less. He therefore proceeds triumphantly to the conclusion that it is nonsense to talk about a price for money, and his argument is perfectly sound on the premises from which he starts.

His mistake arises from the fact that, as has been stated, money is often used in a quite different sense, namely, the loan of money; or perhaps the matter can be made still clearer if we express it by saying that the words "price" and "market" are applied in a different sense when applied to money from their meaning in connection with any ordinary commodity. The price of a hat is the sovereign that you pay to become its owner; the price of money is the sovereign or sovereigns that you promise to pay some day for the loan or temporary use of it.

The market in wool or wheat is the place where you can buy these articles from the assembled merchants or dealers. The money market is the t place in which you can borrow money. It thus becomes apparent that the phrase which has proved a stumblingblock to so many generations of schoolboys and more mature students that money is a commodity which can be bought and sold like any other is not true. Money is certainly a commodity, but it cannot be bought and sold like any other, for that would imply exchanging it for itself, since buying and selling are nothing but the exchange of commodities for money, as distinguished from barter, which is exchanging commodities for one another. Money can be borrowed or lent, and this is at once a perfectly reasonable and comprehensible transaction, which would never cause the least bewilderment in the mind of the most unmathematical schoolboy. It is perfectly clear to Jones, minor, that it might be to his advantage, in the lean and hungry days towards the end of term, to take five shillings in hard cash and to promise to pay seven-and-six after the holidays, when everybody's pocket is bursting with metallic evidences of family affection. And this transaction, allowance being made for local and psychological variations, is a fair specimen of the business done every day in Lombard Street and in the other money markets of the world.

The money market, then, is the place in which money down is exchanged for the promise of money some day. And as the borrower, the man who wants money down, must obviously offer the lender an inducement to let him have it, it will always be found that the amount of money promised some day by the borrower is bigger than the amount of money paid down by the lender. The difference between the two figures is the rate of interest, which is often loosely and confusingly described as the price of money.

This rate of interest, as every one knows, is calculated "per cent.," so much on each 100 borrowed.

If you borrow 1000 for a year from your banker, and he charges you 3 per cent., or 3 per 100 for the advance, he will give you the right to draw a cheque now for 1000, or to withdraw this amount in coin or notes, and at the end of the year you will owe him 1030. But this simple statement of the matter is complicated slightly in usual practice, because the interest is probably payable periodically at the quarter or half-year. This complication becomes important in the case of loans for long or indefinite periods, but the broad fact remains that the chief operations of the money market consist of giving cash down in return for the promise of a little more cash some day, or of annual or half-yearly cash payments.

Time is thus the distinctive element in the most ordinary and obvious transactions of the money market, and clears away the difficulty which besets those who cannot understand how a money market can exist. To exchange money for money would be absurd ; to exchange money now for more money some day is evidently a quite reasonable convenience to a borrower who hopes to make a profitable use of the sum borrowed, and to earn more by its employment than the price that he will have to pay for it. And space is the other element which accounts for the rest of the market's operations. Besides giving and taking money down in return for money some day, it is also engaged in giving and taking money here for money somewhere else. Hence arises the complicated and difficult mechanism of what is generally called " exchange," which also becomes a comparatively simple matter when it is clearly expressed and freed from confusing technicalities. The broad meaning of it is clear enough, if you reflect that when you buy a postal order you are conducting an exchange transaction. You receive a communication from a tradesman in a town in which you formerly lived to the effect that his account, amounting to five shillings, has been long outstanding, and that he would be glad to have it settled. The five shillings are ready enough in your pocket, but the question is, how to get them, for example, from London to Bristol. You can put two half-crowns in an envelope, register it, and so send your money at the cost of threepence.

But the cheaper and more convenient method is to pay some one who has money in Bristol something to induce him to pay your debt for you there.

That some one is ready in the person of the Post Office, which sells you an order for five shillings, payable at any office in the United Kingdom, for five shillings plus a penny. You put the order in an envelope and send the money at a total cost of twopence, and your tradesman presents it at the Bristol post-office and receives cash. Thus you have carried out an exchange transaction, which may be technically expressed by saying that you have bought a draft on Bristol, and forwarded it to your creditor, and that it has been met on presentation. Monetary transactions may thus be divided into three main divisions :

(1) Those in which money is exchanged for any kind of commodity or service ; ordinary buying or selling operations.

(2) Those in which money down is exchanged for the promise of money some day ; these include all kinds of loan operations, from the discounting of a bill due sixty days hence to an issue of a war loan by the British Government.

(3) Those in which money here is exchanged for money somewhere else; and these are exchange operations, which have been crudely exemplified by the purchase of a postal order, but are by far the most complicated kind of monetary business, including such transactions as turning sovereigns into Shanghai taels, composed of silver, or into inconvertible paper notes, issued by some South American Republic.

It will be observed that in all three there is one constant factor, which is money here and now, or cash. In ordinary buying and selling cash is exchanged for goods or services, as when we buy a pair of gloves across the counter of a shop, or send a reluctant cheque to pay a dentist's account or a lawyer's bill of costs. In loan operations cash is exchanged for some form of security or promise to pay. In exchange operations cash is exchanged for drafts representing a right to money in some other place. And before we can go any further, it will be necessary to give some explanation of the different forms taken by cash, or money here and now. Everybody knows that when a payment is to be made it will take the form of coin, Bank of England notes, or, most probably, a cheque drawn on a banker; and the stages by which these forms of payment came into being are a well-worn story, which must be summarized briefly in the interests of clearness and completeness.

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