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 ratio between two numbers, what possible connection can there be between the words "standard” and "ratio?" What sense is there in the term "standard ratio?" And what is the sense in trying to put forth any standard ratio apart from a consideration of TIME? We'll let that concern pass for the moment, though it is a permanent obstacle for these blockheads and shall likely make the remainder of this a moot exercise. Conceptually at least, only E. C. Riegel was on the right track.
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 b y 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." Yes, that was exactly what Riegel attempted to do and there really cannot be but one fixed standard for use by all based on one particular TIME. Let's see if Kitson manages to get it.
Edward Atkinson 1827-1905, 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." ("Engineering Magazine") The so-called standard unit of value of this country is a certain weight, viz., 23.21997 grains of gold contained in a dollar. That was the weight assigned to a dollar at that time, 120 years or so ago. But what was the purchasing power of that weight of gold back then? Would it buy nearly exactly what the same weight of gold might buy today? Some would argue that it would, but we have recent history to remind us that an ounce of gold on 2 Nov, 2011 would certainly buy hundreds of dollars more then than the same ounce of gold would buy now (20 Dec, 2014). Again, the issue is not the weight of gold, or of silver, or of lead or coal for that matter, but the TIME at which the fundamental ratio to be erected as a standard of value is chosen. Without TIME as a consideration, all else shall fail to speculators, because they happen to KNOW the importance of TIME, whereas most people, and apparently most economists, do not. (I suppose this is not the time or place to include the Biblical references in the prophet Ezekiel to the effect that a standard weight of silver and not gold was to be used as the people's money.)
A standard of value, as understood and defined is therefore, essentially a material substance. Now we have already seen that value is a relation between two powers or a ratio between two numbers, 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? This question falls on many deaf (and dumb) ears, especially those who follow the Rothbards of this world. Was Murray aware of the speculative nature of trading in commodities which relied on side bets taken as to their prices at any future TIME? Or did he prefer to leave his reading public asleep as to the realities of the acute gambling mania that centres about towns like Chicago, New York and London? It is an open question whether the so called “Austrian” economists are wilfully ignorant (idiots by our definition) or just more people out to hoodwink the general public?
Professor Bowen very properly 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, 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." (“Theory of Credit”) Confused yet? Don't be. Kitson and all the others think there should be a standard measure of universal value and so do we. Riegel tried to suggest that it should be the purchasing power of a dollar at the close of business in some former year, 1939 was one of his earliest suggestions. We updated Riegel's suggestion by making it the price in dollars (or any other major currency) of 1 ounce of gold (or 1 ounce of silver) on a particular date, 2 November, 2011 (2 11 2011) a handy day to remember. We got a suggestion that it should be the date when an ounce of gold fetched its highest price in dollars. This is fine with us as there is less likelihood that such a standard would require revision. We note (and yeah sarcastically, because that's what they deserve) that this blog's proposed Value Unit has to date out performed any and all standard currencies and gold and silver. Bitcoin, for reasons we'll get into in another paper, is merely another plaything of speculators and represents many dangers.
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 value than it is a standard of values. Gold is not homogeneous with that which it is said to measure. We said that there was no reason why the price in dollars of an ounce of gold should determine the price of a dozen eggs and we meant it.
The unit weight of gold can measure 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 205%. This was all measured in British pounds sterling, no doubt. To talk of a standard, subject to such fluctuations, is the height of absurdity. We totally agree. So let's see whether Kitson or any of the others fastens on TIME as the key element. Bet they don't.
“So palpable is this objection " writes Francis A. Walker 1840-1897, "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.” (“Money, Trade and Industry.”)
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. i88 with one in the year A. D. 1588, or with one in the year A. D. 1888.?" (Ibid) Macleod clearly sees the problem, but can't offer any solution. He has not tied the proposed standard ratio with TIME. Neither did Edwin Vieira, notwithstanding that clearly no one understands the history of the American dollar better than he. His argument fails because it fails to consider TIME as part of the equation; what was the purchasing power of a Constitutional silver dollar at the close of business in 1792? THAT would represent a standard of value and result in perhaps one of the hardest currencies ever known to man. But he, and he's not alone, has notably missed Riegel's concept of a money that doesn't care about quantity, as being immune from speculation. Without immunity from speculation, no alternative money will be any good.
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 a latter period." (Ibid, Macleod) One of the major difficulties in any “science” is to settle prematurely on various “standards” for reference which over longer and longer periods of TIME that cannot be definitively relied upon to be stable. One such is the carbon 14 content in the atmosphere, another is the speed of light, and so on. We get as close as we please and then make a determination, but we are not even close in some instances to a reliable standard of measurement. That tentatively chosen on this blog to represent a modern Riegel based Value Unit is pretty exact even by most other “scientific” measurements.
Macleod further observes: "An inheld to variable 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 is to b = x. It is manifestly absurd to say that 4 is to 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.'” (Ibid) As we said, Macleod was close, but so far, no cigar. Perception of the difficulty of solving the problem is one matter, perhaps only E. C. Riegel understood the solution required reference to TIME.
But the question may be asked, "How do you account for the universal credence given to that denoted by 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 -Rothbard and others have thought so-. It is, he says, owing to the general acceptance of the erroneous doctrine that labour is the cause of value, and that the value of a thing is, therefore, the quantity of labour contained in it -Marx thought so-, 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 labour 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 shown to be impossible in the very nature of things, viz., an invariable standard of value." (“Theory of Credit." Whilst this may partially explain the use of the term, I think it is due still more to its recognition by governments, and their malevolent influence over the currency. — AK) 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 commodify; just as a point in space can convey no idea of distance until a second point is taken -or perhaps even a third or fourth-. And just as distance is expressed between two given points, so value is expressed by the relation between two commodities. To place a given quantity or weight of a certain commodity at Washington or London under lock and key, and declare that to be a standard of value, is like marking a point on paper and declaring that to be the standard unit of length. Two points determine the unit of length, viz., the two ends of a certain rod or yard stick, and if any sense is to be made of the term "standard of value," it can only be expressed by two quantities -or with reference to the two chosen and a third, TIME-. Gold may, in a certain sense, be termed a standard commodity, i. e., a commodity to which others are compared, just as a point on the earth's surface may be termed a standard of position from which to measure distances.
Now since there can in reality be no such thing as a standard of value -without considering TIME-, and since a relationship exists among commodities, the question arises in what way is this relationship shown, 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. Riegel actually agreed with this. The fact that we compare all commodities to one, VIZ., gold, does not constitute gold a "measure " of values, any more than if all yard sticks were made of ebony, ebony would become the measure of length. Riegel would have seen it this way too. His choices for his Value Unit were based on arbitrary decisions to select some former “dollar” as the purchasing power it represented relative to what later “dollars” would have purchased. In order to do this, he would have chosen a 1939 dollar and then computed what some commodities would have cost in those dollars over ensuing years. Again, it was not perfect, or an absolute standard, but it certainly would have worked. We wanted to slay two dragons at once with our updated proposal, which is why we chose a relationship between dollars and gold (and silver) at a particular point in TIME. This is tentative subject to a properly assembled meeting of those who would agree to this standard. That's the best anyone can or could do. But let's continue with Kitson.
Let us look at this matter closely. 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, 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 oi 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 : 20 oz. silver = 1 oz. gold. The value relationship is expressed by the numbers 20 and 1, thus 1 oz. of gold is to 1 oz. of silver as 20 is to 1. This was the so called, “standard ratio” that Adam Smith and others tried to fix for establishing a bi-metalic money system during the 19th century. It failed because silver and gold being commodities, and any and every commodity being open to price speculation, whenever one or both metals became over valued, they went out of circulation. This is really what Gresham's Law, a real one, was all about. By the way, as expressed in dollars, at 19 December, 2014, the ratio between silver and gold was 74.63 to 1 so the precious metals crazies are out there suggesting that people who hold both sell their gold and buy more silver, as if either of them stands any predictable chance of holding their value expressed in dollars. Recall what Kitson had to say at the end of Chapter III: “The paradox that the production of commodities tends at certain points to the lessening of wealth or of values, is the result of measuring wealth by money or by a commodity which is monopolized by a privileged class of society. Hence, when a particular want of this kind becomes satiated, the moneyed class are indifferent to that particular commodity; they refuse to pay any more money for it; its value falls to zero and it ceases to be wealth, notwithstanding that thousands of men who have no money may be dying for the want of this very commodity for which they would willingly give their labour. This evil is entirely due, as we shall presently see, to a monopolized, legally-restricted currency.” His observations constitute the supreme difficulty. That no commodity by itself can realistically qualify as wealth; mere “stuff” is not wealth, but rather only that “stuff” capable of producing a livelihood in terms of exchange for what “making a living” consists, further confounds and confuses understanding. It further confuses issues such as savings; retaining purchasing power, which too many people wrongly confuse with wealth preservation.
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 a bushel of wheat is to 1 yard of silk as 2 is to 15. The only form of expression for the relationship between commodities 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: firstly 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. This is a fundamental of science and of economic thinking.
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.
In order to avoid dealing with the fractional value of one cow, we will make them all its equivalent. From the exchange values above given we may conveniently tabulate the commodities as follows:
Butter in lbs. 100
Wheat in bushels. 60
Whiskey in gallons. 35
Silver in ozs. 50
Gold in ozs. 2
Shoes in pairs. 10
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 value to bushels of wheat, is expressed by these numbers directly, thus, 100 to 60; whilst the value of butter in pounds in terms of wheat in bushels is inversely as the numbers, thus 60 to 100, and so on with the remaining commodities. The relation of butter to whiskey as 35 to100; of cows to gold in ounces as 2 to 1, etc. This is the only expression of values possible. We recall a similar example was given by Riegel to express much the same thing. But of course Riegel indicated that such a scheme would not, nay could not last for all time, but perhaps only for a day or two. Differences between the commodities he regarded as evidence of “price relativity.”
But it may be argued that since the above commodities are all of equal exchange value, they may all be expressed in terms of one. Thus:
100 lbs. butter, 60 bushels wheat, 5 coats, 10 pairs shoes, etc., = 2 ozs. 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." (Ibid)
Let us suppose that we desire to find the exchange relation between horses and mules. In order to make this comparison we are supposed to know the value of each in terms of gold. (By the way, economists do not explain why it is easier to ascertain the value of a commodity in gold than in terms of any other commodity. For instance, why cannot the exchange relation between horses and mules be discovered at once in place of comparing both to gold? Is the transmutation of mules into gold a simpler operation than the transformation of mules into horses? “But the theory of money has proved that, far from being the measure of values, specie -gold and silver- is only their arithmetic, and a conventional arithmetic at that.” — System of Economic Contradictions. — Proudhon)
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. So therefore it is not the gold that expresses the value BUT THE RATIO OF THE NUMBERS OF OUNCES. -Emphasis Kitson's- In other words, it is the relation of the two quantities irrespective of the substance. The value of horses in terms of mules can never be determined by bringing a unit quantity of gold near them. It is obvious that the function here served by gold can be served by anything else, providing it is exchangeable. Precisely, our dear Kitson! As Riegel put it, the function of money is to split barter perfectly between buyer and seller and nothing more.
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 to 30. This selection of one commodity to which all others are compared, may constitute that one, in a certain sense a standard commodity, but it can never be either a standard or a measure of values. And for the reasons Kitson has indicated, Riegel was in total agreement; NO COMMODITY CAN SERVE AS MONEY in the universal sense, precisely because any commodity has whatever intrinsic value as a commodity and therefore contributes to the terms of the exchange / trade / barter. Because this is so, and precisely because bitcoin is in fact just another scarce commodity subject to speculation concerning its trade / exchange value, bitcoin is not true money either!
For instance, if our knowledge is confined to the relationship of gold to mules, we are as far from knowing the relation of mules to horses as ever. Let us put the matter into the form of a simple problem. Given a horse, a mule and a definite quantity of gold. It is required to find the value of horses in terms of mules. It is safe to say that no economist has yet been discovered capable of solving this problem.
A standard of measurement that fails to measure is a phenomenon that science is incapable of recognizing. The use of a commodity such as gold, is convenient merely in prizing and arranging other commodities one above another at a particular time. Good! But this does not constitute gold a standard of value. It is merely a standard commodity at the time at which the prizing or arranging was made. Yes. 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. Correct! 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. Exactly so!
Gold -or silver- is recognized as a standard because it is supposed to be more stable than other commodities. But as we have seen, gold fluctuates considerably in common with all other articles of merchandise. The mistake that economists have made, is in supposing that the commodity which was conveniently selected for comparing at a particular time all others, is a perpetual standard at all times and places. Yes! What was originally required of a standard commodity was to enable society to express values numerically by comparing all others with a particular one. Thus, when it was found that commodities would exchange for certain weights of gold, it was extremely easy and convenient to express the values of commodities, and range them one above another, using gold merely as their arithmetic. Exactly as Riegel saw it; money is the arithmetic of value and only that. 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 absolute 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. YES! Between this hour and the next, a change in its supply or demand may occur, and consequently its relation to all others, or in other words, its value, changes. An illustration will serve to make this clearer. Imagine a number of balloons moving upward and forward, the motions of each 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 position, 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. This is all exactly the problem as Riegel saw it.
It has been thought by many that a fixed standard of comparison which will not be subjected to the slightest variations 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 of any; 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. The same is true of any commodity capable of speculation, which includes ALL national or supranational currencies; dollars, yen, rubles, euros, any of them expressed in terms of aggregate bank credit at any given moment in time are ALL commodities, and so too is bitcoin!
Any commodity may be used for arranging prices at any particular time, so long as its exchange relations with all others is known. An absolute invariable unit, in terms of which prices may be ranged can be obtained by prizing commodities in tenns of some particular one at a certain time and never afterwards. BINGO! And congratulations, as Kitson said this in print a good fifty years ahead of Riegel, so Riegel was not the first to notice. For instance, if gold was taken as the standard commodity on December 31, 1894, and the so-called "standard of value" immediately abolished, the values of commodities would all be expressed in numbers which represented so many grains of gold on that particular day. No matter 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. This, ladies and gentlemen, is the heart of the matter concerning ANY real alternative to present money; the choice of a transaction at a particular TIME to serve as reference for the whole!
It must not be forgotten that this use of a commodity, to arrange the scale and values of commodities, does not constitute that commodity in any sense a " standard of value," since as we have seen, value is an abstract relation. Riegel steadfastly agreed with this, even “value measurement” was never considered possible using his Valuns. All that such a commodity can do is to assist us in ascertaining the relation of commodities by becoming a standard of comparison. When once these relations are ascertained and expressed, it is no longer a standard. This subject will be more fully treated further on.
The question at issue with the advocates of a "standard of value," may be thus stated: "Is value the property or quality of commodities or is it merely an abstract relation between them? 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, then it can be expressed only in terms of the abstract, viz. numbers.
To sum up, then, a standard measure of values is a physical impossibility. First, because values, like ratios, are only capable of expression, not of measurement. Second, because value can only be expressed by two quantities. Absolute value can only be expressed between two commodities at a given TIME; permanent value, as required by economists as a “standard of value” FOR ALL TIME is impossible. A single 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. It is, therefore, physically impossible for a "standard of value" to exist, and the term is seen to be just as absurd and meaningless as “the standard of equality " would be. Quite so! And glad Kitson brought “equality” up, because that too is an idealistic fiction in every last sense of the terms!