Chapter IV
Standard Of Value
Some textbooks use the term, “standard of value”, as one of the qualities or functions of money (currency). It is stated that currency (money) is the standard which people use to measure the value of goods and services.
Let us examine that idea in order to determine [p. 43] whether or not people really use the items of the currency to measure exchange value.
First, instead of the word "value" it is more accurate to use the term "exchange value." There are a number of values which may be applied to goods and services. When we say that an item has exchange value we mean that the item has certain desirable qualities for which others will be willing to give goods or services of their own.
We must now ask, is there any government-set standard by which the giver and the receiver of an item can determine how much of one item must be given or taken in exchange for the other item? If the answer is yes, then it is clear that we have an established standard of exchange values to which we must conform.
While it is true that the government has established certain standards for coins and for a number of other items, such as weights and measurements, it has not established standards to which we must conform our idea of the exchange values of goods and services.
The government only establishes exchange value standards to which we must conform when it freezes or controls wages and prices. That system works moderately well only if the government continually adjusts the wages and the prices to correspond to the normal market prices which would prevail if there were no such controls.
The government has established a unit, called the dollar, with which we can express our idea of the exchange value of any goods or services. But the dollar unit is a standard that we use to determine or measure the amount of exchange value of goods and services. We know that the unit we use to express the weight of objects, the pound, is not the standard metal block kept at the Bureau of Standards. The weight of that block of metal is expressed with the concept unit called the pound. The word "pound" is the name of the unit used to express, not measure, the weight of that certain [p. 44] standard block of metal. The block of metal and the unit used to express its weight are two different things. The weight of an object is measured by the use of a scale and, then the amount of the weight is expressed in the units called pounds.
Although the government has not officially established standards for determining the exchange value of goods and services, there are standards which one may choose for the purpose of determining the exchange value of an item he is appraising. Every appraiser compares the item he is appraising with other items, the exchange of which he knows. Those other items are the standards he uses for the purpose of determining the exchange value of the item he is appraising.
Currency is an item with exchange value. So when a person gives or takes currency in a transaction he first appraises the exchange value of the currency, comparing it with the item having the highest exchange value for which it may be traded. That item will be the standard that he will use to determine the amount of the exchange value of the currency. For example, between 1934 and August 15, 1971, residents of foreign countries were promised by the government of the United States that each dollar's worth of U.S. currency they held could be exchanged for 1/35 ounce of gold. That was one of the standards these individuals could use at that time. They also were promised that U.S. currency could be exchanged for goods and services in the United States at the same exchange value as the currency held by the residents of the United States. That was another standard for them.
On August 15, 1971, the promise of the United States to exchange gold for foreign held United States currency was rescinded. After August 15, 1971, the items for which they could exchange U.S. currency were our goods and services. The amount of our goods and services that they could obtain for each dollar's worth of U.S. currency then became the most important standard for them to use to determine the exchange value of foreign held U.S. currency. [p. 45]
If a government agrees to accept a currency in exchange for a certain amount of gold or silver, or as a payment for taxes at an exchange rate which is higher than that offered by anyone else for that currency, then that exchange rate will be the standard which people will choose to apply to their currency. If at a later date, however, someone else offers an item with a higher exchange value for the currency, then that item will become the standard that people will use.
Thus, we see that people will choose for themselves the standard with which to determine the exchange value of the currency. And they will choose as their standard the item with the highest exchange value for which the currency can be exchanged.
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