These points were not monetary units. That is, they were not units of coins because no coins were used at that time by Peter Meyer or his customers. These points were abstract units. They were concepts used as units without exchange value in themselves. But when the units were applied to items by Peter Meyer, they expressed his idea of the exchange value that each item had in relation to the exchange value of every other item. [p. 52]
They were used as numbers are used. A number is an abstract quantity by itself. It must be applied to objects before it has meaning. The number ten means nothing by itself. But when we say ten boys or ten days, the number ten has a definite meaning.
If the point had no exchange value in itself, then what did it express? It expressed Peter Meyer's idea of the exchange value of each item in relation to the exchange value of each other item.
For example, if two points were applied to a bushel of wheat and six points were applied to a pair of shoes, it meant that Peter Meyer would exchange one pair of shoes for three bushels of wheat. A wheat grower, a shoemaker, or any other producer of goods could look at the point tags on the various items in Peter Meyer's store and determine how much of his product he would have to give in exchange for the items he wanted. In other words, the unit called "point" served the same purpose at that time as the unit called "dollar" serves now.
After Peter Meyer's customers became acquainted with the new system, they saw that they were making their exchanges for the same items in about the same ratio as they did before. They found that they now were negotiating the number of points applied to the items instead of the items themselves.
They also found that when they brought to Peter Meyer more points' worth of goods than the points' worth of goods they needed from him at that time, it was convenient for Peter Meyer to issue them a certificate of credit (a gift certificate) with which they could claim these extra points' worth of goods at a later time. The certificate of credit was a document that gave evidence of a claim for any of Peter Meyer's goods. This was a definite convenience which did not exist before the point system was adopted. The certificates of credit were issued in different denominations, such as one point, five points, ten points, twenty points, and in fractions of a point. For the fractions of a point, Peter Meyer [p. 53] adopted the decimal system. That is, he divided the point into 100 parts. Each part was called a centesimal point. Later, that was abbreviated to a centum point and finally, it was simply called a cent.
Note: The cent was not the name of a coin. It was the name of the unit used to express the exchange value of an item in the amount of 1/100 parts of a point.
The following are sample copies of some of his certificates of credit:
For identification purposes and to prevent loss from forgery and theft, Peter Meyer would keep a record of each certificate issued and each person who received the certificate could keep a record of the number on the face of the certificate and also write his name or identification mark on the back of the certificate. See the following sample:
Because each owner could be required to identify himself, no one would be apt to forge or steal the certificate. And if the certificate were lost or destroyed it would never be returned to Peter Meyer for redemption. So, after the redemption date passed, Peter Meyer could reimburse the owner in a manner that was mutually agreeable.
These certificates of credit were bona fide documents giving evidence of a claim for a specific number of exchange value units' (points') worth of goods hold for exchange by Peter Meyer. They were not coins. They were not money. They were not issued by the government. They were not issued by a bank. Peter Meyer had the right to issue them because he possessed the goods for which they were the evidence of a claim. Peter Meyer did not have to borrow them. No interest was paid for their use.
However, they were negotiable and served as the medium of exchange. They had the exchange value of the amount of goods for which they were the evidence of a claim.
The Point Became The Unit Of Account
Peter Meyer also learned that he could take an inventory of the exchange value of all his goods. He could keep an account of each day's business. Thus, the point was established as the unit of account. We see from this that the unit used to express exchange value was also the unit of account.
(Buying and selling is the exchanging (bartering of goods and services with the use of a medium of exchange. Exchanges are made conveniently when it is easy for those making the exchanges to obtain the necessary media of exchange.
By paying for the goods with certificates of credit Peter Meyer was, in effect, selling the equivalent amount of his other goods. All he had to do was just [p. 57] keep the items until they were called for. The fact that it was easy for Peter Meyer to buy with the use of certificates made it easier for the producers of goods to sell their products to him.)
This system of using points as the units of accounting and as the units to express exchange value (the price) with certificates of credit for currency, worked very well. People could express the exchange value and services in a fairly accurate manner. They could keep an account of the exchange value of all goods and services being traded. People could exchange (sell) their goods or services at one time and buy other items at a later time.
There was no shortage of currency because if a person had a surplus of wanted products, he could easily exchange them for Peter Meyer's certificates of credit. And those certificates of credit were accepted as bona fide currency because they were redeemable at Peter Meyer's Trading Center.
It was easy for Peter Meyer to pay for the goods he bought because he did not have to borrow or pay interest or go into debt to obtain the currency. After he paid out the certificates of credit, they would circulate as media of exchange until someone returned them to him for redemption.
When Peter Meyer received the goods, he issued his certificates of credit as payment. Those certificates were bona fide evidence that the bearer had a demand claim for the equivalent amount of any goods held in his store.
Note: There was no opportunity for anyone to cause an inflation of the currency because no inflationary certificates were issued. Every certificate was redeemable on demand. Peter Meyer had the goods on hand at the time he issued the certificates.
And Then a Silver Coin Was Made
At the same time in the same village of St. Joachimsthal, a count by the name of Schlick was operating a [p. 58] silver mine and a silversmith shop. His mine at that time was the largest and the most productive silver mine in Europe. He sold silver products to silver buyers even in neighboring countries. He made various articles out of silver, such as silver platters, silver cups, and silverware. But, he still had a surplus of silver. So, in 1519 he made a large silver coin which bore the image of St. Joachim.
St. Joachimsthal was the name of the village and the large silver coin was given the name of the village. Each coin was called a St. Joachimsthaler, just as each automobile made by Henry Ford was called a Ford.
Because St. Joachimsthaler was a long name, people began to call the coin a thaler. In some German speaking areas it was called a taler. At that time the word "thaler" was not the name of the common denominator unit to express exchange value. It was not the name of the unit of account. It was only the name of a coin. At that time the word "point" was the name of the common denominator unit used to express exchange value and it was the name of the unit of account.
If we fully understand that there is a difference between a coin and a common denominator unit used to express the exchange value of goods, services, and coins, when later the word "thaler" or "dollar" is used to mean either a. coin or a common denominator unit used to express exchange value.
A large number of these thalers were made and were used in the German speaking countries. Similar coins with similar names were made in other countries. In Denmark the name of the coin was daler, in Holland, dalder, in Italy, tallero, in Poland, talar, and in Spain, dollar.
All of these names were derivations of Joachimsthaler. In 1873 Germany replaced the thaler or taler with the mark as the name of its coin or monetary unit. The mark at that time was equivalent to half a thaler.
Count Schlick offered to exchange his newly made thalers for food, tools, and supplies at Peter Meyer's [p. 59] Trading Center. After some negotiating, they agreed that each thaler would be exchanged for one point's worth of Peter Meyer's goods. That meant that each coin had an exchange value of one point's worth of Peter Meyer's goods.
Count Schlick was happy with the arrangement. He could, with the thalers he produced, obtain the supplies he needed for his family, his mine, his silversmith shop, and also pay the wages of his employees. His employees could exchange their earned thalers for the goods they needed at Peter Meyer's Trading Center. They knew that they could obtain one point's worth of goods for each thaler.
The Thaler Coin Becomes a Certificate of Credit
For some time Peter Meyer stored and exchanged these thalers as he did the other items he stocked. He and others considered the thalers only standardized pieces of silver, which were worth whatever their silver content was worth.
Count Schlick was producing a large quantity of the thalers. So many were brought to Peter Meyer that he became overstocked. He decided that he could solve the problem by giving to his customers thalers in place of his certificates of credit. When a customer had, let us say, five points' worth of goods due him, Peter Meyer would give him five thalers instead of a five point certificate of credit. He promised the customer that each silver thaler coin would be accepted by him as a payment for one point's worth of any of the goods he was offering for exchange.
By making that promise and applying that promise to all silver thalers, each coin became a certificate of credit for one point's worth of his goods. Each coin was the evidence of that promise; it was the evidence that the bearer had a claim for one point's worth of Peter Meyer's goods. It was accepted equally with the certificates of credit. Peter Meyer's verbal promise, [p. 60] which he applied to the silver thaler, was equal to his written promise on the certificate of credit. The silver thaler coin was the physical evidence of that promise.
After that promise was made and applied to every thaler coin, every thaler coin had two exchange values. It had the exchange value of a one-point certificate of credit issued by Peter Meyer and it had the exchange value of the silver content of the coin. Both of those exchange values were equal at that time. But both values did not remain equal.
Peter Meyer Made a Mistake
Peter Meyer used poor judgment when he applied his promise to all thalers. He did not foresee that every thaler made by Count Schlick would become, in effect, his certificate of credit. Every thaler became the evidence of a claim for his goods. But the thalers were made by Count Schlick and Count Schlick had no right to issue certificates of credit against Peter Meyer's goods. Count Schlick did not intend that all the thalers he issued be used as certificates of credit against Peter Meyer's goods. Only the possessor of goods can, with justice, issue certificates of credit for the goods he possess.
Similarly, Peter Meyer had not intended to give Count Schlick the right to issue certificates of credit against his goods. But that is what happened when Peter Meyer promised to exchange his goods for all thalers at the rate of one point's worth of his goods for each thaler.
The Word "Thaler" Replaces The Word "Point"
As more and more thalers came into circulation, Peter Meyer and his customers began speaking of thalers' worth of goods instead of points' worth of goods. And as each thaler was exchanged for one point's worth of goods and one point's worth of goods was exchanged [p. 61] for each thaler, it seemed to make good sense to use the word thaler', as the name of the unit to express the exchange value of goods and services. A thaler was something that could be seen and put in a pocket.
Before the thaler came along, the point served very well as the name of the unit to express the exchange value of goods and services. Its meaning was understood. When the word thaler" became the name of the unit that expressed exchange value, it tended to blur the meaning of the word point." As time passed, the original meaning of the word point" was forgotten.
It is important to note that for some years the word "thaler" was only the name of the coin. It was not the name of the unit used to express exchange value. Only when the word "thaler" replaced the word point" as the name of the unit used to express the exchange value of goods and services, did the word thaler" gain two meanings: 1. The silver coin. 2. The unit used to express exchange value.
After a large number of thaler coins were in circulation, Peter Meyer stopped issuing certificates of credit. For the customers the coins seemed to serve as a medium of exchange just as well as the certificates of credit. Besides being evidence of a claim for Peter Meyer's goods, they had the exchange value of their silver content; they had an impressive image of the patron saint of the village; and many people liked to possess them.
While most of the people used the thalers as a medium of exchange and as claims for Peter Meyer's goods, some people hoarded them for their silver content. Previously, the certificates of credit were not hoarded because they had only one value, which was as evidence of a claim for Peter Meyer's goods. And they had to be redeemed within one year from the date of issue.
For Peter Meyer the use of thalers required less bookkeeping than was necessary when he issued certificates of credit. So he decided to change his price tags from points to thalers. [p. 62]
When he marked the price tags in thalers (the exchange value) the price was expressed in monetary (coin) units as well as in the units used to express exchange value. That is, an item could be exchanged for a certain number of thaler coins or for the same number of points' (now thalers') worth of other goods.
When the exchange value was expressed only in points, it meant that an item could be exchanged for a certain number of points' worth of Peter Meyer's goods, including thaler coins.
Peter Meyer also changed his account books from points to thalers. By so doing, the word "thaler" then became the name of the unit of accounting. To Peter Meyer the change from certificates of credit to thaler coins and from points to thalers as units used to express exchange value seemed so logical and so simple that he did not realize the consequences. So let us list the consequences of those changes:
None of these consequences was foreseen at the time by Peter Meyer or by the other people in the community. [p. 64] Count Schlick was mining silver and making silver objects, including coins. Other people were producing food, clothing, wool, shoes, and all the things the people needed. They were sharing (buying and selling) their goods with each other conveniently with the use of an adequate supply of coins. They had prosperity, not because the currency was silver thalers, but rather because they had a sufficient amount of currency.
But something else had taken place in the world. A man named Christopher Columbus discovered America in 1492 for Spain. When the Spaniards explored the new land, they discovered large deposits of silver in South America and in Mexico. They mined the silver and sold it all over the world. The result was a drop in the world price of silver.
When the people who had hoarded silver thalers tried to sell their thalers to silver buyers, they learned that their thalers would bring only 75% of the amount they formerly did. But at Peter Meyer's store they were accepted in exchange for other goods at the same rate as before because Peter Meyer had previously promised to accept them as if they were his certificates of credit at the exchange value of one point per thaler. The result was that many thalers (too many) were brought to Peter Meyer to be exchanged for his goods.
At the same time, the demand for Count Schlick's silver, his silver products, and his silver thalers was reduced. His business was declining. Peter Meyer could no longer accept his coins at the previous rate of exchange. So, in order for Count Schlick to have a market for his coins, he negotiated a deal with Peter Meyer whereby Peter Meyer would accept five silver thaler coins in exchange for the same items he formerly obtained for four thalers.
To carry out that deal, Peter Meyer raised the price of all his goods by 25%. The effect was that even though the thalers were expected to take the place of certificates of credit, they lost 25% of their exchange value when they were used as certificates. Had Peter [p. 65] Meyer not raised his prices, however, he soon would have been sold out of all his goods at a loss of 25%.
If Peter Meyer had continued the use of certificates of credit with the point system, instead of the thaler system, the price of the silver thalers would have been reduced and all other prices would have remained unchanged. People would have understood clearly what had happened.
As it turned out, those people who had previously hoarded thalers and those who had previously loaned out thalers suffered a loss of buying power. Those people who had previously borrowed thalers obtained an unearned gain. And few, if any, understood the reasons why.
What went wrong? First, Count Schlick, with the cooperation of Peter Meyer, attempted to keep the thaler's exchange value as a silver item up to its exchange value as a certificate of credit, even after the exchange value of its silver content declined. That was accomplished by the increasing of all other prices. Second, when too many thalers were brought to Peter Meyer to be redeemed (exchanged) for other goods, Peter Meyer did not have enough goods on hand to redeem those thalers unless he increased his prices.
If the point system had been kept as the means to express the exchange value of all goods, including the thaler coins, and if the certificates of credit had been kept as the items to serve as currency, no general price changes would have been necessary.
But when the exchange value of the thaler coins was fixed at a rate other than the market exchange value of their silver content, and the coins were used as a medium of exchange, the expressed exchange value (the price) of all other goods had to be adjusted according to the number of coins in circulation.
Instead of increasing prices by 25%, Peter Meyer could have said that since the price of silver declined by 25%, he would count each thaler coin as if it were 3/4 of a thaler. The people who held thalers would have had a [p. 66] 25% loss but the prices of all other items would not have had to be increased. But because he had given his promise (placed a fixed exchange value on the coins) that he would give one thaler's (point's) worth of his goods for each thaler coin, he could keep that promise only by raising all other prices.
Alternatively, instead of raising his prices by 25%, Peter Meyer could have insisted that the quantity of silver in each thaler coin brought to him be increased by 25%. Then no price increase would have been necessary. But, again, he would not have kept his promise.
A Lesson Was Learned
Count Schlick learned a lesson from this experience. He learned that when more thalers were in circulation than the amount that would have been issued as bona fide certificates of credit, the general price level was increased.
He then decided that he would limit or control the number of coins he produced and offered for exchange. He would establish coin control or what some now call monetary control. In this way he was able to maintain reasonable stability in the general price level. That is he did until his mine began running low on silver.
As his mine was being depleted, his production of silver was reduced. He produced a smaller number of thalers and fewer thalers were placed in circulation. The price of silver increased. The general price level of all goods and services declined.
Peter Meyer's business also decreased. People did not have the normal number of thalers for the normal exchanging of goods and services. Does this not show how unwise it is for people to use a money system that can cause a slowdown in business and require the lowering of prices and wages in order to maintain normal business?
The ratio of circulating thalers to the goods and services being offered for exchange was out of balance. [p. 67] The result was that the exchange value of each thaler was, in this new circumstance, increased. Similarly when the quantity of thalers in circulation was reduced, the persons who hoarded thalers and those who previously had loaned out thalers obtained an unearned gain. Those who previously had borrowed thalers suffered a loss because they had to produce more goods or services than before in order to earn the necessary thalers with which to pay their debts.
When Peter Meyer used the point as the unit to express the exchange value of goods, including coins, and issued certificates of credit which served as currency, there was no reason to have too many or too few certificates in circulation. The producers and the distributors of goods and services never suffered a loss because of too many (inflation) or too few (deflation) certificates of credit in circulation.
Certificates of credit were issued as the need for them arose and they were cancelled when they were redeemed for the goods for which they were issued as evidence of a claim. There was no need for monetary control or money management.
This is the end of the story of Peter Meyer and Count Schlick.
What Did We Learn From the Story?
The experience of Peter Meyer, Count Schlick and the people of St. Joachimsthal illustrates that when goods are exchanged by direct barter, the exchange value of one item is expressed in relation to the exchange value of one or more other items. For example, one cow has the exchange value of 5 pigs, or 5 pigs have the exchange value of one cow. No common denominator unit is used to express the exchange value of all items. No common denominator unit is used to keep an account of the exchange value of all items. There is no unit of account.
The story also makes explicit the fact that in direct bartering each party to the transaction determines the [p. 68] exchange value of the items to be exchanged at the time the exchange is made. No third party, such as government or a bank, is involved in setting the exchange value (the price) on any of the items to be exchanged. No debts are incurred. No interest has to be paid for the use of currency. No balance of payment surplus or deficits can occur.
Other object lessons of the story of Joachimsthal are: