What is a Standard of Value?

Standard of value is the term for the commodity in a society in a commodity against which all other commodities are measured. In the United States, for example, the standard of value is gold, meaning that all other commodities are measured by how much they are worth in gold. Monetary systems are created by giving a name to a specified amount of the determined standard, such as the way the U.S. designates a certain amount of gold to equal a dollar. Without such a concept, the trading of goods and commodities would be nearly impossible because the different systems used by various merchants and sellers would lead to an infinite amount of standards that would be practically incomprehensible.

The concept of standard of value has been practiced by all remotely advanced civilizations through time for the simple reason that trade wouldn't thrive without its existence. By establishing a standard, each member of the society can quickly measure how much different goods are worth and decide whether or not they have the means to purchase such goods. In the same manner, those who produce the goods and commodities can decide how much they need to produce to turn a profit in order to purchase the goods they need, and so on.

From the standard of value comes the concept of currency and money. Using the U.S. as an example once again, the U.S. Congress decided that, having established gold as the standard, 23.22 grains of gold would equal $1 US Dollar (USD). The dollar thus became the uniform recognized currency of the U.S., allowing citizens to measure all goods and commodities in terms of dollars. With this stable monetary system in place, citizens can arrange aspects of their lives such as their jobs and purchases in terms of a budget, knowing how much money they need to survive and thrive.

In the absence of a standard of value, a chaotic situation would be practically impossible to avoid. An individual producer of goods would have her own idea of how much her product was worth, but would have no idea of how much other commodities would be worth. Even if trades between two commodities were made, the individuals would then only be able to compare those products in terms of each other. It would be of no help once they moved on to trade their product for a different commodity.

Establishing a standard of value gives a society the ability to commit limitless transactions. The chosen standard is usually determined by whatever commodity is held in highest esteem in a specific society. It also has to be well known to all members of the society so that no one would be eliminated from understanding the worth of specific products.