Money

What is Money?
by Cameron Nehrer

According to most definitions given, money is a good that acts as a medium of exchange in transactions.

So where as person A buys an item from person B
Person A provides a certain amount of money, or price, in exchange for person B's good.

But in order to understand this definition lets go further back and ask Why do people exchange at all?

Lets define Exchange as an agreement between two subjects to transfer the goods or services of one man for the goods or services of another.

Exchange is the foundation of an economy. Voluntary Exchanges happen only when both parties involved expect positive net benefits. Or Positive Utility. Or simply put... Exchange occurs because both parties expect to be happy as a result of the transaction.

Obviously a rational person would always value or expect to value what he recieves more than what he gives up in a transaction.

So If Person A exchanges 2 ounces of silver for Person B's 35 pounds of wheat; than
It can be said that...
Person A values the 35 lbs of wheat more than his 2 ounces of silver and
Person B values the 2 oz of silver more than the 35lbs of wheat.
The exchange would never take place otherwise.

This does not mean that 2 oz of silver and 35 lbs of wheat have any sort of underlying equality to them.

Remember, the exchange only happened because each party valued the two products in different order.

So you can start to see that this is not a zero-sum game.
Both parties benefit from the transaction.

Murray Rothbard once said that,
"Exchange is the lifeblood, not only of our economy, but of civilization itself."

Because of the great variety in nature and man, and the diversity of location of natural resources exchange has become universal among mankind.
We use it every day and we have become very much dependent on its practice.
Remember that without exchange, everyone would have to become self-sufficient.

So exchange in society enables people to specialize in the production of certain goods and services, because they can rely on exchange for there other necessities.

Take this for example:

A carpenter can exchange his furniture for food, shelter, etc
A fisherman can exchange his fish for food shelter, and furniture.

The carpenter can than focus on building the best furniture without having to go out and spend the time fishing in order to get food, Because he can exchange furniture for food.

And the fisherman can focus on catching as many fish as he can without focusing on building furniture for his house, because he can exchange his fish for furniture.

Now in this case the fisherman and the carpenter are much better off then they would be if they were required to be entirely self-sufficient. That is, it takes less time and effort for both of them to acquire their fish and furniture as a result of exchange.

What I have described in the example was a small barter economy between the fisherman and the carpenter. But it is easy to imagine that , in the real world today, this little barter system is relatively primitive and would probably not work out so well.

The two basic problems with a barter economy are
"indivisibility" and "lack of coincidence of wants".

To illustrate these two problems lets think about this.....
say Person A had a horse,
which he would like to exchange for several different things.
Maybe he wants to get milk, eggs and some clothes.

Well how could he break apart his horse and give part of it to the farmer and part of it to the tailor?
He can't.

Maybe then Person A found a fisherman who offered him 30 fish for his horse. Person A, thinking that he could divide the fish and then sell them seperately , accepts the fisherman's offer.

So Person A goes to the farmer, and it just so happens that the farmer is willing to exchange his milk and eggs for fish. Here there is a coincidence of wants between the farmer and person A. But what happens if person A can't find a tailor who wants fish.
There has to be a coincidence that both parties want what the other offers.
So it is clear that a civilized economy is nearly impossible under direct exchange.

With money, the two problems that faced the barter society completely disappear. Through out most of the history gold and silver has been used most often as money. In the early stages of civilizations money was emergent and unrestrained by any government action. So many other things have served the purpose that money does. In addition to gold and silver; oxen, cowry shells, tobacco, skins, wagon wheels, corn, cacao nuts, tea, etc have been used as money. All of these items fit these certain qualities; some better than others of course. The best being gold and silver.

Qualities Of Money

-Utility and Value-
That is, each item or piece of money can be used or valued in a way independent from the fact that it is used as money.

-Portability-
The material of money must be valuable, and that value must be related to the weight and bulk of the material. It must be a convenient size in order to use. For example nobody would use iron money, because 1 penny worth of iron would weigh a pound. You could imagine how inconvenient it would be to pay somebody 5 tons of iron for a gallon of milk and a dozen eggs.

-Indestructibility-
In order for money to be exchanged in the market and kept in reserve money must not be subject to easy deterioration or loss. So you can see why gold and silver fit this quality better than oxen, corn, and nuts. Oxen, corn, and nuts will overtime breakdown or decay.

-Divisibility-
Money must be easily divisible. And the division of the material must not effect its value. For example, if you divide a wagon wheel in half your left with two pieces of the wheel that are not as valuable now because they are split apart. If you divide an ounce of gold in half, each 1/2 oz piece contains half of the original value of the full 1 oz piece. Nothing is lost in the division of the material of money. The gold could even then be melted back into a 1 oz piece again if desired.

-Homogeneity-
All portions of specimens of the material money used should be of the same quality, so that equal weights will have exactly the same value. For example, tobacco as money is not very homogenous because some tobacco leaves could be fresher than others making them of more value than dried out tobacco leaves. Same with oxen, some could be healthier and as a result would be worth more. But an ounce of gold is an ounce of gold.

-Stability of Value-
It is desirable that the material money used maintains a stable value. That is, a material money of minute inflation or deflation. Inflation being the increase in money supply, and deflation being a decrease in the money supply. We all know that when something has a limited supply it usually gains value. Think rare baseball card, or collectors coins. Or if something has an abundant supply it possesses less value.

There are other qualities money can take on, but I feel these are the most important.

Unfortunately, we have a cartel running the production of money. In the U.S. today there are legal tender laws which force us to use fiat paper currency issued by the Federal Reserve. The currency we use does not posses much of the qualities listed above. Our dollars are not backed by gold or silver and are merely pieces of paper with numbers on them. A one hundred dollar bill and a one dollar bill have no difference in weight, and they both cost the same to produce. Unfortunately the dollar's value rest upon the amount of money printed into circulation by the Federal Reserve. This is an unsafe and unstable currency that will create problems for the majority of society.