The Money Matrix – What Makes Money Money? (PART 3/15)

nickelMoney gradually evolved from societies from barter (or direct exchange) economies to economies based on indirect exchange. Under indirect exchange, Joey sells his chickens’ eggs for money and then either buys, say, a wrench from Bob or saves the money for future use. If one looks at this with an economist’s eye, Joey exchanged his commodity (eggs) for another commodity (money) and then either saved the commodity or exchanged it yet again for another commodity (Bob’s wrench). Hence money is actually a commodity just like corn, copper, or even an Ipod, if you follow the literal definition. This is a truth that few seem to recognize or fully appreciate its implications.

This system of indirect exchange, writes Murray Rothbard (see Part 1’s “What Has the Government Done with Our Money?”) is “at first glance… a clumsy and round-about operation. But it is actually the marvelous instrument that permits civilization to develop.” As long as Joey can find a market for his eggs, he can exchange them for money before the eggs spoil and then exchange the money later at a time of his choosing for any other good he wants. Bob does not need to barter his wrench for food, he merely has to find a market to sell his wrenches for money and wha-lah! specialization and quality are born, and Bob can feed himself. Money hence serves as a medium of exchange, and Rothbard comments its other attributes, like serving as a store of value, are merely corollaries of this.

So over time, people developed different types of money. Colonial Virginia used tobacco, ancient Greeks used cattle, Egyptians used copper, Tibetans used dried yak dung, etc. Europe’s kings for instance, used these wooden royal tally sticks as money for the better part of a millennium and well into the 20th century. It may seem a little silly, but the British Empire and Navy arose by a people using these twigs as money for over 700 years! Tally sticks were highly successful since they had a limited supply and were virtually impossible to counterfeit. It is my bet that future Americans will one day look back and break into outright laughter at today’s use of the Federal Reserve Note (see Part 2) as just plain absurd. A return to Austrian economics' principles is starting to beckon, more on this later as the series continues.

Pictures Source1, Source2, Source3

Now what are the Ron Paul Requirements for good money? What makes money money?

  • Durable – money should not wear out easily. For instance, food would make a poor currency as it spoils.
  • Easily Divisible – money should be available in denominations large and small enough for different ranges of purchases
  • Portable ­– money should be easy to transport. Carrying around iron barbells that equal the worth for a house, for instance, would be quite difficult, or even special stone tablets.
  • Recognizable and Uniform – every unit of money for a given denomination should be the same. If gold jewelry is used as money, how will the parties know exactly how much gold is in the jewelry as opposed to a standard coin? Diamonds would also not work well as the quality levels differ from diamond to diamond.
  • Stable Purchasing Power – if the purchasing power fluctuates wildly, people would not want to use it. Cocoa beans or jelly beans might be a fairly uniform commodity by weight, but what if people in the society frequently change their valuation of its purchasing power over time, for whatever reason?
  • Scarcity – money must be scarce in the economic sense – if everyone has all of the dollar bills they could ever possibly need, what would be the point? Same thing if one decides to use dirt as a currency, everyone would have as much as they could scoop up.
  • Reproducible – money needs to be reproducible so that enough units can be created to satisfy the needs of exchange. Using meterorite remains or some rare earth metal would restrict the ability of the money supply to meet this need.

Can you think of any other requirements for good money? Disagreements?

Coming up in Part 4 – what are the different types of money? What is the “best” currency and why?

The Money Matrix – Prelude (PART 1/15)
Published: August 1, 2008
Prelude and Source List to a Series on Global Monetary Policy of Control and Explaining Big Government's Finances

The Money Matrix – What is a Dollar Bill Worth? (PART 2/15)
Published: August 2, 2008
“Living so free is a tragedy when you can't see what you need to see!” – Powerman 5000 'Free'

The Money Matrix – What is Honest Money? (PART 4/15)
Published: August 7, 2008
“If You Don't Know Who the Sucker Is, Then It's You!” The Money Matrix series rolls on by asking 'What are the Types of Money?' and 'What is the “Best” Currency and Why?'

The Money Matrix on the Grand Deception of Seigniorage (PART 5/15)
Published: August 24, 2008
“Do not give in to evil, but proceed ever more boldly against it.” The Money Matrix explores Seigniorage as Legalized Silent Plunder with an introduction into medieval and modern banking.

The Money Matrix – How the FED Works (PART 6/15)
Published: November 17, 2008
A step-by-step explanation of how the Federal Reserve, America's Central Bank, can manipulate monetary policy.

The Money Matrix – What the Heck Are Derivatives? (PART 10/15)
Published: December 9, 2008
This article seeks to define financial derivatives and why they are so important. Future and spot market basics are also examined so the Reader understands how the price of gold and silver is determined.

Police State Invades Mayor's Home & Kills His Dogs
Published: August 1, 2008
“It was inconceivable to me that my government would be coming through my door.” – the Mayor of Berwyn Heights, Maryland, or a recent police raid on his residence

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