The Money Matrix - What Makes Money Money? (PART 3/15)
A quick history of money per Rothbard followed by the properties of money per Ron Paul by Jake Towne, the Champion of the Constitution
Sunday, August 3, 2008
Money 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.
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?
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Rather than "Portable", I would say money must be "Easily Transferrable". Take electronic money for example: I can't really port it anywhere. Its location is stationary in a database somewhere, but as long as long as I can easily swipe my card wherever I want to shop, it's readily transferrable. Portability implies transferability, but it is the transferability that is important.
Â Also, I have a challenge to your commodity definition of money. You can thank Stephen Zarlenga for this, because I have been reading his work. I agree with his definition of money as an artifact of law. If it were truly a commodity, it would have intrinsic value, independent of law. Wouldnâ€™t it? But certainly our dollar bills are void of intrinsic value. They have value because legal tender laws require that we accept them as payment of debt, and because the government accepts them as payment of taxes, fees, etc. So I would argue that your second definition of money as a medium of exchange is accurate, but that the commodity definition is flawed. After all, no one wants money for moneyâ€™s sake. They just want the power to buy things that money grants them. Its value is symbolic only.
...Also, for clarity, I would say this is true even if the money happens to be made out of gold or silver. Sure, coins are nice and pretty, but most people wouldn't careÂ to own them unless they held some hope of exchanging them for something else in the future.
Posted By: Jake, the champion of the constitution
Date: 2009-01-01 21:32:17
Dear PhiRatio -
Sorry, didnt see your question till now.Â I have not read Zarlenga's book.
The above is really the Austrian/ free market/ laissez faire definition of money.Â Try Mises regression theorem in Human Action which states that all (Austrian) money first orginated from free market use.Â From my studies of past cultures to date, gold and silver have unchallenged and successful (though certainly not flawless) records as currencies.Â And, indeed, much of the problems with gold and silver came from gov't interference - or "law" per Zarlenga? seems a little silly to me as fiat basically means decreed by law - not the free market.
That said, wouldnt mind taking a gander at this Zarlenga stuff, thanks for the idea.