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Monday, March 26, 2012

20. Money

The Concise Guide To Economics

by Jim Cox

20. Money

As did language and customs, money evolved--evolved from the process of trade in barter (trading goods directly for goods).  It did not arise via vote or social contract or government decree. 
(This last statement may seem in conflict with the current experience wherein fiat money--money by government decree--is the norm.  Is this not an exception to money arising from a good in trade?  No.  The brilliant "regression theorem" of Ludwig von Mises demonstrates the original truth:  If one regresses through the history of our money it can be seen that the value of our fiat money is based upon the commodity value of gold.  The U.S. dollar was severed from gold in the international arena in 1971 and in the domestic arena in 1933.  Prior to these dates U.S. dollars were redeemable in gold at $35 and $20 to the ounce, respectively.  Without the experience of full gold redeemability a paper dollar could never have become a money.)
Barter however, had the problem of a double coincidence of wants--each party to the trade must have and be willing to trade for that which the other party has and is willing to trade.  As barter proceeded it was discovered by the traders themselves that certain goods were more readily accepted in trade than other goods, thus making those more readily accepted goods even more readily accepted in trade.  A snowball effect took place.  As this good became a standard in trade because of its widespread acceptance the problem of a double coincidence of wants was solved as money became half of all trades.  Having a money--a medium of exchange--facilitated trade and complex business arrangements. This effectively means money is important for human progress comparable to the wheel and fire. 
Money makes possible comparisons of value--a shirt can be bought for 1 gram of gold, and a camera for 5 grams of gold, for instance.  Having a common denominator measure of value engendered profit and loss assessment; without money one would have to list the entire period's exchanges under barter resulting in a huge array of exchanges with no common value.  Lastly, money serves as a store of value, carrying value comparisons over time, lengthening the time horizon available in carrying out productive work.  Notice that to the degree an economy suffers from inflation, money is a poorer gauge, distorting value comparisons, undermining it as a store of value and ultimately--during hyperinflation--failing as the medium of exchange as traders revert to a barter relationship.

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