What is Money?


According to Wikipedia, money is “any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context.”  Emphasis should be placed on the exchange function of money since it is that role alone which creates the need for money.  Before asking whether modern money should actually be considered money at all, we need to take a quick trip into history in order to refresh ourselves with the birth of money.

Back into pre-history man was completely reliant upon himself and his immediate family for all of his needs.  As a hunter-gatherer, man had no conception of trade and therefore had no need for a medium of exchange.  However, as the human population expanded, the proximity between families and tribes became closer and they eventually realized that others were more suited to certain items than they were.  As time progressed, these tribes and families began trading with one another by means of barter.

Since the division of labor increases total output, the tribes and families slowly began to specialize in one or more areas of production.  Unfortunately, direct exchange (or barter) can be difficult if nobody wants what you possess at that very moment.  For instance, suppose one family traps rabbits and one family gathers eggs.  The family with rabbits would likely be willing to trade a few rabbits for a couple dozen eggs as is likely that the reverse is true.  But what should happen if the family with rabbits runs out of eggs prior to the family with eggs running out of rabbit meat?  They will run into the predicament of not being able to effect a trade unless they offer a greater number of rabbits for a lesser number of eggs.

Similarly, as we add more products to our growing market, participants will realize that they may not be able to trade a piece of furniture for a loaf of bread or the construction of a barn for a sufficient number of goods they desire.  So rather than not trade at all and have their goods potentially go to waste, market participants began to trade for a common good which they didn’t necessarily desire in itself but rather in order to trade to someone else for a good which they did desire.  Thus was born the medium of exchange or money.

Money was a vitally important invention in human history because it allowed further specialization and a greater division of labor.  Now a person could focus solely on manufacturing kitchen tables and not have to worry about whether he would be able to trade his table for a desirable array of goods in return.  Rather, he could trade his table for money and then use his money to purchase those goods which he truly desired and needed.

So we now get back to our original question, should modern money actually be considered real money?  Yes and no.

It is generally accepted that there exist a few primary characteristics of money.  These are: (1) acceptability, (2) durability, (3) transportability, and (4) divisibility.  Let’s run through these in reverse order.

Divisibility.  Money should be able to be used to purchase items of a wide variety of perceived values.  Market participants should not have to utilize different monies to purchase goods of varied values.  Modern money works exceedingly well in this regard since it is exceedingly simple to print paper with various denominations (i.e. declared value).

Transportability.  It should be obviously clear that market participants need to carry their money with them to the point of transaction.  Modern money neatly folded in a small wallet takes the cake over having to lug around a sack full of heavy coins.

Durability.  Money needs to be able to sit in a vault or under the mattress for long periods of time while retaining its form and value.  For this reason alone numerous items are unsuitable as money regardless of how divisible or transportable they may be.  Modern money does a reasonable job at retaining its form for long periods of time but fails miserably at retaining value.  More on this in a moment.

Acceptability.  Finally, money should be easily recognized as such and widely accepted by both producers and consumers (we’ll ignore the fact that everyone is both a producer and consumer).  A producer should not have to worry whether the money he receives for his goods will be able to purchase raw materials for further production.  Similarly, a consumer should not have to worry whether the money he receives in exchange for his labor will be able to purchase consumer goods in the future.  In this respect, modern money works well in the short term but fails in the long term.

Let us consider the famous story Treasure Island in order to illustrate why modern money fails with durability and acceptability.  Towards the end of the story, the buried treasure is discovered and the main character describes what they found:

“It was a strange collection, like Billy Bones’s hoard for the diversity of coinage, but so much larger and so much more varied that I think I never had more pleasure than in sorting them. English, French, Spanish, Portuguese, Georges, and Louises, doubloons and double guineas and moidores and sequins, the pictures of all the kings of Europe for the last hundred years, strange Oriental pieces stamped with what looked like wisps of string or bits of spider’s web, round pieces and square pieces and pieces, bored through the middle, as if to wear them round your neck – nearly every variety of money in the world must I think have found a place in that collection; and for number, I am sure they were like autumn leaves, so that my back ached with stooping and my fingers with sorting them out.”

Probably without realizing it, Robert Louis Stevenson illustrated a major difference between modern fiat money versus “old-fashioned” commodity money.  The treasure chest was filled with coins of known origin and perhaps still traded but it was also filled with many unfamiliar coins of mysterious origin.  Even the coins with uncertain minting were accepted as objects of high value simply because of the material they were created from.

Imagine if Jim Hawkins had discovered a treasure chest full of paper money from the various nations rather than coins of gold and silver.  It can be assumed that the chest was buried for quite some time and that many of the issuers of the bank notes were now defunct nations.  In this case, other than for the role of collector’s items many, if not most, of the money in the chest would be nearly worthless.

Today we find nearly every government in the world printing paper money as fast as they desire resulting in the near destruction of accumulated wealth by many people. This paper cannot be redeemed for anything other than what another person is willing to part with in voluntary exchange.  Very soon people will begin to realize that fiat paper money is literally not worth the paper it is printed on and will demand a real money which cannot be manipulated by a government to suit its own purposes at the detriment of the people.

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