What Is Money? Why Is It?

Most people, particularly economists, are unaware of not just what money is, but also how and why it came to be a part of our economy in the first place.

Money, contrary to popular belief, is not the source of all evil. However, tainted money (i.e., fiat money and currency debasement) is the source of a slew of economic, social, and cultural ills.

Yes, most people have a basic understanding of money. Furthermore, most people are unfamiliar with the concept of money. "It is well enough that the people of the country do not comprehend our financial and monetary system," Henry Ford said, "for if they did, I believe there would be a revolution by tomorrow morning." Indeed, today's fiat money system would not exist if money was thoroughly understood.

Money is inherently and first and foremost a vehicle of trade. A commonly accepted good (physical and increasingly also digital) that facilitates transactions inside and across communities. Economist Robert P. Murphy writes in his new book Understanding Money Mechanics, which I suggest because it presents an easy-to-digest yet thorough account of the theory, history, and practice of money:

A formal definition for money is that it’s a universally accepted medium of exchange. Menger’s explanation showed how such a commodity could emerge from its peers merely through voluntary transactions and without any individual seeing the big picture or trying to “invent” money.

Besides being a medium of exchange, money can and does function as a unit of account and store of value.

Medium of Exchange

Prior to the invention/discovery of money (remember, money is a market invention/discovery, not a state invention), early humans traded commodities directly—the barter economy (direct exchange society).

For a trade, an intentional and voluntary exchange of products or services to take place, let's say, between a hunter and a farmer, their desires must be compatible. A piece of meat from the farmer and a chunk of the farmer's potatoes from the hunter would be required. The coincidence of needs is what economists term it.

Money arose naturally as a solution to the problem of 'coincidence of wants,' ushering in a new, more efficient manner of dealing and a superior social system in general—the indirect exchange society. Money, as a medium of exchange, has enabled human communities to function as indirect exchange economies for thousands of years.

Unit of Account (A Measure of Economic Value) 

We use kilograms to measure mass, minutes to measure time, and liters to measure volume. Money, too, serves as a unit of account and a measure of economic value. Without a question, value is a subjective concept. Each of us values goods and services subjectively based on our needs, wants, preferences, perceptions, and circumstances. For further information, see the subjective theory of value.

When I remark that money as a unit of account assesses economic worth, I'm referring to the fact that it is the objective monetary standard by which subjective economic transactions are measured. Fundamentally, prices are exchange ratios between products and services. Prices are quoted in money in indirect exchange societies. As a result, money is a tool, a monetary measurement that all products and services are compared against.

If a bouquet costs fifteen euros, for example, the fifteen euros represent the objective monetary measurement against which individuals, or groups of persons, will subjectively judge the bouquet as expensive/unaffordable, reasonable, or cheap at the time. Potential purchasers use this information to decide whether to buy it now, later, or not at all.

Another example is that one US dollar is one US dollar and has been for more than two centuries. It's a different question whether one dollar now buys the same quantity of products or services as it did yesterday or twelve years ago. Similarly, no matter when or where, an ounce of fine gold is an ounce of fine gold. Money serves as an absolute monetary standard for assessing economic worth in this way. As a result, overall economic activity.

The price mechanism is enabled by the unit of account/measure of value function of money. As a result, individual, family, corporate, and societal economic calculations are now available. Furthermore, it enables profit and loss accounting. Accounting for profit and loss is critical for establishing the best (most efficient and productive) ways to allocate and manage (limited) resources.

Store of Economic Value

Money, third, serves as a store of value. Participants in the market accept a certain currency as payment for transactions because they believe and/or know that they will be able to purchase goods and services with it now, tomorrow, or in the future.

Modern money (for example, fiat currencies, cryptocurrencies, silver, and gold) can serve as a medium of exchange (transaction intermediary), a unit of account (measure of value), and a store of economic value all at the same time. This is the situation with today's national currencies, which are closely intertwined in their money operations.

Modern society cannot live without the store of value function of money. Because a means of holding economic value allows for savings (capital accumulation), investments, entrepreneurship, and the production of commodities and services.

Money is a mechanism for moving economic value from the present to the future in this context. Savings, investment, entrepreneurship, and production are all represented in the commodities and services accessible for consumption today.

Similarly, the commodities and services available for consumption in the future will inevitably reflect and represent the current savings (and, of course, capital goods, which began with savings), loans, investments, production, and entrepreneurial activities.

Money: Why Is It?

Why not abolish money to end tyranny, poverty, greed, and injustice in the world? Money is a moral and necessary tool that modern society cannot function without.

Because of the critical economic, social, and moral roles that money plays, it must be as stable, trustworthy, and incorruptible as feasible. When a society's money is sound and independent of politicians and bureaucrats (who have historically been the primary perverters of money), it becomes a powerful enabler of social stability, economic prosperity, and freedom.

Money, on the other hand, may be a tool of evil when corrupted and politically exploited, with terrible economic, social, and moral implications. As evidenced by the numerous instances of hyperinflation throughout history. Zimbabwe, Venezuela, and Lebanon are the most recent examples.

This is why fiat money, which is an unbacked and inconvertible currency with a limitless supply, should be shunned because it is notorious for being unstable and disastrous. Fiat currencies are inherently insecure, prone to inflation, and readily tainted. Worse, fiat currencies do not withstand the test of time and have a long history of failure.

Money Enables Indirect Exchange

As previously said, modern civilization is predicated on the indirect transaction made possible by money. As a result, one of the most significant discoveries in human history is the concept of money. It is the philosophy that has allowed humanity to progress from a primitive stage of existence to today's modern society and living conditions.

Modern civilization as we know it would come to an end if money were abolished, and living standards would plummet. Because barter—a straight transaction society—is impractical, money must exist.

Because of the "coincidence of requirements" problem, the barter economy is antisocial and severely limited. Trade, progress, and human collaboration would be severely limited, and civilization would revert to its prehistoric state.

Barter was impractical even then, and it is even more so now. Without this magnificent tool known as money, today's societies would collapse. The advantages of indirect exchange for society and human advancement are immeasurable.

Money Enables Specialization

We live in indirect exchange societies because of money. As a result, rather than having to be a jack of all trades, people can specialize in specific tasks. You don't have to cultivate your own food, build your own house, fish to eat fish, or do any of the other duties that barter societies required you to undertake alone, with your family or tribe.

It is also unnecessary to obtain goods and services by the use of force or violence. Instead, you can generate items or services based on your natural or taught ability, sell them in the market, and use the proceeds to meet your and your family's needs and goals.

This is how labor is divided. Money is the means by which society's division of work is feasible.

The division of labor has numerous advantages that go beyond providing individuals with a better, cheaper, and expanding pool of goods and services to pick from. The division of labor also encourages social collaboration, friendship, increased trade, cultural exchange, knowledge sharing, and other benefits.

Money's civilizational and cooperation-enabling nature is as follows.

Money Communicates

The market economy outperforms other options because it is more efficient, effective, and timely in allocating resources for the production, distribution, and consumption of products and services, among other things.

This is made possible by the price mechanism, which transmits information, signals, incentives, and disincentives to market participants in the dynamic and never-ending process of determining when to allocate capital, what to produce, where, how, by whom, for whom, and what to consume and where to buy goods and services.

This occurs on a completely decentralized and voluntary basis. A central planning body is unnecessary. Government pressure, control, and command are unnecessary.

Money has made this feasible in a magnificent way. By monetary values. In essence, this is how money prices communicate and coordinate a market economy to achieve a level of economic progress, individual and communal success that no other system can match. The price mechanism (i.e., the free price system) has incredible power, which Adam Smith referred to as the "invisible hand."

Money Enables Cooperation 

Human collaboration is severely limited in a direct transaction society, and life is primitive. Money is both an incredible economic instrument and a necessary tool for large-scale peaceful and voluntary collaboration within and between communities since it enables indirect exchange and hence the division of labor.

For example, I have a friend whom I met five years ago at a vehicle sale. I'm sure you've had a similar experience. Through a business transaction, a person has become a friend or acquaintance. People who met through a commercial transaction and went on to raise a family are not uncommon. The majority of our buddies are folks we meet at work. Most individuals are unaware that money is the fundamental mechanism that facilitates the division of labor and consequently large-scale social cooperation, as self-evident as this may appear.

Money Enables Human Progress

As I previously indicated, one of the most important discoveries or creations in human history is the concept of money. That is because humanity would still be in a primitive state of existence if it did not have money—the barter culture. Human living standards have increased dramatically over thousands of years, particularly in the last few hundred. Progress in the areas of money-based trade, savings, investments, and entrepreneurship has occurred and continues to occur.

It's like a domino effect. Money facilitates the indirect exchange society, which promotes the division of labor, more trade, capital and knowledge accumulation, increased productivity and production of products and services, and a constant rise in living standards. It goes without saying that there will be ups and downs, trials and blunders along the way.

Conclusion 

Money is a moral and necessary tool for facilitating transactions, measuring, storing, and transferring economic value. Money allows the indirect exchange economy (modern society) to exist, as well as the division of labor and the transmission of important signals that help to manage the market economy in a decentralized, voluntary, and harmonious manner.

Money, being an instrument with ramifications in every element of human life, must be as stable, trustworthy, independent, and incorruptible as feasible. Money becomes a tool of systemic inequalities and oppression when it gets corrupted and politically manipulated, even while it continues to perform its essential functions.

Because the form of money a society uses has such a huge impact on whether it will succeed or eventually fall, anyone who values justice over injustice, prosperity over poverty, and liberty over tyranny must oppose fiat money regimes and support sound money.
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