>> January 31, 2020
>> Blog Post #22
Rothbard is extremely methodical and concise in his explanations. Here are notes that follow his explanation of what money is and how money came to be. Note that once again, you have an early assumption which is that we are considering money in a free society.
Some of the examples are my own, for brevity reasons
The value of exchange
- Money wasn’t created out of nothing.
- You don’t need money to conduct an exchange.
- For example, you can exchange fish for lumber.
- Without exchanges, there would be no economy and practically no society.
- Take the fish for lumber exchange:
- For centuries, people have mistakenly translated that mathematically by A = B. That is incorrect. (people such as Aristotle or Marx for example)
- Voluntary exchange happens because both parties to the exchange benefit.
- The first party will conduct the exchange because it values A over B. (A > B).
- The second party will conduct the exchange because it values B over A (B > A).
- They value the products being exchanged in different order.
- Exchange is universal because of the
variety in nature:
- Human needs and wants,
- Diversity and location of resources in nature.
- Specialization enables
- Man, to develop his best skills,
- Regions, to develop their particular resources.
- If man was forced to be self-sufficient, he would barely survive.
- Exchange is the lifeblood not only of the economy, but civilizations itself.
Barter – Direct Exchange
- Direct exchange of goods and services would barely suffice to sustain an economy.
- Barter is barely better than self-sufficiency.
- Problems that you face with barter
- Divisibility: how to you exchange a house for a few grams of salt?
- Coincidence of wants: do you need to exchange a house as often as you need salt?
- Born out of trial and error.
- Indirect exchange: instead of selling A for B, you will sell A for C and then C for B.
- Indirect exchange although it feels inherently more cumbersome, is actually very efficient.
- People will trade for an
intermediate commodity if they believe acquiring it will help them trade for
the end product they want. Those intermediate commodities may possess sought
- The advantages one media has over another, will increase its marketability. And the more a commodity is marketable the more it becomes even more marketable.
- Eventually some commodities become so marketable as a medium of exchange that they are used extensively.
- Such a media is called money.
- Some examples of money through time: tobacco, sugar, salt, cattle, nails, copper, grain, beads, tea, fishhooks.
- Two commodities have emerged over the centuries as the better money, displacing other forms of money in the process.
- Their emergence is due to the free market.
- The development of a medium of exchange on the free market is the only way that money can establish itself.
- Money cannot originate out of the decision of a government or a group of people as money must have pre-existing prices on which to ground demand. This can only happen through the use of a commodity in barter as a first step.
- A government is powerless to create money for an economy. Money can only be developed through the process of the free market.
What is money
- Money is a commodity,
- Money is not an abstract unit of account divorceable from a concrete good,
- Money is not a useless token only good for exchanging,
- Money is not a claim on society,
- Money is not a guarantee of a fixed price level.
It differs from other commodities as it is mainly used for its properties of medium of exchange. As such it has:
- A certain level of stock,
- A demand for it expressed by the market,
- A price, determined by the interaction of its total stock and the demand of people for it.
Benefits of Money
- Money is generally acceptable by all.
- Thanks to money, an elaborate structure of production can be put in place.
- Since all exchanges are done in money, all exchange ratios are expressed in money. These are prices.
- By comparing prices, people can more easily see the value of products on the market.
- The establishment of money prices on the market enables the creation of a civilized economy.
- Money helps the businessman, the laborer, the worker to make calculations, compare prices, determine profits and losses. The results of these calculations will enable man to direct money to its most productive use, the uses that will most satisfy the demand on the market.
- There is one great function of money.
It is a medium of exchange. All others function you might hear of are corollaries
to that one main function:
- Unit of account,
- Store of value.
- Prices are expressed in money; they are not measured by it.