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English isn't my native language, so bear with me here. Finnish is spoken by only about 5 million people and since my topics are rather universal, I felt like I should make an effort and write my posts in English. Comments and questions are welcome.

2010-04-19

Some thoughts on money

I gave a small presentation on money at school, so I thought I'd write down some of the thoughts I have on this subject.

Most people don't really think about the origins of money. Money is just euros, dollars, pounds and such. It's coins, pieces of paper and ones and zeros on a computer in a bank and it is all created by wise men and women at a central bank.

Money was not, however, invented in a bureaucratic department by the state. It came from the marketplace.

A long, long time ago when we still had direct exchange(i.e. barter), someone figured out that it was wise for him to trade his goods for some other goods not because he wanted to consume them, but because he knew he could later trade them for something else that he wanted to consume. This is what money is: a common medium of exchange. Something that makes indirect exchange possible.

The way this happened implies that money had to have some non-monetary value before it could become a common medium of exchange. If I simply put my picture on a piece of paper, named this new money "Xasew" and tried to trade 5 Xasews for a bottle of coke, it obviously wouldn't work. How could the person I was trading with trust me when I told him it was a fair deal(or how could it be even known by me if it was a fair deal)? More importantly, how could this person go and trade these Xasews for something else later on? He would have no way of knowing what he could get with it! Even if the originator of money was trust-worthy, a good of no non-monetary value could not have originally emerged as money, because its price in terms of other goods would be unknown to market participants.

Obviously if a certain good is chosen as money by the community and this money over time loses all of its other functions except that of being a common medium of exchange, then there is no problem. The value of this money in terms of other goods has had time to establish itself, which means a money can continue as money even when it has no other uses.

Some features have been especially demanded in money. It must be marketable, easily divisible, it should have a high value-per-unit, it should be durable, homogeneous and easily recognizable. Over time the market process weeds out the less suitable moneys, until only a few or only one remains. History tells us that when people get to choose, they tend to prefer two commodities especially: Gold and silver.

Until 1971 most currencies were tied(although loosely) to gold. This is no longer the case, but a point must be made here: The current paper money system we use could not have come into existence had it not been for the original link to gold. Small pieces of paper probably have some uses, but other than that our current paper moneys operate only because of their monetary value. If that monetary value is lost(i.e. hyperinflation) then those pieces of paper are gone forever. On the other hand gold and silver, goods no longer serving as media of exchange, still have value and could become money again at any time.

Ok I'm gonna stop here. I guess the point here was that money is not a creature of the law, nor a creature of the state. It is a creature born of spontanious order.

Books to read on the subject:
-What Has Government Done To Our Money? by Murray Rothbard
-The Theory of Money and Credit by Ludwig von Mises

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