Money: Keep the Change
Written by Christophe Cieters.
Let’s say a farmer has a few cows. After a hard day in the field, he feels like getting a drink at the local tavern to discuss current events with his friends who will no doubt be present as well. But in the absence of money, how will he pay for his drink?
Barter is an obvious option. The farmer may come to an agreement with the innkeeper that he will trade one of his cows for a year’s worth of beer for the farmer and his friends. Or they may agree to trade a liter of beer for two liters of milk at their convenience, and so forth. In a free market, there is certainly nothing that prevents them from doing so – and for some goods and services bartering remains a very good option even when money of whatever form is around.
But what if the innkeeper is neither interested in cows nor milk? Instead, he may really want a new shirt more than anything else. The farmer can try to convince the tailor to trade him a shirt for some milk. He can then take the shirt to the innkeeper to trade for some beer. But the innkeeper may have had a different color of shirt in mind, or may have even changed his mind and have decided to now want a new pair of shoes instead.
Clearly, barter becomes very complicated very fast whenever a situation occurs where the trading parties do not have exactly the goods and services at their disposal which the other party wants.
However, things get even trickier when our farmer needs a new roof for his stable. His cows are no longer being sheltered from the rain and may get sick, or worse. He quickly meets with the carpenter. They talk and agree that a new roof would be worth about two and a half cows. However, the farmer cannot give the carpenter half a cow, and if he gives him three cows the carpenter cannot give him half a cow back.
Luckily, the carpenter likes milk. After some further negotiation, the carpenter says that he is willing to build a new roof for a thousand liters of milk. The farmer thinks that this is certainly a reasonable trade, but it creates another problem: his cows only produce about a hundred liters of milk a day, but the non-pasteurized milk will only stay fresh for about a week before quickly starting to go down in quality. In other words, he cannot save up enough milk to pay the carpenter for the new roof.
As these situations show, on the one hand, the farmer’s milk comes in handy for day to day transactions, but because of its easy decay, it cannot be used as an effective store of wealth. On the other hand, his cows stay around longer than the milk and can therefore be a better store of wealth, but they are very impractical for day to day transactions and are therefore not very well suited as a currency. There must be a better way to go about this!
It would be infinitely easier for all involved if there would be something besides cows, milk, beer, shirts, shoes and roofs, something which they would all want and which could function as an intermediary medium of exchange – a solution to the problem of non-coinciding wants. Something which could perhaps also act as a store of wealth, allowing savings and so forth.
In a competitive process, one or a few media of exchange become generally accepted as desirable for this purpose – they become money.
Throughout history and the present day, all kinds of goods have taken on the role of money: arrow heads, wheat, tobacco, sea shells, specific types of stones, and so on ad infinitum. There is literally no limit to what it could be, even something as strange as detergent, mobile phone credit and even cans of mackerel; all have been and – to this day are being – used as money.
Money in other words has historically almost always been linked to one or more physical commodities.
Historically, gold and silver have emerged throughout the world in independent geographical and cultural areas as the dominant money of choice. The most likely reason would be their particular physical qualities which make them ideally suited for such use (rarity, lack of oxidization, malleability, divisibility, homogeneity, ease of storage and transportation, etc.). Gold, being the rarer of the two, is usually used for large transactions and as a store of wealth; the more common silver for smaller day to day transactions as a currency.
Christophe is a guns and gold loving anarchist from the geographical area known as Belgium. He spends his days slaying dragons and rescuing damsels in distress, invigorated by bathing in statist tears on a daily basis. He was put on this world to kick socialist ass and chew bubblegum – and he is all out of bubblegum.
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