Galt's Gulch
10

What is Money?

Posted by dbhalling 8 years ago to Economics
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My latest article on SavvyStreet, "Money is just a generally accepted IOU."
SOURCE URL: http://www.thesavvystreet.com/what-is-money/

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  • Posted by $ blarman 8 years ago
    Nice article, db.

    Money starts out as a claim on labor and productivity. When you work, you create "money" - which is why the money supply is roughly analogous to population size (barring government manipulation). A debt is a claim on future labor/productivity. Money spent is correctly titled consumption, but in many cases what is one man's consumption is another's productivity, so those labor claims trade hands. The trick is that one's labor may not be worth the same amount to someone else that it may be to you, which is why some kind of physical medium then enters the picture. That physical medium (aka currency) represents a unit of value generally recognized by everyone in society - whether it be shells, cows, gold coins or what have you and this physical medium may or may not have intrinsic value. This facilitates the appropriate valuation of various goods and services based on a common medium/unit of value which further facilitates barter progressing toward trade. It also facilitates wage negotiations because one generally has a rough idea of how much one must spend for a given lifestyle.
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  • Posted by illucio 8 years ago
    Money is, fundamentally, trust. It´s a symbolic exchange that measures value, and has its means for the foundation of organized society. Before there was trade, and money replaced this system for a more accurate approach on the value of all things, both material and abstract (such as professional fees, etc). Without money, things would be alot more chaotic.
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  • Posted by LarryHeart 8 years ago
    Federal reserve Notes are a debt the government owes to the banks.

    The HUGE problem is that the FED and the Government can redefine what that debt is at any time and subtract what all notes represent to create new Notes that the government can spend. Dilution of the value of the "Money". Also if all debt are paid back (Clay tablets collected) there is no money in circulation.
    Commodity certificates representing a fixed amount of gold or other commodity stored in the treasury can not be redefined and the supply of certificates can be increased by the treasury purchasing more of the commodity and issuing more certificates. or by issuing smaller denominations as prices decrease relative to the commodity. Deflation of prices is not the tragedy people make it out to be. Loans just need to be adjusted to factor deflation instead of inflation.
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  • Posted by $ WilliamShipley 8 years ago
    I'm struggling with utilizing the term IOU. Generally an IOU is something you give to someone to promise future payment. But in the case of money, you are not promising them anything other than possibly someone else might take it, but if they don't it's their problem, not yours. So you didn't promise.

    The real trick is to keep the amount of money in circulation in balance with the amount of goods so that a loaf of bread maintains a constant price.

    My favorite money is from the island of Yap where they carved large limestone rocks on a neighboring island and floated them over to Yap to use as money. Since they weighed a ton they were hard to move and thus you would just keep track of who owned which stone. Once, when bringing a stone across the ocean it sank. Undismayed, they continued to trade it and someone owned the stone at the bottom of the sea.
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    • Posted by dbhalling 8 years ago
      When you provide someone with a good, they give you money. That money is a debt the world owes you in return for that good you provided.

      As long as the government stays out (legal tender laws and central banks) the amount of money will roughly track the size of the economy naturally.
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    • Posted by $ MikeMarotta 8 years ago
      There is no problem. The amount of money in circulation will always be correct. Moreover, prices need not be constant. In fact, they seldom are, and (morally) never should be. (You wrote: "The real trick is to keep the amount of money in circulation in balance with the amount of goods so that a loaf of bread maintains a constant price.")

      First, there is no one single thing called "money." We know the classic photograph of the German guy with a wheelbarrow of worthless marks. It was not the only money in circulation. People still used silver coins; and they created ad hoc "Notgeld" emergency scrip.

      If money were only metals mined from the ground, the cost of mining and the value of the metals would be the natural parameters that determined how much money was in circulation. (We have seen silver and gold inflation when huge inventories were injected unexpectedly by the Spanish Empire and later the Comstock Lode of Nevada.)

      Falling prices are a consequence of a stable, commodity based money, such as gold. There's only so much gold in the universe. So, every new invention, every new product or service,increases the value of gold, and prices fall. We saw something like this during the "Long Recession" of the late 19th century when wonderful new inventions and falling wages caused both optimism and chagrin. People just did not understand enough about economics to see through the events of the day.

      The idea that we need "the right amount of money" in circulation is the primary error in Milton Friedman's Chicago Monetism theory of government intervention in the economy. And, again, despite the fact that gold was the "standard" from 1817-1933, there were always many kinds of money. About 2001, I heard Alan Greenspan on NPR say that the Federal Reserve knew about 15 kinds of money, but only tracked about six.
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      • Posted by $ WilliamShipley 8 years ago
        Money supply can distort investment and production. Deflationary times tend to discourage farming which requires investment of time and resources in advance of harvest.

        Flooding the market with money can make it meaningless and also prevent investment because you don't have any idea what's going to happen.

        You're right that bread doesn't have to stay the same price, there are changes in production costs, price of wheat etc. However, in general the price should reflect cost to keep the ovens going.
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