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Wednesday, January 19, 2011

The Evolution and Use of Money in Society: Part 1

By Michael Richards
Before there was money, there was barter. When people exchange goods, they exchange because they value the good that they are exchanging for more than the good they are exchanging. Let's say Jack wants to trade his apple for Jill's orange. Jack trades his apple for Jill's oranges because he values Jill's orange more than his apple. Likewise, the only way Jill will trade for the apples is if she values Jack's apples more than her oranges. If she does not, Jack will have a to search out for something to trade his apples for that Jill will want more than her oranges. This type of situation can get complicated.
As time progresses certain goods became popular in society. Let's say three goods; gold, seashells, and clothe, become the latest rage, as people valued it for its ability to make a necklace. If Jill is one of these people who wishes to make her own necklace, Jack will seek one of these materials to trade not only with her, but with as many people as possible who desire these things. Eventually people will desire these things, not for making necklaces, but for their ability to trade with the maximum number of people possible. People will begin to set prices stating that they will exchange a certain number of these goods for a certain number of other peoples' goods. Jill will agree to sell her oranges for 2oz of gold, 10 seashells, or 2 sq. ft. of clothe to Jack who will set the price of his apples accordingly. Thus these three commodities become money as they are the common medium of exchange.
Now due to he abundance of seashells and clothe, individuals will begin to focus their energies to obtain these things in abundance in order to trade with them on the market. Let's say that the number of seashells triples in society and the number of clothe doubles. Jill may see that people seem to be able to buy more oranges than she can produce. In response, she realizes that if she raises her prices, she can buy more things she desires on the market and thus raises prices to 30 seashells and 4 sq ft. of clothe. Jack, who wishes to buy her oranges now must work harder in order to obtain them. However, he also notices that people are buying his apples in excess and decides to raise his prices so that it becomes easier for him to buy the things he wants. This eventually turns into a ripple effect where every merchant begins to raise the price of all their goods and services.
Now those who come in last to raise their prices will be unhappy in this state of affairs as they had to work harder to obtain the goods they want. Unlike the first comers, they did not raise prices so that they could obtain more of the goods they wanted. This is the effects of inflation (which means the increase in the money supply, not prices). Those who benefit from inflation are those who are first to obtain the new money and those who wish borrow money as money has become easier to obtain to pay off their loan. Those who are hurt by inflation are those who save and those who lend since now their money can buy less than it previously could. Deflation (which is a contraction of the money supply) can have the effect that it will take less money to buy goods, as people become more desperate to obtain it. The winners and looser are the opposite of what it would be during a time of inflation: lenders win, borrowers loose. Businesses will also have to adjust to the new prices, which may cause them to temporarily downsize until all prices in society adjusts. In the short term, deflation benefits the consumer and saver as they need less money to buy things.
Now those who come last will begin to see that although the prices of seashells and clothe begin to rise, the price of gold remains relatively constant due to its rarity. They begin to except payment in gold only. This will weaken the market for seashells and clothe as fewer people will agree to use them in exchange. This will continue until gold comes out on top and becomes the sole common medium of exchange and thus the only money society will except.
What this example shows, is that money, the common medium of exchange in society, is really a commodity that follows the same rules of supply and demand as any other commodity. The sole use of any money (regardless of what that money is) is the use of exchange in society. People, however, do not desire money for its own sake but instead value it for what they can exchange it for.Remember, Jack rose prices in response to Jill because he wanted to buy her oranges with the same or less work it took prior to her raising prices. Jack did not want more money just because. He wanted it to buy more goods in society. More money does not equal more wealth and neither is money a determinant of a thing's value. Wealth is the goods and services produced in society. Prices are determined by individuals' subjective valuations of those goods in society and money is valued in its ability to obtain those goods. When people save and invest money, they do so because they are willing to withhold present consumption for future consumption. Therefore money, even in this case, is still valued for its use in exchange only.
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The Evolution and Use of Money in Society: Part 1 by Michael Richards is licensed under a Creative Commons Attribution 3.0 Unported License.
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1 comment:

  1. hello, there are grammatical errors. You should fix and repost this later.