Thursday, November 15, 2007


Money is perhaps the single most useful invention in human history. Without something like a uniform medium of exchange any sort of modern society would likely be impossible.

By "money" I mean goods which people will accept as part of a transaction, not for any direct use it may have, but because it will be used as a payment in future transactions. It follow that it is not strictly correct to say of something that it is or is not money, but rather that it is or is not being used as money. If you accept gold coins because you actually expect to use the gold, say to make an lovely ornamental calf statue, from your point of view the gold coins aren't money, they're a consumption good.

People will sometimes say things like "money is also a measurement of value or a store of value". This is a confusion of conncepts. In the first part, it is the same sort of error as using the same word for "meter" and "meterstick", and concluding the same thing. A "dollar" as an abstract measurement of value is something different from a coin or note considered to be worth a dollar. The second part is a different sort of error. There are reasons why the same sorts of things are likely to be useful as a store of value or as a medium of exchange, but if we accept that calling something "money" denotes what it is used for rather than what it is, and incidentally that it is not always true that the same sorts of things are useful for both purposes, we can see why calling these two concepts by the same name is misleading.

There are many sorts of things that have been used as money, but they come in two general sorts of categories: goods that are considered to carry intrinsic value (even though it is not expected that they will be used as primary goods, it is vital that they could be), which I will call "value money", and signifiers of some sort of transferable promise, which I will call "promise money".

There are many reasons why metal coins have been particularly popular as value money. Uniformity (value is determined solely by the mass), durability (gold won't rot or rust), density (an ounce of gold will usually fetch more than a ton of wheat).

Because metal coins have so often been the items used as value money, and because promise money (at least initially) pretty much has to be redeemable for something specifc, there is sometimes a tendency to view metal coins as being "real money" and promise money as just "representing" money, the promise money representing some quantity of metal. In 1957 dollar bills were still "silver certificates". But fundamentally gold and silver are just commodities like any other, subject to the same sort of fluctuations in value. The advantages of metal money really only apply when the metal itself is being used as money. Any sort of certificate would have the same advantages.

There's no reason in principle why there must be a direct relationship between price denomination and form of payment. For example, one could imagine a loan arrangement where the debt payment is specified in tons of wheat value equivalence but the payment is in the form of gold coins. This of course necessitates specifying a method of determining what the relative vales of gold and wheat are, so one wouldn't introduce this added complexity for no good reason.

But such an arrangement would make sense if wheat had a more constant value in time relative to other goods and services (so tons of wheat makes a better measure of value) but gold is much more convenient as the actual medium of exchange (because you only have to ship ounces rather than tons).

I believe the state's involvement in the issue of money originated because it's a convenient way to tax. Demanding that internal trade takes place using the official coinage allows for charging a seigniorage, and also allows the state to effectively repudiate a portion of its internal debt by debasing the coinage (or "inflating the money supply"). This is better for the state than repudiating the debt directly, since by requiring citizens to accept debased coinage at face value the state causes the burden to fall on the people as a whole rather than merely upon its creditors.

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