Where does Money come from and why did we start using it?

Today I want to talk a bit about a topic that should be discussed in every household, especially those interested in the economic well-being of their families and of the nation. This newsletter is a primer on some initial facts you should be aware of when contemplating what type of monetary system should prevail if we want to have a prosperous society.

 

Where did money come from? This is a fundamental topic to which we should all devote time to study, carefully.

 

The prevailing wisdom seems to be that money as such came into existence by fiat at the hands of the government or monarch. We were all running around engaging in barter (direct exchange) until this decree occurred. I as a wheat farmer would come to you with a bushel of wheat and directly exchange my wheat for something I valued in consumption, let us say bacon.

 

Does this example make clear the concept of direct exchange? When two commodities are exchanged, each one intended to be directly consumed by the exchanging party, a direct exchange has occurred.

 

Barter is messy, however. For example, if I the wheat farmer brought my wheat to the pig farmer and he did not want wheat in exchange for bacon, I would be out of luck.

 

So how did we move from this messy system of barter to a system in which I give you wheat, which you want directly for consumption, and in exchange, I accept something that I do not want at all, let us say steak (which in this hypothetical world I dislike)?

 

The conventional wisdom tells us that this problem of the double coincidence of wants, a monarch or government in all of its wisdom came up out of the blue with the idea that instead of each party getting exactly what they want in the exchange, that one party would accept something that they do not want at all for its own use.

 

Even under the dictate of a king or government, who in their right mind would give up something the other person wanted in exchange for something they did not want, simply because some monarch said, “Hey if everyone accepts something they don’t want, we will all be more prosperous?”

When you take into account that, by definition, engaging in direct exchange never happened before it actually happened, this theory becomes even more absurd. It is a laughable and untenable position to maintain.

 

We as thinking human beings can do better.

 

In truth, money could have come about in only one way.

 

Individuals in their quest to improve their life according to their own preferences would seek in exchange commodities that were the most marketable.

 

By most marketable, I mean a commodity that was most easily saleable in exchange.

 

Think about it. As individuals kept engaging in exchange, they inevitably run into the same situation over and over- they could not find someone who wanted exactly what they were selling, and was selling exactly what they wanted to buy.

 

Therefore, individuals in their own self-interest began to sell their wares for whatever good they had the best chance of selling in the future. As this process continued, eventually certain commodities would prove themselves uniquely marketable or saleable. The end of this process of exchange for the most saleable goods led to one or two commodities gaining widespread use as media of exchange– that is to say, they became MONEY!

What is so important about this fact? It is this- money came about organically on the free market as individuals in their own self-interest sought to exchange their goods for goods that would be the easiest to trade away at a later date.

 

There are certain commodities that have characteristics that are particularly useful in playing this role as a medium of exchange. By medium of exchange, I mean a commodity that serves as a bridge for direct exchange (the commodity that is accepted even though it is not intended for direct consumption). A medium of exchange should be:

 

  • Portable. No one would want to carry around iron as a medium of exchange. You would be carrying around a ton of iron on your way to Best Buy. We want something we can carry around in our pockets. Scarcity plays into portability as well.
  • Durable. If the commodity that served as a medium of exchange were destroyed before it could be traded away, that commodity would not be able to be used very long and the system not be very efficient- in fact, it would probably collapse.
  • Homogenous. If this medium of exchange is going to be on one side of every transaction, it would be very hard to reckon one exchange against another if the units were not homogenous. Homogeneity allows for consistency throughout the money supply. An ounce of pure silver for example is exactly same as any other ounce of silver.
  • Scarcity. Paper clips wouldn’t serve very well as money. They are very easily manufactured and thus their value of them would be unstable. Scarcity ensures that the value of money remains roughly stable.
  • Divisible. A commodity able to be divided and still keep a pro rata share of its value would further enhance its desirability as a medium of exchange.

This lends some insight as to why gold and silver have universally been used as money. Remember, money is simply a commodity or commodities that have been selected above all other commodities for use as media of exchange.

 

This is all very interesting- but what does this mean for me as I form my opinion about what the monetary system should look like?

Well, since you now know that money came about organically on the free market without ANY government or monarchical intervention, you tell me…Should government determine what you are legally allowed to use as money, and back up their monopoly over money with the threat of violence via legal tender laws?

Or should this job be left up to free individuals who can produce money in the same way they produce cheeseburgers and laptops?

If you want to know more about where money comes from, you can read What has Government Done to Our Money? by Murray Rothbard. Here is the link; it is FREE to read online.

 

http://mises.org/books/whathasgovernmentdone.pdf

I highly encourage you listen to Radio Free Market at RadioFreeMarket.com or check out our archives on iTunes. We are also LIVE at 7AM Pacific Time on RonPaulRadio.com.

 

Thank you for reading. Enjoy your weekend.

 

Aaron Brown

Note: To add friends/family to the list, have them contact me at my e-mail.

 

The content of this letter is for informational and entertainment purposes only and is not to be viewed as financial advice from the author. No part of this letter can be redirected, rewritten, or reused somewhere else without express permission.

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