Money

2010-01-13T11:48:27Z

82.198.250.70: /* Medium of exchange and cheese */

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People wishing to achieve their ends often have to [[trade]]. They can exchange their [[good]]s ''directly'', if they have matching preferences and suitable goods, or ''indirectly'', with the help of another good, the ''medium of exchange''.

A commonly used medium of exchange is called '''money'''.

==Medium of exchange and money==
Jones can trade an apple against two eggs from Brown. But this direct exchange or [[Trade#Direct Exchange|barter]] limits the number of exchanges and the extent of social cooperation. Both must have a direct personal need for the goods of the other person (this problem is called the "double coincidence of wants") and the goods must be easily divided. Using another, marketable good between the traded and desired goods and services helps to reduce some of the problems.

:Indirect exchange means, "''if, between the commodities and services, that are the ultimate end of exchanging, are one or several media of exchange.''"<ref name="Goods">Ludwig von Mises. [http://mises.org/humanaction/chap17sec1.asp "1. Media of Exchange and Money"], ''Chapter XVII. Indirect exchange'', [[Wikipedia:Human Action|Human Action]], online edition, referenced 2009-04-27.</ref>

A [[commodity]] that comes into general use as a medium of exchange is money. The concept of a "medium of exchange" is precise. But when exactly comes a medium of exchange into "common" or "general" use is not strictly definable. Whether or not is a medium money can be decided only by the judgment of the historian. Since there is a great tendency on the market for a medium of exchange to become money, it is called money for simplification.<ref name="Rothbard_medium">Murray N. Rothbard [http://mises.org/rothbard/mes/chap3a.asp#2._Emergence_of_Indirect "2. The Emergence of Indirect Exchange"] Chapter 3-The Pattern of indirect exchange, ''[[Man, Economy and State]]'', online edition, referenced 2009-05-05.</ref>

Note that money is still a [[good]] - the most marketable good. Money is valuable to the extent that others are willing to accept it in exchange. But, money itself must first have originated as a directly serviceable good before it could become an indirectly serviceable good.<ref name="Mahoney_money">Dan Mahoney. [http://mises.org/story/672 "Austrian Business Cycle Theory: A Brief Explanation"], ''[[Mises Institute]]'', referenced 2009-06-17.</ref>

==Origin and properties==
In the history of mankind, a great variety of commodities — cattle, shells, nails, tobacco, cotton, copper, silver, gold, stone wheels<ref name="Friedman_Yap">Milton Friedman. [http://hoohila.stanford.edu/workingpapers/getWorkingPaper.php?filename=E-91-3.pdf "The Island of Stone Money"], The Hoover Institution, Stanford University, February 1991, referenced 2009-08-14.</ref>, and so on, have been used as media of exchange. In the most developed societies, the precious metals have eventually been preferred to all other goods because of their physical characteristics ([[scarcity]], durability, divisibility, distinct look and sound, homogeneity through space and time, malleability, and beauty).<ref name="Hulsmann_money">Jörg Guido Hülsmann. [http://www.mises.org/books/moneyproduction.pdf "The Ethics of Money Production"], online version, Chapter 2. The origin and nature of Money p.22-24, referenced 2009-05-08.</ref>

For a good to become money, it must have the physical properties and be considered valuable by itself. The [[price]] of a good, when employed only for nonmonetary purposes, is a good starting point to estimate its price for use as a money. Should the good stop being money, it will still have [[value]] due its other uses.<ref name="Hulsmann_money" />

Historically, there were often several types of money used concurrently and for different purposes. For example, [[silver]] tended to be widespread in daily use, while [[gold]] served for larger and international transactions. Livestock<ref name="Davies">Davies, Glyn. [http://projects.exeter.ac.uk/RDavies/arian/origins.html "A history of money from ancient times to the present day"], Origins of Money and of Banking, referenced 2009-05-09.</ref> was for ages associated with wealth (and while it is bulky, it can be easily transported). The role of cigarettes<ref>R. A. Radford. [http://www.albany.edu/~mirer/eco110/pow.html "The Economic Organisation of a P.O.W. Camp"], ''[[Wikipedia:Economica|Economica]]'', vol. 12, 1945, referenced 2009-05-09.</ref> in prisons is also well documented.

In the present, money is mostly in the form of [[coin]]s and [[banknote]]s.

{{See also|History of Money and Banking}}

==Money in the free market==
The emergence of money happens through a gradual process, in the course of which more and more market participants, each for himself, decide to use one commodity rather than others in their indirect exchanges. Thus the historical selection of gold, silver, and copper was not made through some sort of a social contract or convention. Rather, it resulted from the spontaneous convergence of many individual choices, a convergence that was prompted through the objective physical characteristics of the precious metals. Money selected in the free market. i.e. money that comes into use by the voluntary cooperation of acting persons, is also called ''natural money''.<ref name="Hulsmann_money" />

==Types==

===Commodity money===
As the more marketable [[Commodity|commodities]] in any society begin to be picked by individuals as media of exchange, their choices will quickly focus on the few most marketable commodities available. The demand for these commodities has now an additional component - not only for their direct use, but also for their use as a medium of exchange. This increase in the demand greatly increases their marketability. If e.g. butter begins as one of the most marketable commodities and is therefore more and more chosen as a medium, this increase in the demand for butter greatly increases the very marketability that makes it useful as a medium in the first place. The process is cumulative, with the most marketable commodities becoming enormously more marketable and with this increase spurring their use as media of exchange. The process continues, with an ever-widening gap between the marketability of the medium and the other commodities, until finally one or two commodities are far more marketable than any others and are in general use as media of exchange.<ref name="Rothbard_medium" />

===Money substitutes===
Or ''money certificates'', are placeholders for actual money, that is stored in a [[bank]] and can be redeemed at any time by the present owner of the note. Instead of trading e.g. silver, people would trade with notes representing the silver. Apart from paper notes, the main types of such substitutes are token coins, certificates of deposit, checking accounts, credit cards, and electronic bank accounts on the Internet. The advantage are lower transaction costs, the downside is a greater potential for abuse (and historically, this lure appeared to be irresistible).<ref name="Hulsmann_certificates">Jörg Guido Hülsmann. [http://www.mises.org/books/moneyproduction.pdf "The Ethics of Money Production"], online version, Chapter 2. Money certificates p.35-41, referenced 2009-05-10</ref>

===Credit money===
Credit money is created when financial instruments are used in indirect exchange. It is only a derived kind of money: it receives its [[value]] from an expected future redemption. For example, an [[Wikipedia:IOU (debt)|IOU]] can be accepted by others, if they trust the reputation of the issuer of debt. This risk of default also limits its application.

"Not surprisingly, therefore, credit money has reached wider circulation only when the credit was denominated in terms of some commodity money, when the reputation of the issuer was beyond doubt, and when it was the only way to quickly provide the government with the funds needed to
conduct large-scale war."<ref name="Hulsmann_credit_money">Jörg Guido Hülsmann. [http://www.mises.org/books/moneyproduction.pdf "The Ethics of Money Production"], online version, 2. The origin and nature of Money p.28-29, referenced 2009-05-10</ref>

===Fiat money===
{{Main|Fiat Money}}
Often called '''paper money''', fiat money is in a wider sense any money declared to be [[Legal tender|legal tender]] by government ''fiat''. In the narrower sense used here, fiat money is an [[Wikipedia:intrinsic|intrinsically]] useless good used as a means of payment and a storable object.<ref>Walsh, Carl E. Monetary Theory and Policy, The MIT Press 2003, ISBN 978-0-262-23231-9, [http://www.google.com/url?sa=U&start=4&q=http://books.google.com/books%3Fid%3DeX3n3LSZVrIC%26dq%3DWalsh,%2BCarl%2BE.%2BMonetary%2BTheory%2Band%2BPolicy%26printsec%3Dfrontcover%26source%3Dbn%26hl%3Den&ei=kCwHSuypIoGH_Qb99sXcBg&usg=AFQjCNFILyic0qj63G7aiTnMpix5BJaRDQ&ei=kCwHSuypIoGH_Qb99sXcBg&oi=book_result&ct=result&resnum=4 online version], referenced 2009-05-10.</ref> All modern paper currencies are fiat money.

There are many reported advantages to fiat money as opposed to commodity-based money, among them:
* much lower costs of production
* the quantity can be easily modified to suit the needs of trade
* the quantity can be easily modified to stabilize the value of the money unit.

The main risk of this money is the possibility of a complete loss of value.

{{See also|For and against paper money}}

===Electronic money===
The information technologies have been able to develop very efficient and beneficial new instruments to access and transfer. But no purely electronic money has been produced so far, except for government money, which is free from competition.<ref name="Hülsmann_fiat">Jörg Guido Hülsmann. [http://www.mises.org/books/moneyproduction.pdf "Ethics of Money Production"], online version, Chapter 1., 5. Paper Money and the Free Market p. 29-33, referenced 2009-05-10.</ref>

==Production of money==
The [[production]] of additional units of money will decrease the value of already existing units. Those owning these additional units will tend to pay more money for goods and services or demand additional goods and services, and demand in turn more money when selling their own goods and services. Thusly, the production of money has a tendency to raise money [[price]]s, starting from the producers of money and spreading to other economical actors.

In the free market, the amount of money produced depends in the free market on the consumers. They decide not only the amount of goods (or money) to be produced, but also the the types of money widely used. Historically, coins of several metals and alloys were used concurrently, this appears to be the natural state of things.

It is often asserted, that higher money prices benefit debtors, as it lowers the relative value of their debts. This may not always be the case: if the lender's estimate of the rising prices is too high, the debtor may end up paying more on account of the expected [[inflation]].

The final and possibly most important effect of a rising money supply is in its timing - the positive effect of "having more money" benefits the producer of money and those getting it first; while the negative effects impact the latecomers. This redistribution of of wealth and rising prices may be limited to some degree, but cannot be avoided.<ref name="Hulsmann_production">Jörg Guido Hülsmann. [http://www.mises.org/books/moneyproduction.pdf "Ethics of Money Production"], online version, Chapter 3 Money within the Market Process, referenced 2009-05-10.</ref>

==Using money==
Money can be employed in several ways:<ref name="Mahoney_money" />

* Money can be held. Holding it "buys" alleviation from a currently felt uneasiness about an [[Uncertainty|uncertain]] future. If the future seems more uncertain, people will increase their cash holdings.
* Money can be used to buy consumer [[good]]s. People increase their consumption if their time preference rises.
* Finally, it can be [[Saving|saved]], to buy producer goods and so form [[capital]]. People save because their [[Time preference|time preference]] falls.

==References==
{{Reflist}}

==External links==
* Murray N. Rothbard, [http://mises.org/rothbard/mes.asp Man, Economy and State], esp. Chapters 2 and 3
* Ludwig von Mises, [http://mises.org/resources/3250 Human Action], esp. Chapter XVII
* [[Wikipedia:Money|Wikipedia page]] on money and [[Wikipedia:History of money|history of money]]
* Frank A. Fetter, Economics In Two Volumes: [http://chestofbooks.com/finance/economics/Economics2-Modern-Economic-Problems/index.html Volume II. Modern Economic Problems]
* [http://mises.org/books/desoto.pdf Money, Bank Credit, and Economic Cycles] (pdf) by Jesus Huerta de Soto
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Money