Chapter 9

Money: Part 2

CONVERGENCE ONCE MORE

In the last chapter, we argued that economic actors in search of a medium of exchange will tend to converge on a few goods. People who want to obtain goods that they think will always be accepted by

others will tend to choose the same goods, more or less.

Can we go further? What properties will the goods they select have? Here we take a temporary leave of absence from praxeology and engage in historical inquiry of a sort.

We are asking: what properties does it seem reasonable to want in a medium of exchange? To put the question another way, what will people tend to choose as money? We shall define money as a good almost universally accepted in a market for purposes of exchange. If you want to exchange what you have produced at all, you will most likely accept money for it.

1.	Must a good be universally accepted to count as money?	?
	Suppose someone will accept only a particular spider in
	exchange for his copy of General Theory and not the
	money to buy the spider he wants. Must we conclude that
	because of this person, money does not exist in his socie-

ty?

149

150 An Introduction to Economic Reasoning

PROPERTIES OF A MEDIUM OF EXCHANGE

Historically, all sorts of things have served as money, ranging from cattle to sea shells to sugar. In prison camps during World War II, cigarettes were used as money.

But most societies that have allowed a market in money to develop have converged on gold and silver as the commodities used for media of exchange.

First of all, the medium of exchange should be durable. Ice cream, however desirable, would not be a good medium of exchange because it is perishable. True, you can keep it in the freezer; but this is costly. And how would you carry it around to exchange it for other things?

Chapter 9: Money, Part 2 151

Austrian Hundert Schilling

This leads to a related property that money is likely to have. It should be readily divisible into small units. Can you see why elephants would not be a good choice as money? Suppose you want to buy a candy bar. How could you do so, if one elephant were the smallest unit of currency? Gold and silver, by contrast, can easily be cut into small units. (In countries on a gold or silver standard, metals of less value, such as nickel or copper, are often used for the smallest denominations of coin.)

The third quality follows from our discussion in the previous chapter. The medium of exchange must have qualities that make it widely acceptable. The beauty of gold and silver has made these metals widely desirable in a great many societies.

To sum up, with a free market, we may expect gold or silver (or both) to be adopted as the medium of exchange.

1.	Give examples of different commodities that have been	?
	adopted as money by various societies.
2.	Why do you think that many writers have criticized the
	desire to amass gold? (Murray N. Rothbard and Dr. Joseph

Salerno have termed this phenomenon “aureophobia.”)

152 An Introduction to Economic Reasoning

MONEY AS A STORE OF VALUE

We have now completed our first historical excursion. We shall assume that a society has adopted gold as its medium of exchange; and, proceeding by praxeological reasoning, ask what follows from this fact.

One advantage of a gold (or silver) standard follows at once from one of its physical properties. Because gold is durable, people who own it need not make their exchanges all at once. If I own gold, I can save it until I find something that I want to buy with it.

As we have seen already, a medium of exchange extends our ability to obtain different goods. If I wish to trade economic textbooks for ice cream (I’m sick of apples), I must find an ice cream owner who wants a textbook. If I have gold, I have the much easier task of finding an ice cream owner who wants gold. And of course the task is much easier in large part because he wants the gold so that he can buy the things he wants. (Have I repeated this idea enough times yet?)

Now we see that the gold not only extends the space of goods available to me. It also extends the time in which I can purchase them. In doing so gold acts as a store of value: this is one of the main functions of money.

?1. Extra-credit: By extending the time in which someone can purchase goods, how does gold also extend the space of goods available? Notice that “time” is used literally here but “space” figuratively.

MONEY’S EFFECT ON OTHER GOODS

As always, let’s review. We started with direct exchange: I trade one orange for one apple. From this we moved to indirect

Chapter 9: Money, Part 2 153

exchange. Since you don’t want my orange but do want a copy of General Theory, I trade my orange for the book and then trade the book for the apple. Goods in general demand for further trade, we saw, will have their value enhanced by their being perceived to be in wide demand. People in a market society will tend to converge on one or two goods, almost always gold or silver, as the medium of exchange.

Now we must attend to a rather more subtle point, often overlooked. Remember, that before gold was adopted as the medium of exchange in our model market, we had several goods, e.g., oranges, whose value increased because of their being perceived to be in general demand. People wanted oranges, among other goods, in part because they thought that other people would take oranges in trade.

The question that now arises is this. Once gold has become the generally accepted medium of exchange, what happens to the part of the value of oranges that rested on oranges’ exchange value?

Before you try to answer, let’s make sure that you understand the question. Before gold became accepted as money, oranges increased in value because people wished to use them as a medium of exchange. Once gold is accepted, what happens to this part of the value of oranges?

Fairly obviously, it decreases; depending on circumstances, it may lose this part of its value altogether. People who want to exchange what they produce for a good that will be generally acceptable to others will now want gold, not oranges. Once a good is adopted as the medium of exchange, it becomes the main good whose value is determined by its general acceptability.

1.	If gold is the medium of exchange, will the component of	?
	oranges’ value that depends on its general acceptability
	always fall to zero? Can you think of circumstances in
	which it will not?