Friday, April 20, 2012

Situational Awareness - Money and its Origin


The problems which exist in our nation are too great to adequately quantify.  Having studied these problems for the greater part of two years, one of the best places to start is with the things we interact with every day - money.
Money is what we as humans use as a means of indirect exchange with others in society.

Knowing everything you can get your hands on about MONEY will take you very far and most likely keep you from being poor.  This knowledge about money will give you invaluable situational awareness to survive and thrive no matter your state in life.

We trade our labor, property, talent, time, and skills for money instead of participating in direct exchange since many of our needs are known while others are unknown to us at the time we acquire our wages. Barter may be efficient for short term transactions (food, shelter, clothing, transportation), but it does not work for more complex transactions in which time preference plays a role. But, in a barter economy, what would the most frequently traded goods be? They would most likely be commodities.

However, one can quickly see the problems with a barter economy.  If I have 8 loaves of bread and my neighbor has 5 fish, we can easily work out a short term medium of exchange (i.e. 2 loaves of bread = 1 fish).  But, neither of us can save these items as "money units" long term since money must be scarce, durable (cannot spoil), easily divisible, and so on.  Also, barter requires a coincidence of "double wants".  Someone has to value my loaves of bread more than I value mine in order for the exchange to transpire.

So, as an economy becomes more complex, money as the arbiter of exchange and store of value comes into being in a free society.  Thus, any form of "money" must start out as a commonly understood money in any society. Ludwig von Mises made this important observation in Human Action:
"It [money] is the most marketable good which people accept because they want to offer it in later acts of impersonal exchange." (Human Action, p. 401).
Why is this important?  Because acknowledging the fundamentals of how a money unit comes into society is paramount to recognizing the types of "money" that have been transformed through government decree, coercion, and force.  Instead of allowing the free market determine the best medium of exchange and money unit (which tends to be either gold or silver precious metals), governments have introduced legal tender laws and a monopoly on the coinage of money.

Many books do an excellent job of explaining the fundamentals of money.  Scholars rooted in the Austrian school of economics are uniquely qualified to understand money while other schools have a "muddled" theory of money at best.

Please do yourself a favor and learn everything you can about the basics of money.