Posts Tagged ‘indirect exchange’

A brief history of money and its breakdown- Part 1

Monday, January 8th, 2007

Today, for this part, we will give a brief introduction on the history of money. For the next part, we will then look at how the monetary system had (and are still today) broken down. For a more in-depth coverage of this topic, we recommend Murray Rothbard?s excellent book: What Has Government Done to Our Money?, which is just only 58 pages?a quick read over the weekend. This background knowledge is highly useful for understanding the value of gold (and the corresponding absurdities of the fiat monetary system that we now have) with regards to today?s monetary system.In the beginning of history, mankind simply used barter for economic exchange. Obviously, barter is problematic because it requires a coincidence of wants. Even if coincidence of wants exists, they require costs to search for them. Also, for some goods (e.g. a live cow), there is no way to divide them for exchanges with more than one counter-parties. Thus, barter is highly restrictive.

The next stage of monetary development is indirect exchange. For this, if you have A and wants C, you exchange A for B and then exchange B for C. Though this way may look inefficient at first glance, it actually works because B may be a more highly sought-after good than A. Therefore, it makes sense to acquire B first as the intermediate step towards acquiring C.

At this third stage of monetary development, a highly marketable good will eventually emerge as the most sought-after intermediate good for the purpose of exchange with other goods. This intermediate good functions as money as we know it. Obviously, such an intermediate good must have characteristics of portability, divisibility, durability and sufficiently rare (but not too rare). Historically, goods like tobacco, cattle, grain, cooper and tea had functioned as money. But over the course of centuries, gold and silver, for whatever reason, were eventually selected by most civilisations as money?gold for larger exchanges and silver for smaller exchanges. That is why we must not make the mistake of following the market?s error by seeing gold and silver as industrial commodities (see Is gold a commodity?).