October 1, 2022
Top

Essence of money

The previous article was devoted to such a very remarkable phenomenon as money. In it we answered the main question is what is money, and consideredthe nature and origin of this phenomenon. We saw that money is not the result of either legislation or a collective agreement of market participants. Rather, it is a logical outcome of the interaction of economic entities that exchange their goods for more sold ones, in attempts to get a larger number of the best exchange options. Then suddenly money spontaneously appears, becoming a generally accepted medium of exchange.

Understanding the nature of money has given us the opportunitydefine sales as the degree of economic costs necessary for the exchange of a particular product, as a distinctive characteristic of the essence of money. For this reason, identifying a specific substance that turns into money requires us to further study the concept of marketability.

Proper assessment of the impact of varioussignificant factors on the sales of goods is a complex task that does not have universal methods of solution. Nevertheless, we can highlight some important forces that have a predominant influence in most cases. The study of these forces will give us typical examples and, more importantly, general methods for studying and analyzing specific cases. Through understanding some of the main considerations regarding the selling of goods, this article is intended to provide the reader with a general approach to assessing the likelihood of various goods appearing as money in the economy.

Sales Aspects

As noted above, the issue of salesgoods is too complex to be formally generalizable, at least without losing some essential aspects. Instead, we will use an approach based on the study of the main factors and the correct way to analyze them. To begin with, what effect can the properties of a product have on its marketability by looking at three types of general issues.

Sellability and Divisibility

The first type can be called the sales of goods indifferent scales. It concerns the costs associated with the use of goods in exchanges of various sizes (in terms of the value involved in the exchange). The lower the economic costs necessary to adjust the quantity of a product in order to accurately reflect a specific exchange value, the more suitable exchange opportunities, and therefore the higher its marketability.

The most noticeable property affecting thistype, is the divisibility of the goods. The degree of divisibility of a product is determined by the extent to which we can divide its entire unit into smaller parts, while preserving the value of the entire value. If we take an ordinary chair as an example, we will see that it has poor divisibility, since two halves of the chair have much less value than a whole chair. Silver, on the other hand, has relatively high divisibility, since two halves of a silver coin usually cost as much as the whole coin.

In assessing fissility, twoThe main points are the degree to which a single unit can be really divided into parts while maintaining the total final value, and the economic costs associated with the process of dividing the goods. The stronger a product can be divided, and the lower the costs of division, the more divisible this product can be. As we can see, silver perfectly fits the first criterion. However, with the second criterion, we see that the process of separation of silver is not very convenient and may require specialized labor, which makes it somewhat expensive.

Portability and portability

The second type is related to the possibility of selling goods indifferent places, that is, the portability of the goods. This consideration has two main components: transport costs for the movement of goods and transaction costs of transfer of ownership of the goods. The lower the economic costs associated with transporting and exchanging goods in different places, the more he will have the opportunity to exchange and the greater demand he will enjoy.

However, this consideration is not at all limited.a question only of physical remoteness, especially in our modern economy. When using banks or other financial intermediaries, some minimal fixed costs are usually required, often regardless of the distance to the payee, or even in cases where the payee is the bank itself. This commission, charged by intermediaries, makes some small non-physical payments unprofitable, even if they were made without transaction costs [1]. I would still classify this as a “location”, both for convenience and because physical location in most cases plays a role of no small importance.

Sellability and Durability

The last category we will consider here- is the sales of goods over time. The longer the product will retain its value, the less economic costs will be for its owner, if the owner of the product is in no hurry with its exchange.

The most important factor in this regard isthe durability of the product, that is, how well it can be stored in time, and what are the costs of its storage. We see, for example, that perishable goods have very low durability, while other goods, primarily gold, have high durability and can be stored, requiring low costs, or no costs at all. The more durable the product, the better it can maintain its value and application in the economy. Therefore, improved durability increases the demand for the product, thereby increasing its marketability.

On the sale of goods over time, likeOther types that we discussed above are also usually influenced by other factors that are not necessarily inherent in the product itself. Now we turn to such an extremely important issue, which, although it is not an inherent property of a product, but has a huge impact on its marketability, production and supply.

Money offer

Product offer and its featuresproduction is probably the most influential external factor in its sales. Consideration of the process of money production is beyond the scope of this article, but suffice it to say that it can have a huge impact on the supply of goods and their marketability [2]. Below we will consider a more specific question about the effect of an increase in money supply on their sales and the possible consequences of such emissions.

All products are subject to the law of diminishing marginalutility, and money in this regard are no exception. This economic law states that the marginal utility of a good for an economic entity decreases with an increase in the quantity of this good at its disposal. The reason is that in order to save money, a person will first of all devote a specific benefit to the satisfaction of his most urgent needs. Then, receiving additional units of this good, he will use them sequentially to meet less urgent needs, which will entail the assignment of lower use value to each additional unit of good [3].

The effect of this law on money in the first placethe queue can be observed on the example of money available to a person. But more importantly for our purposes, it is also applicable to the purchasing power of the money itself. With an increase in money supply, the first one to receive new monetary units will assign them a lower marginal value in comparison with other goods. Thus, he will be ready to spend more money on goods that now have a greater marginal cost for him. The owner of the new money will then be ready to spend more in trade, as a result of which more recipients will have more money than before. Accordingly, they will also be more willing to spend a nominally more significant amount of money, since the increased cash reserves that have now appeared with them reduce the value of each currency unit for them.

This process continues to gain momentum ineconomy, reducing the value of each currency for an ever-increasing number of people. Those for whom the value of the monetary unit has declined will become less willing to exchange their goods for the same amount of money as before, since this nominal amount of money now represents less value for them. Therefore, they will begin to raise prices for their goods, bringing them in line with the value that the same amount of money had for them before.

This consistent price increase will be wavesto disperse throughout the economy, while the exchange continues between those who received new money and those who do not. This process will end only when all market participants adjust their prices, which will lead to higher prices in the entire economy, that is, each currency will lose part of its purchasing power.

The more money production will increase,the lower the cost of money will become, and therefore the economic costs of exchanging goods will increase later as a result of a drop in their purchasing power. Thus, we see how this effect passes into costs, into economic costs, which burden those who receive money in exchange for their goods. Economic losses associated with the exchange of goods reduce its marketability and, thus, prevent its use as money.

It is important to note that even without actualthe production of a monetary substance, a simple awareness of the risk of a substantial increase in the supply of money can reduce their sellability. The reason is that this risk can lead to higher costs when selling money in the future, and will force people to take it into account and evaluate them accordingly in their current transactions. Thus, the preventive measures taken in relation to the risk of future production of money can lead to higher costs and, consequently, lower sales opportunities at the present time.

External factors

The money supply in the economy may partiallybe regarded as an external factor, but not fully. The last issue that we will discuss here is the influence of factors completely unrelated to the monetary substance itself. The most significant of these, as a rule, are legislation, social structure and epistemic factors, that is, public knowledge.

We already discussed similar examples in the previousan article explaining what legislation can have on the market attractiveness of fiat money, and how the evolution of society from nomadism (nomadism) to permanent settlements contributed to the transition from commodity money (for example, livestock) to metal. So, now we will focus on the third factor - epistemic.

Striving for knowledge, people findcausal relationships between the use of certain items and the satisfaction of one’s needs. Discoveries that expand human knowledge can cause massive changes in demand for goods. For example, oil was once considered unsuitable for people and had little demand. However, the demand for oil became incredibly high after the discovery of its usefulness as an energy source and suitability as a fuel for an internal combustion engine. In other words, with the increase in the volume of our knowledge, the market attractiveness of oil from almost negligible has turned into an incredibly high. Later, the further development of oil sales markets further improved its marketability. We can apply the same logic, albeit to a lesser extent, to many other goods, including historical examples of monetary substances. For example, the demand for gold, probably increased significantly after people opened the process of smelting metal, which made it possible to find many new ways of using gold.

Gaining new knowledge may also havenegative consequences for the market attractiveness of a product. For example, if people find that the widely used material is toxic to their health (as happened with mercury), demand for it is likely to fall sharply, and its market attractiveness is likely to go to zero. Thus, external factors have a significant impact on the sales of goods, and usually you can trace their influence on many historical examples of changes in the essence of money.

Functions of Money

The traditional interpretation of money is usuallydivides the scope of their application into three roles: a medium of circulation (exchange), a means of saving (accumulation) and a measure of value (sometimes a unit of account). In the previous article, we focused solely on the use of money as a medium of exchange and presented arguments that this is the nature of money and the reason for its origin, while ignoring other roles.

This ignoring other roles wasintentional, because they do not matter much to the general question of the nature and origin of money as a medium of exchange. However, for this article it is extremely important to consider other uses of money, as they can greatly affect the demand for specific money, and, consequently, their market attractiveness. Contrary to popular belief, I would like to argue that other (not as a means of circulation) uses of funds are not independent and different from the main one, but there is a natural continuation of their use as a means of exchange. These other ways of using, as we shall see, are not inherent exclusively in money alone, but are only a by-product of their use as a medium of exchange [4].

Means of savings

The first role we will discuss here isconservation (accumulation) of value. When exchanging goods for money, people may not immediately use the money received during the exchange. In fact, most often people put them off and use them at other times for various purposes or, for various reasons, are in no hurry to spend them. When people hold on to their money or save it, we can say that they use it to “preserve value” because they hold it with the intention of exchanging it later.

However, maintaining value is not at allan integral property of money, nor an exclusive way to use it. The reason why money usually serves as a standard means of saving, at least to some extent, is that, as the best-selling product, it can be easily exchanged with low economic costs, also in the future. This gives the money holder a better position for exchanging them at a later time. In addition, since the marketability of a product is greatly influenced by its ability to maintain low exchange costs over time, money prevailing in the market is likely to be well suited not only for immediate exchange, but also for saving value in the future.

Therefore, it seems very economicallyit is advisable to store at least some value in money, although there may be other goods more suitable for this in certain economic situations. For example, in today's economy, real estate, stocks, bonds, and gold should be noted as some significant examples of goods to preserve value. Along with the fact that a product can be a means of saving and even a very good means of saving, and this may increase the chances of this product serving as money, there is no guarantee that this will happen. In fact, we could observe how, in numerous cases of hyperinflation, people were so reluctant to keep their savings in money that they were in a hurry to exchange them as quickly as possible, running to stores to get rid of cash balances.

A common objection to thisThe assertion is that when new money appears, especially in cases where old money is already entrenched in the market, it will, first of all, be used as a means of saving and will begin to participate to a large extent in circulation only some time later . This process gives the impression that money begins first as a means of saving, and only then becomes a medium of exchange. However, one can see how this initial use of money as a “repository of value” before they become widespread, is actually the result of initially low market attractiveness as a medium of exchange, but, nevertheless, is a medium of exchange.

At the dawn of the emergence of money, their appeal atthe market will still be relatively low, as they are just starting to increase demand, thanks to their use as a medium of circulation. This means that at first there will be few exchange opportunities for new money. This necessarily implies that in order to exchange them, people will have to wait a considerable amount of time, compared with established money. That is, they will need to keep them in order for them to be recognized and widely distributed. Then the new money will have to reimburse the economic losses that they impose on their holders because of their relatively low feasibility. Otherwise, it will be unprofitable to start using them as a medium of exchange and, as a result, they will not be put into circulation as money. The most likely reward to owners for the low market attractiveness of new money could be the prospect of an increase in their value. In order for this to be sufficiently attractive compensation, they will have to exceed the value of other goods commonly used as a means of preserving value. Thus, not being a sufficiently attractive means of saving, a product is unlikely to acquire the necessary market attractiveness to replace established money. Then we will see how, even initially, new money is really used as a medium of exchange, but with a low velocity of circulation. Then they will have to gradually increase their marketability, which, in principle, can be achieved in the free market, if you serve your owner as an excellent means of maintaining value. The use of money as a means of saving should not be confused with their true nature as a medium of exchange, and we should consider this as a harmful factor hindering the growth of their market attractiveness, and, ultimately, wider distribution as a means of circulation.

The measure of value

The second use of money is a measure of value(or unit of account), that is, the basic unit of measurement of prices and value in general. The reason that money usually serves as a unit of account in commercial transactions and settlements is due to the extensive knowledge about the stock prices of money that we have. A unique property of money is that, due to its market attractiveness, it circulates widely as the most commonly used medium of circulation. Since people actively use money in trade, we obtain information on the economic exchange value of goods on the market, which is almost exclusively expressed in monetary units. Due to their widespread use as a medium of exchange, the handling of money in economic calculations and pricing is naturally simplified, since we can obtain the most accurate data on exchange “equivalents” for almost any other product traded on the market.

However, it should be noted that although moneynaturally become a common measure of value, this is not at all their inherent characteristic. The existence of money, which usually does not serve as a measure of value, or the use of non-monetary goods as a unit of account, are all perfectly acceptable (albeit unlikely) cases.

Mises revealed a logical flaw in the statement aboutthe function of money as a measure of value, comparing it with the "description of the definition of latitude and longitude as a" function "of stars" [5]. In both cases, the function under discussion is a useful tool for a person, but it is neither the essence nor the root cause of the object being studied, but only another way for people to further use it.

We will end here, concluding thatthe only use that is inherent in the very definition of money is its use as a medium of circulation. While the use of money as a means of saving or as a measure of value seems very likely and even effective from an economic point of view, and, along with the fact that these functions of money, as a rule, arise naturally as by-products of their marketability, they are neither a definite nor an important part of the concept of money.

Conclusion

Sellability is a defining indicatorthe essence of money, which is influenced by various various factors. We have seen in numerous examples how certain properties of a product, such as its divisibility, portability and durability, can affect its marketability. We also saw what impact it can have on the supply and production of money, that is, their hardness, as well as other external factors. With the advent of money, people will naturally be inclined to use them as a means of saving and a measure of value, because some important aspects that affect their market attractiveness, and therefore the likelihood of turning into money, correspond to the qualities necessary for such methods of applying them . However, these roles are “secondary” to money and are a by-product of their use as a medium of exchange.

References

[one]: High transport costs for the goods can also lead to its centralized accumulation in trusted institutions. This situation creates the risk of abuse of this trust, which may then affect the ability to use this product as money.

[2]: For a discussion of money production issues, see Jörg Guido Hülsmann's book Ethics of Money Production, especially chapters 3 through 12.

[3]: Karl Menger, who was one of three independent researchers on marginal utility theory, explained this concept in detail in his Foundations of Political Economy, chapter III, The Doctrine of Value.

[4]: The same argument can be found in Karl Menger's Foundations of Political Economy, chapter VIII, section 3 - “Money as a“ measure of prices ”and as the most economic form of accumulation of exchange values”.

[5] Ludwig von Mises, “Theory of Money and Credit,” p. 55 - “... we usually do not call the definition of geographical longitude and latitude the“ function ”of stars.”

</p>