What Does Money Solve?

Money solves the coincidence of wants problem. For example, a person who makes shoes can offer shoes to trade with others. If they want a car, offering the car seller 1,000 pairs of shoes may not be effective. The shoe maker wants the car, but the car seller doesn’t want the shoes. In this case, there is not a coincidence of wants. To solve this, the shoe seller may trade shoes to many others in hopes of getting things the car seller wants for his car. This is a clunky solution for the shoemaker and the car salesman.

Money solves this. As people try to resolve the coincidence of wants, they will tend toward things that most people want. Things that are uniform, can last a long time, and can be divided easily are popular for use as money. One money solution was salt. Paying people with salt is where the word “salary” is derived. This was a great improvement to the initial example. Salt could be divided into very small amounts and lasted a long time.

What Makes Good Money?

As different moneys were developed and competed, the value of the money over time was important. A person saving in a money wanted to know people in the future would value that money.

There are two ways to get a money. You can earn it from others, or produce more of it. In the example of salt, you could work or sell to receive salt, or you could go mine salt. Either way you had more money. But, the more the supply of money increases simply by people making (or mining) more of it, the less valuable it is as a money.

The two components that influence this most are the amount of the money at any given time (stock), and the new production of the money (flow). If there is a large amount of salt in the economy (stock), but it is very hard to mine new salt (increase flow), then this is favorable to salt as a money. This is a high stock to flow ratio, and a sign of good money. There is lots in the economy, and it is hard to make/mine more. The supply is stable.

On the other hand, even if there is a large stock, if it is easy to increase flow, this will be unfavorable to use as a money. If there is a large amount of salt in the economy, but it is easy to mine new salt and increase the supply, this is unfavorable to the use as salt as a money. People will spend their time mining salt, instead of making goods or services to get salt. This is not a good money.

Historic Winners?

Gold and silver have been the historic winner in this long experiment of moneys competing against each other. This is not because they are someone said they should be valuable or there is a law that says they are money. It is because there is a lot of this metal out there (a large stock) and and it is expensive, hard work to get more of it mined out of the ground (to increase flow).

This is much more so for gold than silver, so gold has been the winner as money to date. Gold is not a mystical substance. It has been used as money for 5,000+ years only because it solves the problems that money is meant to solve. It can be used to solve the coincidence of wants problem, and has a large stock, and and a low flow. In simple words, people choose to use as money, and it stores value.

If something comes along that can beat gold in the money competition, it could become the new money.

The Current Money Experiment

Gold was a good store of value which was good for those who used it as a money. This same feature was bad for governments who always want more money. People and organizations want more money also. The difference is that people and organizations generally have to make something others want to trade for money. Governments take money from people directly, it is called taxes.

People tolerate low taxes better than high taxes. When the government wants more money it needs to increase taxes (or sell debt, increasing future taxes). This made it difficult for the government to get more money.

The solution to this, was to stop the use of gold as money and introduce fiat currencies. Fiat currencies are not backed by gold, silver, salt, or anything else. The are just digits on a computer (your bank account) or sometimes paper in your wallet. Now that all governments are using fiat currencies they can spend more without the unpopular increase in direct taxes.

This is sold to the public as the government having wise economists who can manage the supply of money to make the economy better. The reality is that it allows the government to spend without increasing direct taxes. The creation of new money that allows them to do this is an indirect tax which takes the spending power of earnings and saving. This indirect tax is called inflation.

The dollar was “temporarily” taken off the gold standard in 1971 when it’s price was at $35/ounce. As of this writing (2024) gold is about $2,500/ounce. The temporary suspension of the gold standard is now 53 years old. It now takes 71 times as many dollars to buy the same amount of gold. A lot of value has been transferred away from the citizens through this inflation of the fiat currency.

Contact

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