What is Money Really?
They say you cannot eat money. Money, in and of itself in form of physical objects, has no value for immediate survival here and now in nature, but that does not mean it is worthless.
Money may be a contrivance, a human construction, but it represents real value. Money is a medium of exchange, which means that somebody worked to create value, such as food, housing, clothing, TV’s, or cars.
Origin in Barter
Money originated in the barter economy. Before money was invented, people traded with each other by exchanging goods for goods, such as a sack of wheat for a sack of oats.
There are two problems with the barter economy:
- You must be offering what the other party wants, and the other party must be offering what you want.
- It is difficult to save up, since your good may change in value (and condition).
If you want new clothes and offer eggs, while the other party wants carrots and offers fishing rods, then it is not easy for either of you to get what you need. Furthermore, it may be challenging to save up enough money to buy a car or a house. The introduction of a money system solves these problems.
Fiat Money and Inflation
A monetary economy can exist in several versions, but the most famous and widespread version today is a system of so-called «fiat money». This means that the government issues legitimate tender through the Central Bank.
Therefore, money is a representation of an unspecified good, but, as with all other goods, money is sensitive to the law of supply and demand. The more money the Central Bank prints the less value it has. We observe this in society with general price increases on all goods.
A liberal solution for this problem may be the resolution of the Central Bank, complete separation of government and economy, and legalizing some type of gold standard.
- Money is a medium of exchange representing real value
- Money originated in barter and solved two important problems
- A monetary economy can exist in several versions, but fiat money is most pervasive today
- This means that the state issues the only legitimate tender through the Central Bank
- Problems with inflation can be solved by separating government from the economy and legalizing the gold standard