All exchanges in the market place, if reduced to their common denominator, are nothing more than barter. Most primitive people, once they discovered the merit of obtaining surpluses, sought to exchange these surpluses with their neighbors.
The proceeds of the hunt or the excess of the production of stone axes, awls, knives, fur robes, pottery and so on, were offered to tribes, or representatives of tribes called traders, in exchange for the surpluses of these other tribes.
A normal practice was for one tribe to approach the encampment of a second tribe and at a safe distance to form an encampment. Then the traders would advance to a point approximately half-way between the two camps where they would lay out on the ground the items they wanted to exchange. After making as attractive a display as they knew how, they would withdraw.
Now, representatives of the second tribe would approach the display, examine all items with care, and sort them out in groups, leaving items of their own production or hunt in such a manner that it could be readily observed what the second tribe was willing to exchange for specific items brought by the first tribe. Now, the second tribe would withdraw, taking nothing with them.
Members of the first tribe would advance, examine the corresponding heaps of goods. If they agreed in any given case, they would take with them the goods offered, leaving their own. If they disagreed, they would rearrange the heaps to their own liking and again retire.
This process could continue for days until all possible combinations of exchange had been tried and satisfaction found on both sides. If possible combinations seemed unsatisfactory in any case the proffered items were regathered by their depositors.
This was the beginning of market place exchanges. But as one cam readily see, the process is cumbersome, time consuming, and would only work where there was a very small number of items to be exchanged.
In order to facilitate exchanges, the idea of money was introduced.
Money could be anything that both tribes agreed upon as being universally desirable.
There is no closed circuit respecting money. Some tribes used salt. Others, grain. Some, sea-shells. In the long history of the rise of man from primitive times there is probably nothing at all that hasn't been used as money some place and at some time. Money has included such varying objects as stones, beads, cattle, women, arrowheads, furs, bits of metal (all kinds), glass, slaves, paper and in modern times even cigarettes and chocolate bars.
And thus we learn the requirements for money.
1. Money is something that must be believed to be universally desirable. When a man accepts money it is not because HE wants it; it is because he believes that when he is ready to part with it SOMEONE ELSE will want it. If he is convinced that one one else will ever want it, he will not accept it. At least, he will not accept it as money, tho he might accept it as goods.
2. Money must be relatively scarce. If everyone has all the money he wants, it would follow that no one else would want it. Scarcity is a requirement.
3. Money must be distributed in an unequal manner. Usually this is accomplished in an automatic manner. An equal distribution of something intended as money should the distribution occur at dawn, would find an unequal distribution by nightfall, or a total rejection of the item as money.
The Problems of Finding the Best Money
The introduction of money did not eliminate barter; it facilitated barter. Instead of an exchange process which might involve such unlike things as axes on the one hand and fish on the other, the axes could be exchanged for sea-shells (money) and then, later on, the seashells exchanged for fish. The advantages of this process are numerous and quickly apparent. There are two major advantages.
1. Flexibility. To make a stone ax is a laborious process when modern tools are non existent. No primitive manufacturer would be willing to exchange a stone ax which took him many days to form, for a single brook trout, which might be caught in an hour's time in a nearby stream, all other factors being equal. But he still might have an ax in surplus and be very hungry. He might be willing to receive the fish as part of the payment, together with a number of sea-shells which he could trade for more fish on ensuing days.
This introduced the concept of flexibility. Unlike things could be traded with no loss accruing to the trader who had either durable merchandise or non-durable merchandise.
2. Time. Not only the trading of unlike things caused flexibility with the introduction of money, the trading of things thru a time sequence was introduced. The preceding illustration reveals both factors.
Having noted these major advantages, it it easy to see that certain substances when used as money have a superiority over other substances. For example, if grain, salt, cigarettes or chocolate bars are used, the tendency is for the "money" to be consumed as a consumer's item. Thus, the durability of whatever is to be used as money places emphasis in certain areas and de-emphasizes other areas.
Also, when cattle, huge rocks or the equivalent were employed, the disadvantages of size and lack of portability were quickly apparent. What was desirable, obviously, was something which was small, easy to carry, durable and of such lasting beauty as to be more or less permanently desirable to almost anyone at any time.
The market place, without political or government order, gradually moved in the direction of precious metals and centered its attention upon gold as the natural medium of exchange for this planet.
So, while it is true that from a market place point of view anything at all could be used for money, the market place itself helps to discipline those who would provide money, and the tendency of people the world over is to seek a transfer agent for exchange purposes which is made of gold.
Money, whether it be gold or anything else agreed upon, is a medium of exchange. As money, it is subject to all of the market place pressures and forces, just as any commodity is. But money always occupies a place in the market place BETWEEN commodities or services. Thus, it is seen as a lubricating agent, a device for speeding up and facilitating exchanges.
Virtually anything that could be used for money could also be used as a commodity. Gold, for example, can be minted as coins, formed into gold bars, or it can be fashioned into jewelry or false teeth, can be flattened into gold leaf and generally employed decoratively. As coins, gold is money. As jewelry, it is a commodity. And with a little work the metal itself is interchangeable.
One of the reasons gold is so often chosen by so many people as their favorite metal for purposes of providing a medium of exchange is that its demand is almost constant and nearly universal. This is important, particularly as it relates to the time factor.
If a man has a surplus of any goods and wishes to dispose of them, he transfers the value of his goods into the medium of exchange. But he would like to be assured, when he wishes to complete the transfer and get something else for his money, that the relative position of the money to the new goods he now wishes to buy, is approximately what it was at the time he sold his goods in the first place.
Watts ... Gresham
When a customer purchases a commodity, in theory, the transaction terminates with the purchase. When a seller sells the commodity, that is the end of the exchange process, so far as he is concerned. But money is never an end in the market place, but a means to innumerable ends. Thus it would follow that whoever could control the money supply would be in a strategic position. He would hold the high ground between buyers and sellers.
Historically, money has been both a privately provided and circulated medium and a governmentally provided and approved monopoly. The advantages of private money over the government monopoly of money are so numerous that it is almost impossible to see why the market has permitted government to make use of this open doorway to market control on so many occasions. But market place users are, alas, quite willing at times to try to get the government into their corner. And if money can be divorced from the natural checks and balances that the market provides, then, in the hands of a prejudiced group of politicians it can be manipulated to favor one group over another.
That is what governments have often promised to do. And
in such promising they deceive the persons in the market place who trust
them with this monopoly. For in the end the government pleases no one but
government. And finally, when the natural tendencies of all governments
have been permitted to run their
course, government betrays itself and falls, victim to its own insatiable greed and its unwillingness to practice discipline in regard to money.
We have said that there is a natural system of checks and balances in the market place that would safeguard the economy if private money were used.
The reason relates primarily to the fact that when private money is used, those who are to receive money are free to choose or reject whatever is being offered as money. Thus, the customer is king. Money is compelled to restrict itself to those particular substances or types which people will accept. Bad money is driven from the field. Only good money, finally, only the best money, will survive. This rule is called Watts' law.
But when government obtains a monopoly over the money supply, Gresham's law pertains. For any government can, and all governments do, issue fiats as to what can be used for money. Further, governments can and do declare that unlike things have the same worth and that the value in exchange is preserved by law.
In our own case, in America, we use as money gold, silver, currency, bonds, merchandise orders, some copper and even some lead, as well as credit itself, all geared to a government order which has set up an artificial standard and established a ratio between these unlike things. But the ratio is false, as it must be, due to the action of market place forces.
For example, in this country we have always tried to operate on a bi-metal system including gold and silver. So many ounces of gold were declared to be equal in value to so many ounces of silver. Both gold and silver were declared to be worth so many "dollars." And dollars could be currency, or could be represented in any of the other ways mentioned and more.
The result, as Gresham foresaw, was that good money would leave the market and only the bad would remain. That which people trust the most, will find its way into storage and secret hiding places, leaving the country or otherwise disappearing from the marts of trade. That which the people trust the least, will remain in constant use, despite the government's declaration that things which have little or no utility in themselves are equal to things which have utility.
Gold in General Use
If government were to be banned from having anything to do with money at all, including all the various forms that money can take, the best of all possible systems would result, we believe.
The system would not be perfect, for men are not perfect.
But errors would be restricted to local soft spots in the market; losses
would have the benefit of teaching others the areas where losses occur;
and best of all, political purposes could not be employed in the money
field to advance political objectives. Instead, the natural forces within
the market would control and discipline exchanges relating to money.
If this general theory were to be adopted, we believe that experience and history indicate there would be a universal demand for gold as the common medium of exchange. Gold, for a number of reasons, is an ideal medium for this purpose. It is relatively rare and relatively difficult to produce. Although new gold strikes could occur at any time, the likelihood of sufficient gold mining increases to create a disruption in the market is remote.
There is always some attrition in any money supply. Coins are lost or wear away. But new gold production would fairly well tend to offset those losses, making likely about as stable a supply of money in circulation as could possibly be managed.
This is important. For the truth of the market is contained in the fact that values, even the value of money, cannot be permanently fixed. What is desirable is a kind of money wherein greatest stability occurs. Gold appears to offer this. And if the government were barred, even tho gold would be deposited and checks or notes written against it, the ratio of such writing would tend toward a relationship which the market would deem to be the most useful in its manifold trade and banking activities.
There is a general belief, often stated, that gold would not offer itself as a particularly useful metal for money because of its recognized scarcity. It is said that there aren't enough gold dollars in the whole world to take care of the enormous amount of exchanges which occur daily, both nationally and in world trade.
This belief is false. It rests upon the idea that there is some fixed relationship between goods in the market and money that could be exchanged for those goods. There is no fixed relationship. If politicians could be prevented from getting into the money business, then it would follow that a trend could develop which would result in a gradual appreciation of the value of money. This is to say that if the market place decided gold was the proper substance to use, then, even tho the supply of gold so used didn't increase, the value of each gold dollar would increase.
If money is permitted to increase in value, the result would be a fall in prices. More people would be able to buy more goods with less money.
The trouble with getting this to happen relates primarily to the beliefs many people have about money. For people continue to be fooled about money. They like to think and compete in an area where dollars are used, not only as a medium of exchange but as a measure of value.
So, in spite of the fact that dollars do not measure value, but only facilitate exchanges, most persons act as tho an increase in the number of dollars they possess automatically means that they are wealthier and will be able to buy more things. The reverse could be, and often is true.
Therefore, what is needed is a money system as freed from political pressure and ambition as possible. A system in which the users of money were free to select their own media of exchange would probably offer the best results. This would be a natural system in which the customer, the user of money, would be king.