The Theory of Money, Part 3

Image credit: dmagazine.com

Links to part 1 and part 2.

Ok, so we’ve talked already about the purpose of money and then delved more into wealth and where it originates and is distributed, and I also introduced Labor Units (LUs) as a standard unit of labor and showed how it can also be used to quantify wealth and the true price of things.

This week, we’ll continue on with our early society to discuss what we can do with stored wealth/stored Labor Units.

Remember that blacksmith? Let’s say he’s been selling a lot of items and has accumulated a lot of gold coins that he doesn’t need to use in the near future. He has a three options of what he can do with that excess wealth/stored labor.

Option 1: Spend it. He can finally splurge on painting his house black like he’s always wanted. He is consuming his stored wealth, but it doesn’t just disappear out of society because it gets transferred to the paint supplier and the painter in compensation for them providing those goods and services.

Option 2: Save it. In other words, keep those coins hidden under his loose floorboard. Or maybe there’s a vault somewhere that he can rent space in to more securely store it.

Option 3: Invest it. My definition of the term “invest” is that you give up something now with the expectation of getting back more later. So he will give up that money now expecting to get it back plus some more later.

There are actually two different kinds of investments he can make: (a) He could simply loan his money to someone, or (b) he could purchase something that will earn money for him.

The loan option is straightforward. The farmer wants to buy a new plough, so the blacksmith loans the farmer 10 gold coins to buy a plough, and then the farmer pays him back 11 gold coins after the harvest. Hopefully the plough enabled the farmer to be so much more efficient that he earned enough to pay the blacksmith back the principal plus interest. The modern equivalent to this is investing in bonds.

The “purchase something that will earn money for him” option is more flexible, and it comes down to him putting his money into some kind of business venture. Maybe he has a passion for town news and wants to start a town newspaper with the new town printer who owns a printing press. Maybe he wants to own 30% of a new mail carrying venture that his neighbor is starting. These investments could be relatively active (with him contributing his own labor, like doing all that work with his printer friend to found a newspaper) or relatively passive (like buying 30% of his neighbor’s mail carrying venture, where the only thing he’s contributing is money and he is promised a share of the profit commensurate with the percent of the business that he owns). The modern equivalent to the active investment type is starting your own business, and the modern equivalent to the passive investment type is buying stocks.

So, as a society becomes wealthier, more people have more excess wealth stored up in cash, and then they can choose among those three options what to do with it. Note that choosing to save the money (as opposed to spending or investing it) is the only option that doesn’t put that stored wealth back into circulation to be used and reused in society.

Let’s stop there for this week. Next week, I’ll talk more about how wealth gets destroyed, how much money a society needs to be able to store all its accumulated wealth, and maybe we’ll even get into the origin of banks.

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