The Theory of Money, Part 5

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Ok, part 5 already!

I’m going to explain what I promised at the end of part 4. But, first, I’d like to clarify a couple things so that my explanation makes sense.

First, I tried to describe this before, but let it sink in: The simplest way to quantify the true value of something is in Labor Units (LUs).

Therefore, when I am quantifying the true value of accumulated wealth a society has, I will tell it in terms of LUs. I could instead quantify it in terms of gold coins, but remember what I said in part 2 that this adds a conversion factor (the LU: gold coin exchange rate), which can muddy the waters when that exchange rate changes.

Second, wealth can be stored in many ways, but I’ll divide them into two broad exhaustive and mutually exclusive categories (my favourite): cash assets and non-cash assets. So someone’s total wealth is their cash assets plus their non-cash assets (minus any debts they have).

Great. Now let’s answer the question of how much gold our fictitious society needs to be able to store all its wealth.

Let’s say our society had one goldmine and that it collapsed, so there is no access to new gold. In other words, the total amount of the gold in the society has become fixed (apparently no one loses any gold either).

Everyone is working very diligently for a year and they all get bitten with the save-up-for-an-emergency bug, so they start trying to save some extra cash (in the form of gold coins, of course, since that’s the only form of money our society has so far).

As the total number of LUs attempted to be saved as cash increases, the demand for gold coins increases, so each gold coin comes to be worth more LUs.

This was a really short lead-up, but hopefully it’s enough to illustrate the principle that any amount of gold is enough to store the entire cash assets of a society because the gold coin:LU exchange rate will adjust to meet the market’s needs.

I guess this provides a new way to calculate the value of a gold coin. It can be determined by the aggregate-number-of-gold-coins:aggregate-number-of-LUs-attempting-to-be-saved-as-cash ratio.

This will be useful information when we talk next week about what might happen if someone figures out how to counterfeit gold coins, which will finally offer some (possibly troubling) insight into at least one modern money issue.

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