The Theory of Money, Part 1

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I have many interests. The ones I write about on this blog are generally related to government in one way or another.

One of the government-related topics I am really interested in, but haven’t yet written about, is money. And since I’ve been thinking about it and trying to figure it out lately, I’ll share a few posts on the topic.

Let’s go back to the early days of human civilization. Farmers worked the land and were able to raise a crop and then sell the food. Blacksmiths made things and sold them. How did everyone obtain the things they needed that they couldn’t make themselves? Originally, it was through barter. For example, “I’ll give you one bushel of wheat for that cook pot.”

But simple barter of these self-produced items has a problem. If a blacksmith worked really hard and made more stuff than he could sell immediately, then he had to find space to store piles of nails and cook pots and horse shoes and swords. That’s inconvenient. Or, think of the farmer who has a nice big crop of perishable food but doesn’t need to use it to barter for anything just yet. The need arose for a more convenient way to store wealth.

Enter precious metals. They are easy to divide into smaller units, they are intrinsically valuable, they don’t spoil, they don’t take up a ton of space, their value stays remarkably constant over time. They are a great form of money! They very conveniently achieve that primary purpose of money–which is to act as a means of storing wealth. They also enable someone to conveniently transfer that wealth to others in payment for a good or service, which is another really important characteristic of anything people are going to use as money. For these reasons, many (most?) civilizations eventually landed on precious metals being the preferred commodity to use as money.

I’ll talk about the transition from precious metals money to the paper money we have today, and also how cryptocurrencies fit into all of this, in another post. But there is one more theoretical aspect of money that I want to explain in this post.

If money’s purpose is to store wealth, where does wealth come from anyway?

I’ve already said that the farmer generated his wealth from a combination of two things: the land plus his labor. This land + labor combo is the origin of all wealth. And then after that wealth had been gleaned from the earth through labor, it could then be transferred to other people, including those who didn’t glean their wealth directly from the land, through exchange. For example, the farmer would give food to the blacksmith in exchange for making him that cook pot.

These days, relatively few people are employed in direct wealth-gleaning-from-the-earth occupations, but this is still the true origin of any wealth that is had on this earth. Therefore, any money anyone has today is actually stored wealth that was originally gleaned from the earth (or, sun, in the case of solar)! Part 2 here.

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