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Essay: Rense Houwing

How money came into existence

A brief and partial history of money Who do you think creates the majority of the money supply and allocates the money? Very probably, like eighty-five percent of respondents to this question you will say something like, Oh, its the government isnt it, its the central bank isnt it? Second question. Would you agree to a system whereby the majority of the money supply in society is created and allocated by profit oriented private enterprises? To this you will probably answer, No, you wouldnt agree. Yet this is precisely the monetary system that we have today. Therein about ninety-seven percent of the money supply is created and allocated by commercial banks (Bazlinton 0:42), thereby burdening society at large with debt and eternal interest. Apparently the ignorance about this is part of the system, since people just wouldnt agree if they were aware what system we have (Bazlinton 3:20-4:25), or, paraphrasing Henry Ford, if the people understood our banking and monetary system, there would be a revolution before tomorrow morning ( Although, obviously then, you wont hear much about it in text books or newspapers, there are quite a few people claiming that this system, that works so very well for banks and makes them very profitable, is detrimental to the rest of society. What all their arguments and the value thereof might be would surely be interesting in the light of the current economic crisis, and the correllated election debates about cuts to decrease national debts versus extra expenditure to promote economic growth, at the cost of increased debt. However, this would be a trifle too much to cover within a mere thousand words, not to mention the fact that this is to be an historical essay, not an economic one. Therefore, I will restrict myself to some ground work for those issues, by shedding light on how we arrived at a money based society in the first place, defining what money really is and reviewing a few features that make money so crucially important and convenient. Thus leaving for another occasion the next subjects: what banks originally were and what they originated from, how they acquired control of the money supply, and how or why theyve stayed in control ever since. Before money, people traded through direct exchange of goods. This barter system was very costly in terms of time and resources, since always a double coincidence of wants is required. It was also severly limited because if someone has an indivisible good, for instance a dairy cow, and wants clothes, gin, shoes and tomatoes, he cannot cut the cow up without losing its value. Then someone invented indirect exchange, a much more efficient solution,. Everybody needed for instance salt, so if he wanted someones shoes but that person didnt want his eggs, he would go trade his eggs for salt and then come back and trade the salt for the shoes. Others emulated this solution, and as time went on, salt became, in that society, a medium of exchange, aside from its direct use to satisfy certain human wants. This was money in the essential sense of universal, divisible purchasing power. Its adoption, then, permitted everyone to specialise, because they would be confident that they could sell whatever they produced for salt, and use the salt to buy everything theyd need. It also solved the indivisibility problem, because one could now simply sell the cow for salt, and then divide the salt up among the other specialists one wanted to buy from. Other benefits included, very importantly, that it served as a unit of pricing, allowing to compare the value of goods, and also as a unit of economic calculation, allowing businesses to calculate revenues, costs, profits and losses. Moreover, it greatly reduced the number of prices, since prices of goods no longer had to be expressed in terms of all the other goods around. Finally, a big problem in barter that was solved by money was the impossibility to produce large durable consumer goods or capital goods, arising from the problem that workers wouldnt accept if they were weekly paid in, for example, a piece of a boat, or yet another barrel of oil, or ten more pounds of iron. So, all these problems on the barter were solved by the gradual adoption of some type of money. It is known that in history many different useful items were used this way as media of exchange. Over time, as a network of interregional and international trade developed, a few goods came to be used throughout the world as the general media of exchange, meaning they were universally and routinely accepted by everyone without giving it a second thought. This happened with gold and silver, and to some extend copper, and for good reasons. Media of exchange have six important characteristics. First of all, they are generally acceptable, they are widely used in the society. Also, they are highly durable, so one can hold the medium until attractive opportunities on which to spend them

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are found. Next, they have a high value-to-weight ratio, making them easily portable. Furthermore, they are highly divisible without losing value. In addition, every unit is identical to the other units, making it easy to recognise the value of them. Finally, they are easily recognisable. Gold and silver outcompeted all the other local media of exchange and became the world money because they embodied these qualities to the highest degree. Any money that developed as a useful commodity is referred to as commodity money, under th what is called a commodity standard. The gold standard of the 19 century is an example of this. Since money came into existence as useful commodity, and most commodities circulate by weight or by volume, commodity money too circulates by weight. That is why from 1834 to 1931 the British Pound (weighing 1/4 ounce) and the American dollar (weighing 1/20 ounce) were just different weights of the same thing, namely gold. And as the pound weighed 4.86 times the weight of the dollar, its value was also 4.86 times that of the dollar. In conclusion, money was not invented. It was not created by the state. There wasnt some good king once who, seeing his people suffering from a lack of coincidence of wants, got all his wise men together to solve that problem, upon which they said, yes, we have to use salt. Nor was there a town meeting where all citizens drew up a contract that theyd all accept dried tobacco leaves for money. Governments had nothing to do with it, they stepped in much later. Instead, there was a market process which embodied the actions of millions of people over time, all seeking their own benefit, all seeking to solve the problems of indivisibility and coincidence of wants, and in doing so motivating others to follow their example. And as a consequence, over time, money arose on the market, and gold and silver became the preferred money. All in all, it is clear that money exists out of necessity and is therefore here to stay. List of Works Cited Bazlinton, Charles (charlesbazlinton) (ed.). R A Werner: 2 Who allocates money? YouTube-video, 2011. ( ) (web site). ( Paul, Ron (CongressmanRonPaul) (ed.). "What is Money?" with Joseph T. Salerno -- Ron Paul Money Lecture Series, Pt 1/3. YouTube-video, 2011. (

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