Fed News Friday: What is Money in 2011?

This week, I decided we should lay down some foundational elements of discussion before we go any further. What would Fed News Friday be without understanding where all this money comes from or where it originated from?

If you are a fan of Murray Rothbard you would know that he loves dividing ham sandwiches and using tractors to explain the grief with bartering and currency. He also claims in The Case Against the Fed, that money doesn’t just appear as a medium of exchange. The government can’t just close their eyes, spin around, and pick the money for a country. It develops. Today we may see that America uses paper currency, backed by debt, for purchases and though its worth amounts to nothing…the American people still exchange their hard work for it.

If you walked around and asked the public today what money is (ooo do I smell another Harvard Square visit), they would most likely answer dollars, credit cards, checks, coins, etc. Even economist Paul Krugman finds himself describing it in this ever-changing fashion.  This outlook seems to be missing an important element: the fundmentals of money and its origin. When and why did people begin to accept dollar, credit cards, checks, and coins as money? Why isn’t Murray’s ham sandwich in your wallet?

In a small community if there was no developed form of money, but resources to produce useful things how would you decide what is money or how to sell/buy what you produce? Do you think walking into a community whose resources help them produce several food and health products would be interested in your tattered green pieces of paper (dollar)? Barter (or the double coincidence of wants) has been proven as a logical option in smaller communities, but you run into problems with bartering that make this mode of exchange very inconvenient.

Chances are within a community without a developed currency, the market would take its course and a medium of exchange would evolve.  For instance, if everyone loved apples because they are a source of medicine and food, as well as native growing, then there is a possibility that apples could be used as a medium of exchange/money. However, let’s keep in mind some of the ideal qualities of money:

• divisibility
• industrial or other uses
• durability
• convenient mobility

Apples are easily divisible so you could cut an apple in half in exchange for that bar of soap. The uses are apparent because of its food and health benefits which may be important to this community. The downfall with apples is their durability. You leave an apple alone for too long and it becomes brown and soft, no longer appealing to one’s appetite. Also, not everyone is ok with having apple bulges from stuffing their pants and purses with the fruit/money. Yet, if they were abundantly produced this may not be a significant issue. Thus apples would be the most marketable commodity in this community, and according to Austrian Economist, Ludwig Von Mises…that’s money!

In a recent news story one will find that Honey Buns are money within a Florida State prison. That’s right 270,000 Honey Buns find their way through the prison system a month. Within the cell blocks you will find people purchasing cigarettes, using them for bribes, and also as a substitute for addictions.

To understand why they developed as a form of currency in the jail cells, use the list above. They are divisible, abundant, easy to carry, and last quite a long time in their packages. The price and addictive taste doesn’t hurt either.

There are many other examples of how in small and large communities a medium of exchange develops by the needs and wants of the community.  Here in our country we are offered the United States Dollar. Once backed by gold, this dollar is the spawn of the 3rd generation of central banks. Backed by debt alone, the dollar is what drives the economy to produce…but is it giving back the way it should?

To be continued…

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