The Role Of Money

Many economies in the distant past functioned without money. People simply bartered their products and labor with one another. But these have usually been small, uncomplicated economies, with relatively few things to trade, because most people provided themselves with food, shelter and clothing, while trading with others for a limited range of amenities or luxuries.

Barter is awkward. If you produce chairs and want some apples, you certainly are not likely to trade one chair for one apple, and you may not want enough apples to add up to the value of a chair. But if chairs and apples can both be exchanged for something that can be subdivided into very small units, then more trades can take place, benefiting both chair-makers and apple-growers, as well as everyone else. All that people have to do is to agree on what will be used as an intermediary means of exchange and that means of exchange becomes money.

Some societies have used sea shells as money, others have used gold or silver, and still others have used special pieces of paper printed by their governments. In the early colonial era in British West Africa, bottles and cases of gin were sometimes used as money, often passing from hand to hand for years without being consumed. In a prisoner-of-war camp during the Second World War, cigarettes from Red Cross packages were used as money among the prisoners, producing economic phenomena long associated with money, such as interest rates and Gresham's law.!

What makes all these different things money is that people will accept them in payment for the goods and services which actually constitute real wealth. Money is equivalent to wealth for an individual only because other individuals will supply the real goods and services desired in exchange for that money. But, from the standpoint of the national economy as a whole, money is not wealth. It is just a way to transfer wealth or to give people incentives to produce wealth.

While money facilitates the production of real wealth-greases the wheels, as it were-this is not to say that its role is inconsequential. Wheels work much better when they are greased. When a monetary system breaks down for one reason or another, and people are forced to resort to barter, the clumsiness of that method quickly becomes apparent to all. In 2002, for example, the monetary system in Argentina broke down, leading to a decline in economic activity and a resort to barter clubs called trueque:

Gresham law is that bad money drives good money out of circulation. In the P.O.W. camp. the least popular brands of cigarettes circulated as money. while the most popular brands were smoked.

This week the bartering club has pooled its resources to "buy" 220 pounds of bread from a local baker in exchange for half a ton of firewood the club had acquired in previous trades-the baker used the wood to fire his oven. . . . The affluent neighborhood of Palermo hosts a swanky trueque at which antique china might be traded for cuts of prime Argentine beef.

Although money itself is not wealth, an absence of a functioning monetary , system can cause losses of real wealth, when transactions are reduced to the crude level of barter.

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