We got into the topic of money a little bit yesterday—mostly how it developed and its humble origin as a run-of-the-mill commodity.
Money is a commonly used medium of exchange. Money has certain characteristics, which you might think would be found in a book titled “Basic Economics”, but most economists seem to neglect this all important subject.
Money must be valuable: It is wealth, like a herd of cattle, a barn full of tobacco, a storehouse of salt, or a vault filled with gold. All of the above have been used as money at different times and in different places. Money has to be something of some value before it can ever be considered a commodity.
Next, it needs to be relatively scarce. There is a reason coins were made out of gold and silver, not iron. Today our coins are only token money, but were we to actually trade iron on its value, that would come out to about $50 per ton. For a young man taking his date to dinner and a movie, he would want to bring along at least one ton of iron and maybe a few hundred pounds change. Well, what about something along the lines of diamonds? Most simply, diamonds are too rare. Rarity is a problem. There simply are not enough floating around to be used.
Diamonds also are not fungible. That is to say, every diamond is unique. It’s impossible to consider a pricing system with diamonds—not only do you have size and carat, but also clarity. It truly boggles the mind…or mine, anyway. However, something like gold is fungible. One 1/2 ounce of gold is just as good as any other 1/2 ounce out there.
Another very important feature of a money that either allows for a more complex economy, or is brought about by a more sophisticated economy, is durability. The quality of not being used up over time is very desirous. This is why gold and silver have won out over time whereas cattle, salt, tobacco, and animal skins have finally reverted to regular old commodities.
Diamonds are durable, cattle are not—not over 15 years, at best, anyway—but neither are divisible. This is another essential to a more complex economy. If I want to buy only 1 goat, but the going rate is 5 goats per 1 cow, what should I do with the other 4 goats? Now I’m back to bartering around to get rid of them. I only want 1 goat, I cannot trade 20% of my living cow, now can I? I can take either 5, or none. This isn’t good. The same problem would arise with the diamond example above.
About the only things that seem to work are gold and silver, with copper making a guest appearance from time-to-time for extremely small exchanges.
I will deviate from some Austrians and add that bitcoin and crypto-currencies seem to be sound and meet all of the above criteria. Their inherent value being found in their ease of moving value through space without 3rd party participants. It’s possible to easily send any amount of value of bitcoins from a farm in Montana to a village in central America, so long as both people have internet, and with the bonus of no transaction fee. To send money through Western Union it would cost upwards of 10% of the amount sent. That is the value of bitcoin, and had I caught upon this 2 years before I did, I just might be a rich man today.
But that should do it for the properties of money.
4) Fungibility, or homogeneity
If you want a quick resource page, I recommend checking out: http://wiki.mises.org/wiki/Money
It has a good, quick little run down on money, as well as plenty of resources.