Chapter 17- Introduction to Money

We are finally getting to the area of economics where Sowell is actually very weak; famously weak. I’d read Sowell long before being introduced to the Austrian School and I remember when I did start talking to other Austrians and I told them I read Sowell, they would respond sadly and reluctantly, “Yeah, Sowell is alright, but he is kinda weak on monetary policy.” Back then I didn’t think that was such a big deal, but it is actually critical to having a sound view of economics in other areas. The fact that Sowell is so good in other areas despite being so bad on monetary theory is remarkable. So, I’m glad we’ve finally made it to monetary theory, and my guess is that we are going to be here a while.

Sowell doesn’t even get out of the first paragraph without running into problems. He writes, “While money is not wealth—otherwise the government could make us all twice as rich by simply printing twice as much money—a well-designed and well maintained monetary system facilitates the production and distribution of wealth.” The book would be better had that whole line been cut. What do you mean money isn’t wealth? And, a monetary system designed by who? And, maintained by who? He doesn’t even define money, taking for granted that someone who has never before picked up a book on economics knows what money is.

If you think I’m being too harsh, scroll down to the comment section and list 3 of the 5 qualities of money. I would also point out that Sowell doesn’t address the development of money. He does discuss, or mention rather, barter exchange, but how did we go from barter to indirect exchange? That is with money, where I don’t trade my labor directly for the things I want, but I trade my labor for money, and then trade the money for all the things I want and need.

Let’s start first with how money comes into existence and then define it. The theory goes, as men produced and engaged in direct exchange-barter their aims were often frustrated, and a man making shoes would want fish, but wouldn’t be able to acquire fish because the fishermen already had shoes. Therefore, the cobbler would go to the fishermen and ask what they want for their fish, and then what they would take.  It so happens they may need more hooks, but the hook maker has had his fill of fish, so the fishermen ask for buckskins. Thus the cobbler who uses buckskins himself in his profession, trades some of his buckskins to the fishermen for fish, and the fishermen take the buckskins to the hook makers to get hooks.

Here you can see the gradual transition between barter and indirect exchange. In this example, we haven’t quite made it into a money system necessarily, but you can begin to see how thinking men stop thinking so much about what they themselves want, and begin to consider what others want. Some, myself included, consider this to be the very bedrock of society extending beyond blood relations.

The idea goes that as more and more people begin to trade their goods in terms of buckskins, the buckskins slowly move from being just another commodity among many to being a commodity currency. When the butcher, the baker, and the candlestick maker are all satisfied in taking buckskins as payment, the buckskins are monetized. They become money. In fact, buckskins were more or less used as a currency in the early days of the Indian trade with tribes in North America.

First, it might be worth mentioning that there is no intelligent design when it comes to the formation of money, and furthermore, money is wealth. The buckskins were sought before they became money, and had a value in themselves as much as any other commodity.

Sowell, as well as others, are tempted to look at the “money” we have today, which is only paper. It is now “fiat” currency.  Fiat being the Latin word for decreed.  However, it is important to note that it didn’t start out that way. In the beginning, money was directly tied to gold with a hard and fast exchange rate of 1 dollar for 1/20th of an ounce of gold. That is a $20 bill was as good as one gold ounce.  Over time, through government intervention, and debasement by the central bank, the dollar has had its tie to gold cut, and gold is now trading for around $1,150 an ounce; a far cry from the original $20/oz.

This, notwithstanding, the qualities of real money and its origin are still worth understanding, and are critical to going further in economic understanding. This is why  Rothbard deals with money and its formation very early on in “Man Economy and State.”

Time runs short and I’ve got to be moving on, so we’ll have to cover the attributes of money tomorrow.  Until then, take care, and leave comments in the Facebook group; don’t be shy.