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Understanding the concept of "money" Print E-mail

Friday, 09 December 2011 00:00

Written by Rosetta Taylor

Human beings have used money to oil the machinery of trade since coins were first minted several thousand years ago. 

Since the precious metals had an intrinsic value, the exchange of coins for goods was a useful way of establishing the value of commodities, which previously had to be bartered for other merchandise not necessarily on the seller's wish list.  By accepting a piece of gold of a certain weight in exchange for his cow, a farmer was free to roam the market to purchase the variety of goods he needed to feed and clothe his family and work his farm.

Precious metals were often in short supply however, and eventually rulers began to recognize the merit of having a coinage backed by their government as a way of organizing trade.  Coins of low-grade metal were engraved with images of the emperor who guaranteed their worth, and this currency was able to circulate freely amongst any populace, not necessarily his own subjects, satisfied by the ruler's power to back up his pledge with concrete wealth.  These coins were the forerunners of today's international currencies.

Such a system works well when values are stable, and there is only one coinage in circulation.  Complications arise with multiple currencies, backed by different rulers, and with the effect of inflation on the relative price of a commodity.  If a government decides to increase the supply of money in circulation by printing more banknotes, it follows that each individual unit of currency cannot have the same value as before, since the wealth of the guarantor is being divided by a greater number.  The farmer who was previously willing to exchange his cow for one piece of gold now demands two, and inflation soon spreads through the land. 

A coin bearing the head of the king of France, known to be engaged in expensive wars, might have been regarded as less valuable than the currency guaranteed by the Spanish Emperor, who could rely on gold from his New World conquests.  So a rate of exchange between the two currencies would have to be established, even though their face value might appear to be similar.  Exchange rates were based on the real or apparent wealth of the currency's issuer and the amount of paper money or coinage in circulation.

With the passage of centuries the expression of money in terms of currency values has become a more exact science, and instant international communication means there is little local variation in the calculations.  A US dollar buys just as many yen in Tokyo as it does in New York, depending on the dealer's commission.  For a regular international traveler, up-to-date exchange rate information is essential, but may appear meaningless for anyone who rarely ventures beyond the borders of their homeland.  Nevertheless, the cost of filling their car's fuel tank still depends to a large extent on how their national currency fared in international markets last week. 

The farmer opened a can of worms when he let go of his cow, which he knew to be worth enough milk to feed his family, and ten calves in years to come.  Now he has a gold coin in his hand.  Money.  It might buy a replacement cow today, but not next week.  It might buy twenty chickens and a bolt of cloth in his local market, but in a city over the border it could be viewed with suspicion and be exchanged for only ten chickens and no cloth.  What is money worth?  It is not worth the cow you sold here today, but the chickens you can buy over there tomorrow.

 

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