Libertarian Land Philosophy:
Man's Eternal Dilemma
Oscar B. Johannsen, Ph.D.
BOOK II: Exchange and Money
Chapter 5 - Exchange Media
Money and money-aids are used interchangeably in effecting exchanges
of goods with few people giving much thought to any differences
between them. For convenience in discussing them, therefore, it seems
appropriate to classify them both as Exchange Media.
As the reader knows by now, money-aids are not mediums of exchange.
They merely assist the medium of exchange and act as a catalyst. They
may even eliminate the need for using the medium of exchange in many,
if not most, exchanges. Such would be the case if an article of wealth
were exchanged for a money-aid, and that money-aid then exchanged for
another good.
Really it should not surprise anyone that money-aids are not mediums
of exchange, for money-aids tend to be so voluminous that they violate
that essential characteristic of money which is relative scarcity. It
is this important fact which solves an intriguing problem very simply
and efficiently. Millions of transactions are consummated daily in a
highly complex society as the United States. If money were needed to
effect each of those transactions, the amount of money required would
be as great as the grains of sand on the seashore. But, then, it would
not be money for it would not be sufficiently scarce. A problem would
arise how to effect those millions of transfers of goods which require
some medium inasmuch as mutual coincidences of desire rarely exist.
It is doubtful that man could ever have determined the solution to
the problem if he tried to think it through. Yet the solution occurred
without his realizing it, through the use of these money-aids. Since
these money-aids assist the exchange of goods over time and as there
is no limitation on the number of exchanges of goods which can be made
over time, other than the limit of the amount of goods in existence,
the problem is automatically solved. Money is not used directly at
all. In effect, the goods are bartered one for another, principally
over a period of time with money-aids as the evidence of the debts
involved. Thus, it is a matter of indifference to what heights a
civilization will rise, nor how enormous the transfers of goods are.
Inasmuch as the transfers involve the exchange of goods for other
goods, no large amount of money is needed to act as a medium.
The money-aids might be likened to cartons which contain the goods
that are exchanged for each other. When the goods are exchanged, the
cartons are discarded, as when a banknote is destroyed; or the cartons
may be used over and over again, as when banknotes are used over and
over again.
The cartons did not exchange the goods. They merely helped to
exchange the goods. Similarly, the banknotes did not exchange the
goods. They merely aided the exchange. Because money-aids exist, money
can continue to perform its essential function as a medium of
exchange. When needed, it will act as the medium. By and large,
however, the more complex the civilization, probably the less
frequently money will be required as a medium of exchange.
Although money may not be used in credit transactions, it does
indirectly aid all these exchanges. It does this by acting as a common
denominator by which all goods, no matter of what kind or description,
may be compared in the only way in which they can be compared. That
is, goods are priced in terms of money. You cannot compare an apple
with a hammer, but you can compare the price at which an apple sold
with the price at which a hammer sold.
This comparison aids man in using money-aids to make credit
exchanges. They help him to decide at what prices he will exchange
goods when using a money-aid instead of money. If a pocketbook sold
for $5.00 and a hammer for $5.00, a person could give a $5.00 banknote
for the pocketbook. The merchant, in turn, could take the banknote and
exchange it for the hammer. No money was used. A money-aid in the form
of a banknote aided the time-barter transaction of a pocketbook being
exchanged for a hammer.
Now, as will be shown subsequently in the discussion on prices, in
order for an article to act as a common denominator its quantity has
to be fairly steady. The quantity does not have to be absolutely
fixed, but relatively so. Sea level is determined as the point from
which heights and depths are measured, and although the sea level is
not absolutely fixed, it is steady enough to be used. If the article
which is used as money had to increase in quantity to keep up with the
increasing number of exchanges, comparison with it would tend to
become meaningless. This does not mean that it should not increase or
decrease somewhat as a civilization rises or declines, but the changes
probably must remain small for it to act as a common denominator.
As the reader now understands, ordinary barter is the most efficient
means of exchange if a coincidence of desires exists for only one act
of exchange is required. Money eliminates the numerous intermediary
exchanges which would be needed if coincidence of desires does not
exist. But this use of money means that there are two exchanges
involved; the exchange of an apple for money and then the exchange of
the money for an orange. This is not as efficient as ordinary barter
for it involves an extra exchange. Therefore, consciously or
unconsciously, as man seeks to satisfy his desires with the least
effort, he cannot help striving to place his exchanges on a pure
barter basis. . This may appear surprising to the reader as the belief
is pervasive that barter coincides with a crude society whereas money
is associated with an advanced civilization.
Note, however, what man has accomplished. By evolving money-aids, he
largely reduces the need for actual money through the substitution of
credit. While money establishes the ratios at which goods are
exchanged, the actual exchanges are primarily on credit, i.e.,
time-barter. In a sense it might be said that the combination of money
and money-aids largely eliminates the problem of the coincidence of
desires existing, so that, in effect, all exchanges are of the order
of ordinary barter. This is because the money-aids eliminate the
problems of trust and time in credit transactions, (as will be
subsequently shown), so in effect they become ordinary barter
transactions, while money establishes the ratios at which these
exchanges are made.
Some monetary students appear to be of the opinion that with growing
sophistication many societies may discard money, substituting credit
cards and even computerized systems to effect exchanges. But that
development is impossible. In any society goods will be compared, and
there is only one way in which a comparison can be made. That is with
some common denominator. That denominator is the medium of exchange.
In order to establish ratios, actual money must be used from time to
time. It can no more be eliminated than can the standard yard in
Washington D.C. To produce extremely accurate measuring devices, there
must be constant reference to the basic yard in Washington D.C.
Substitutes and copies may be made to assist, but such can never
eliminate the fundamental yard. The same is true of money. To
determine prices, money must always be available as the good to which
all other goods are compared, just as the sea level must always exist
as the standard with which all heights and depths are compared.
Just how much money must be in existence probably cannot be
ascertained by any empirical or theoretical means. Efforts have been
made to determine some per capita amount of money which should be
available. Elaborate studies of past records have been made, but they
are of little help. After all, the quantity of money which a society
at one period of time may require does not necessarily imply that such
is the correct amount for the same or a different society at another
time period.
The only means by which the proper amount ban be determined is in the
free and open marketplace where money is produced and exchanged, as is
true of any commodity. As a civilization advances, it nay be argued
that possibly more money is required as an absolute quantity, but as a
proportion of the number of exchanges, it may very well be that it
declines.
No coterie of men can solve that problem no matter how voluminous the
records they may have of the amount of money which existed in past
eras. Each new day requires just so much money and the correct balance
is determined quite precisely in the marketplace, just as it
determines how many cars, books and furniture are required each day.
If there is too much money, it becomes unprofitable to manufacture
more, so goldsmiths, bankers, or whoever is manufacturing money
proceed to restrict its production.[1]
(There is much confusion over what is assumed to be the manufacture
of money. Because most people think that money-aids are money, they
believe that when banks issue them, they are manufacturing money. But
to say that a bank's debt, such as a banknote or a demand deposit, is
money, is to say that a bank's promise to pay money is money. This is
an absurdity. It is analogous to saying a picture of a pie is a pie.
It is the result of a definition of money which is much too broad and
a failure to look beneath the surface to see what -aids actually are
and do.)
If it were forbidden for commercial banks to establish demand
deposits as they are now forbidden to issue banknotes, such would not
eliminate the use of debts as money-aids. It would merely mean that
someone else's debts would take their place. As has been pointed out
before, in Colonial times the debts of prominent businessmen
circulated. Today, if banks were restricted, possibly the same thing
would occur. The debts of wealthy businessmen might circulate;
possibly the debts of gigantic corporations. Even if such debts which
could circulate do not now exist, they would come into being. No one
can say exactly what form debts which would circulate would take, but
that something would develop you can be sure. After all, the exchange
would still be one good for another. A debt of an individual, or a
corporation, can assist an exchange just as well as a bank's debt.
It may appear pedantic to keep stressing that goods are purchased
with other goods inasmuch as anyone who takes a few minutes to think
about it, recognizes that such is the case. However, people lose sight
of the fact that money-aids do not fulfill the function of aiding
goods to be exchanged in the same way that money does. Money is an
article of wealth. When exchanged for a pair of shoes, an article of
wealth (money) is being exchanged for another (the shoes). This is not
true of a money-aid, such as a banknote. If it is used to purchase the
shoes, it appears as though it is being exchanged for the shoes.
However, actually the banknote is merely evidence that a time-barter
transaction (that is, a credit transaction) is being consummated. On
the one side is the actual money, or good, in which the banknote will
be redeemed ultimately. On the other side is the pair of shoes.
Because governments have made money their monopoly and because they
have declared that the banknotes of their central banks are legal
tender, people tend to look upon banknotes as being money. They
believe the purchase of an article with a banknote is the same as with
money, for to them banknotes are merely another form of money. But, as
explained in the previous paragraph it is a mistake to assume that
such is the case just because superficially it appears so.
For thousands of years. men believed that the sun rose in the East
and set in the West as they saw this happening each day. No doubt, a
few men recognized that the motion of the sun and the earth was a
relative one. Probably they told their fellowmen, who may have
appreciated the truth of the statement, but then promptly forgot it.
Similarly, when it is emphasized that fundamentally goods are
purchased with other goods, and that banknotes, demand deposits, or
money certificates merely assist the exchange, all recognize that
fact. But, then, they will forget that these are merely mechanical
aids and ascribe to them powers which simply do not exist.
Recapitulation
Money and money-aids constitute exchange media. Money is the only
medium of exchange. Money-aids do not act as a medium of exchange,
although it is mistakenly assumed that such is the case.
Those money-aids which comprise debts, as banknotes and demand
deposits, assist in the consummation of credit transactions by
constituting evidence that such dealings are being made.
In advanced civilizations, actual money is not utilized to the extent
that money-aids are. However, indirectly money is involved in all
transactions for they are consummated on the basis of prices which are
determined in the marketplace, and these prices are the ratios at
which goods exchange for money.
NOTES
- The fact that governments are
in the field of money has distorted the whole picture, just as
they do when they are in any business in which they do not belong.
Cf. Book VII.
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