#27 The Coincidence of Wants

Contrary to popular euphemisms, money is not a shared illusion. If you study monetary history you will find that societies historically converged on a single, most saleable good as “money”. But the reasons for this are very specific and they stem from a concept known as the coincidence of wants.

Imagine a barter economy. I raise chickens and you grow apples. I would like to buy one of your chickens in order to cook my dinner, and you would like some of my apples. However, one whole chicken costs 50 apples and you only need 10 apples. How do we solve this problem?

By the use of a single, most saleable good as an intermediary exchange of value, we could conduct our trade where rather than exchanging apples for chickens we exchange both items for that single saleable good. This could be sea shells, beads, rocks, metals, really whatever our particular society has generally converged upon as the single most saleable good. This was typically a product of culture and geographical restrictions up until economies started seeing more globally interconnected exchange.

As this happened, good monies won out economically and bad monies lost, often to the severe detriment of the localities using bad money.

Within the confines of an isolated society, something like glass beads likely served the function of money quite well. It was highly desirable for various ornamental and cultural purposes, they could be difficult to produce, they were small and easy to transport. However, as thiers’ law states, bad money drives good money to a premium. The arbitrage on this premium can destroy economies in short order.

In truth, the idea of money as a shared illusion never materialized until the rise of fiat experiments and their subsequent legal tender laws, something we will expand on more in the future. It is important to remember that fiat means “by decree”. Today’s quote from Jorg Guido Hulsmann, below, is particularly appropriate. Money fulfills the very necessary function of not only a medium of exchange, but also an instrument of economic calculation and storage of productive value into the future.


Book of the Month:

The Ethics of Money Production by Jorg Guido Huulsman

-“We may call any kind of money that comes into use by the voluntary cooperation of acting persons “natural money” (the concept of natural money is not much used in the contemporary literature, but it has a venerable tradition in economics) ”

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