by the Man in the Bowler Hat
Last time when blogging about “money” and “banks” I quoted a few religious passages because, when we exchange “money,” everyone must agree to a belief and have faith that a bank note is actually worth something. Simply stated if there isn’t faith, then its game over! So what is money and why is it important?
To begin “money” is anything that has three basic characteristics.
The first characteristic of money is “its a medium of exchange.” This simply means money is an object or idea that everyone believes to be true. For example before there was a printing press or a digital computer, ancient societies used items found in nature like gold nuggets or sea shells as money.
The second characteristic of money is “its a store of value.” This simply means its an object or idea that everyone believes isn’t all that common but worthy of gathering, then putting away (where it could be kept safe from other people). Ponder for a moment if a gold nugget or gold dust was as common as beach sand which is found pretty much all along the sea shore. In this counter example “sand” isn’t worthy of being considered as money because its pretty common and does not require much work to gather.
The third characteristic of money is “its a unit of account” which simply means its an object or idea that everyone believes can be traded for any other kind of object or idea. Lets say for example that 1 gram of gold is something everyone agrees is a desirable item that every other person wants because it not all that common and requires some kind of work to obtain. If this is the case, then 1 gram of gold could be traded for a cow to provide milk, or an animal fur which could be used to cover up in winter, or it could be traded for a plot of land on which it would be possible to grow crops, etc.
As to why money is important, well the bottom line is, basically when any object or idea, where everyone believes in “money”, this in turn makes trade much easier, which then stimulates development.
Just imagine if there wasn’t “money” then ask yourself how would it be possible to have a modern consumer society, with useful products like an iPhone, iPad or Macintosh.
Now lets consider a simpler time before an iPhone or iPad were ubiquitous, a time before the first Macintosh computer. So lets do a thought experiment and go back 200 years to the year 1817. Back then the United States was a newly formed nation, New York City was at the top of the heap with a population of just over a hundred thousand people and the State of California with cities like Los Angeles, San Diego and San Fransisco, did not exist. At the time there was no mass production of food, most people had to grow their own food on farms simple because of need. Actually, the only mass production in agriculture (back then) involved slavery because there wasn’t technology. Just imagine how difficult life would be if you had to grow all your own food, without modern plumbing to supply water.
Another example of modern day living too many people take for granted is the car. Stop for a moment and name different stuff that it takes to make a car. In materials alone there are various metals that have to be dug out of the earth and processed, rubber that is used for tires and gaskets also has to be somehow produced. Next consider the fuel that is needed to power all the forms of transportation (not just cars but also planes, trains and ships), etc., etc., etc.
Hopefully you are starting to get the idea that money makes the world go round because without “money,” trade is all but impossible. So whats not to love? To answer this question we look to physics where we literally see that for every action, there is an equal and opposite reaction. When dealing with money, economists use the term “externality” to describe the consequence of an economic activity experienced by unrelated third parties.
To illustrate consequence of an economic activity, consider the case of a person buying gas for their car. Here one might think the price for a gallon of gas is the only cost. But looking at the big picture, we see various costs include air pollution (which causes harm to humans), along with other environmental consequences. So basically whats not to love is all kinds of unforeseen complex interactions which happen as a result of new technology being developed for the marketplace.
As a kid I remember being told that, it is easier for a camel to go through the eye of a needle than for someone who is rich to enter the kingdom of God. Looking back on this passage I’ve come to realize that having lots of money in a bank isn’t unto itself a bad thing BUT having lots of money does make living the “bling bling” lifestyle pretty easy and tempting. Viewed another way, its possible to put lots of money in the “bank,” the EASY WAY is to sell your soul and ignore the “externalities of bling!” The HARD WAY to have and keep a big bank account requires discipline, thought and constant vigilance.
