Wednesday, April 12, 2006

Quality of Money

Continuing from Origin of Money we will examine what are the qualities that a commodity should have so as to be picked as money.

Let us analyze the qualities which led the market to choose that particular commodity as money. Individuals do not pick the medium of exchange out of thin air. They will pick a commodity in heavy demand. Second, they will pick a commodity which is highly divisible, so that small chunks of other goods can be bought, and size of purchases can be flexible. For this they need a commodity which technologically does not lose its quotal value when divided into small pieces. For that reason a house or a tractor, being highly indivisible, is not likely to be chosen as money, whereas butter, for example, is highly divisible and at least scores heavily as a money for this particular quality.

Demand and divisibility are not the only criteria. It is also important for people to be able to carry the money commodity around in order to facilitate purchases. To be easily portable, then, a commodity must have high value per unit weight. To have high value per unit weight, however, requires a good which is not only in great demand but also relatively scarce, since an intense demand combined with a relatively scarce supply will yield a high price, or high value per unit weight.

Finally, the money commodity should be highly durable, so that it can serve as a store of value for a long time. The holder of money should not only be assured of being able to purchase other products right now, but also indefinitely into the future. Therefore, butter, fish, eggs, and so on fail on the question of durability.

In all countries and all civilizations, two commodities have been dominant whenever they were
available to compete as moneys with other commodities: gold and silver.

At first, gold and silver were highly prized for their luster and ornamental value. They were always in great demand. Second, they were always relatively scarce, and hence valuable per unit of weight. They were portable as well. They were also divisible, and could be sliced into thin segments without losing their pro rata value. Finally, silver or gold were blended with small amounts of alloy to harden them, and since they did not corrode, they would last almost forever.

Generally, gold and silver have both been moneys, side-by-side. Since gold has always been far
scarcer and also in greater demand than silver, it has always commanded a higher price, and tends to be money in larger transactions, while silver has been used in smaller exchanges. The difficulties of mining gold, which makes its production limited, make its long-term value relatively more stable than silver.

No comments:

Post a Comment