Tea at Trianon: The Origins of Money

John Wilson Croker on Marie-Antoinette

"We have followed the history of Marie Antoinette with the greatest diligence and scrupulosity. We have lived in those times. We have talked with some of her friends and some of her enemies; we have read, certainly not all, but hundreds of the libels written against her; and we have, in short, examined her life with– if we may be allowed to say so of ourselves– something of the accuracy of contemporaries, the diligence of inquirers, and the impartiality of historians, all combined; and we feel it our duty to declare, in as a solemn a manner as literature admits of, our well-matured opinion that every reproach against the morals of the queen was a gross calumny– that she was, as we have said, one of the purest of human beings."

~from History of the Guillotine by John Wilson Croker, 1844

Edmund Burke on Marie-Antoinette

"It is now sixteen or seventeen years since I saw the queen of France, then dauphiness, at Versailles; and surely there never lighted on this orb, which she hardly seemed to touch, a more delightful vision. I saw her just above the horizon, decorating and cheering the elevated sphere she had just begun to move in, glittering like a morning star full of life and splendor and joy. Oh, what a revolution....Little did I dream that I should have lived to see such disasters fall upon her, in a nation of gallant men, in a nation of men of honor and of cavaliers! I thought ten thousand swords must have leaped from their scabbards, to avenge even a look which threatened her with insult. But the age of chivalry is gone; that of sophisters, economists, and calculators has succeeded...."

~Edmund Burke, October 1790

Sunday, July 22, 2018

The Origins of Money

From Intellectual Takeout:

Money has been around for most of human history. From Mesopotamia (or even earlier), all civilizations have employed some kind of medium of exchange to facilitate transactions regardless of their geographical locations, legal and economic systems, religious beliefs or political structures. Have you ever wondered why? In a brief essay entitled "On the Origins of Money," the nineteenth-century Austrian economist Carl Menger provides an answer to this question. Menger argues that money emerged spontaneously in different times and places to overcome the disadvantages of barter and facilitate the expansion of trade. Which disadvantages?

Imagine Sandy, a farmer in the Midwest, produces wheat, which she expects to exchange for barley. Two problems arise at this point. First, she needs to find a barley producer with whom to barter her products. This problem can be easily overcome if Sandy goes to a market where another farmer (let’s call him Billy) sells barley. Since both proucts are harvested during the same time of the year, the exchange would easily take place.

But what if we are dealing with products with different life cycles? In this case, Sandy and Billy could only agree on exchanging their products if Sandy accepted the deferral of the payment until Billy’s products have been harvested. This is what economists call deferred barter. Even though deferred barter solves some problems, it has an important limitation: it can only take place within small communities based on mutual trust due to the risks involved for one of the parties. What if Billy decides not to deliver the promised barley? Thus, the use of deferred barter as a system of exchange prevents the expansion of trade beyond the limits of one’s community.

Barter has a second problem. Billy could refuse to trade barley for wheat. He might prefer exchanging his barley for any other commodity or good that better satisfies his needs. This represents another obstacle for the expansion of trade. How did societies overcome these problems?

They did so by using certain commodities as generally-accepted media of exchange, and more specifically precious metals. But why precious metals and not other commodities? According to Menger, gold or silver possess a high degree of saleableness, which he defined as “the greater or less facility with which they may be disposed of at prices corresponding to the general economic situation”. Today we call this property liquidity.

The relative high degree of saleableness of precious metals in relation to other commodities is fundamentally linked to their durability, divisibility, low transport and storing costs as well as the traditional demand for these goods in most places throughout history. The fact that precious metals are more saleable than other commodities implies that it is easier to exchange them for other goods: even though Sandy doesn’t need gold (she wants barley), she will accept it as payment because she knows she won’t have any problem to trade it for barley.

That’s why most civilizations adopted precious metals as money. Since then, money has gone through many changes, some of them spontaneous (e.g. the emergence of paper money) and some induced by the State (e.g. the replacement of commodity standards for central-bank fiat money). (Read more.)