On Money
© 9 Jan 2017 Luther Tychonievich
Licensed under Creative Commons: CC BY-NC-SA 3.0
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A pseudo-historical look at money.


Two years ago I posted about economics. In that post I likened money to a universal IOU. In this post I wish to say more about that idea; the next post will explore our digital money equivalents.


The most direct form of non-altruistic exchange of property is the two-party barter system. Farmer gives smith two thousand pounds of wheat, smith gives farmer plowshare. The goods exchanged have direct useful value to the people receiving them, more value than they have to the people giving them up which is why the trade is attractive to both parties.

But what if a pair of people do not have mutual interest in trade? The miner wants wheat, but the farmer has no use for ore; the smith wants ore, but the miner has only limited need for metal; the farmer wants metal, but the smith has only limited need for wheat.

One option would be a multi-way barter, where all several people get together and agree to each give the others what they want; but that requires time and effort to get everyone together and potentially a lot of time spend conversing and figuring out a mutually-beneficial trade the every party wants to engage in.

A different, easier-to-implement option is to barter for things that are of no immediate value to you but that you assume will be valuable to someone else who does have something you want. The miner might trade ore for a plowshare from the smith, then trade that plowshare to the farmer for wheat. But knowing what other people will want is intellectually challenging, particularly for trades that will eventually involve many parties.

As more speculative trades are made, goods can be expected to change hands more times. And that’s wasteful. It takes time and effort to transport the goods, space to store them at each intermediary’s domicile along the way, and some goods suffer in quality from unnecessary handling. Hence promissory notes.

Promissory notes

Suppose a farmer has just harvested two thousand pounds of wheat If you eat little other than wheat, you need a bit shy of four hundred pounds of wheat a year, so a harvest like this suggests farmers would need to be about 20% of the population. and wants to go in to town to trade it for goods needed. But instead of loading the grain into a massive cart of some kind, the farmer writes out forty tickets that say “‍This ticket is redeemable at the farm with the twisted ash tree for fifty pounds of wheat.‍” These are easy to carry, easy to hand in stacks to the smith for large purchases, easy for the smith to give to the miner to give to the lamp oil merchant to give to the oil renderer to give to the whaler to give to the ship builder to give to the woodcutter to give to the…. And in the end, after changing hands many times, all of those tickets can be brought back to the farmer who can give each of the people involved in the trade (likely including professions the farmer didn’t even know existed) their individual allotment of wheat.

These promissory notes make trade much easier to progress in a decentralized fashion than if each of the parties involved had to have means of storing, measuring, and transporting the better part of a ton of wheat. But it has limitations. Forgery, for one; also

Still, for all their faults, promissory notes enable a much larger economic system with longer supply chains than barter. And that, in turn, means those using these systems become wealthier (or more relaxed) than those not using them.


The Wheat Standard

To fix the various problems with promissory notes, and hopefully the questionable-worth problem of barter as well, we need some kind of product-independent notion of value. We’ll get to gold or paper money shortly, but lets start with something of more obvious practical value: food.

Everyone needs to eat. That means we can reasonably expect everyone to have a sense of how valuable wheat is, and thus how valuable everything else they regularly deal with is compared to wheat. So let’s create a wheat bank See Alma 11:7 for an example of what appears to be a grain-backed monetary system. . It’s got huge granaries capable of storing all the wheat all the farmers could ever produce; skilled engravers who make easily recognized, unforgeable wheat promissory notes; and builds a reputation for honoring its notes faithfully.

These notes can become the universal promissory notes. By opening branches of the bank in many locations, they gain extended range. By having the banks cycle grain, giving out the oldest grain in stock, they gain practically unlimited life. Everyone can judge value based on how hungry they got producing whatever it is they are producing or how much hunger their new purchase will stave off. And since the bank is selling very little other than trust, it is in the bank’s own self-interest to honor every note, thus making it easier for people to trust it.

Leaving the Standard

But what if you don’t like wheat? Not a problem; when someone gives you a wheat note, don’t turn it in at the bank for wheat: trade it to a rice farmer for rice instead. Even if the rice farmer in question doesn’t like wheat either, there’s sure to be someone else who does. As long as both parties in any given transaction trust that the wheat notes will be valuable to other people, they retain their value in enabling trade.

The use of wheat-backed notes for universal trade is going to create a strange problem: wheat will become to too valuable to eat. As more and more people are using wheat notes in trade for other kinds of food, there will be more and more demand for wheat notes to be circulating in the economy. Let’s get at this indirectly

If a bumper potato harvest coincides with a weak wheat harvest, each bushel wheat note may come to be worth a hundred bushels of potatoes, not because people actually think wheat is a hundred times more valuable than potatoes but simply because there is a scarcity of the money itself. When a farmer with tens of tons of potatoes to sell is selling to people who only have a few pounds of wheat notes, the people won’t be willing to trade a pound of wheat for a pound of potato, so the cost of potatoes will plummet.

By extension, the more things wheat notes are used to purchase other than wheat, the more need there is to have excess wheat notes in the monetary system. As long as the banks continue to doll out notes faithfully, matching their wheat intake properly, this will mean that wheat will become more valuable as a source of notes than as a source of calories. Thus, farmers will grow wheat but eat other, cheaper foods instead. Wheat production will begin to outstrip wheat consumption.

Excess wheat production causes a problem for banks: wheat lasts a long time, but not indefinitely; eventually their ever-growing stock of wheat will start to spoil. This puts them in a very strange position: they either have to start refusing to give a 1-pound wheat note for each pound of wheat or they have to accept they they have more promissory notes in circulation than they can actually fill with non-spoiled wheat in stock. Either way, the wheat-backed notes will no longer be perfectly aligned with wheat. The wheat standard as an actual truth is doomed.

There are many possible next steps for the banks, but all of them involve the same basic shift in perspective: notes have value in and of themselves, independent of wheat. Maybe we stick with wheat, but wheat is money not food. Maybe we switch to a different intrinsically-valuable but non-perishable commodity like iron, but if we do it will suffer the same kind of value inflation and become worth more than its utility suggests. Or we could break the standard completely and either say “‍a pound of wheat is worth half a wheat pound note‍” or circulate a lot more wheat notes than we have wheat to try to keep the cost of wheat approximately right.

Once the wheat backing is broken, the real value of the promissory notes (our trust that others want them) becomes harder to defend. Still, this is what money is: something that is valuable to me primarily because I know it will be valuable to others. In barter, that is why a smith valued a supply of wheat in excess of the smith’s family’s own appetite, and it remained the source of value in every step thereafter.

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