Medium of Exchange, Barter, and Money

“A Resource-Based Economy is a system in which all goods and services are available without the use of money, credits, barter or any other system of debt or servitude. All resources become the common heritage of all of the inhabitants, not just a select few. The premise upon which this system is based is that the Earth is abundant with plentiful resource; our practice of rationing resources through monetary methods is irrelevant and counter productive to our survival.”

Money is only a medium of exchange. It is not the wealth. It only presents the future wealth we believe it can provide us in form of goods and services from other people whom we hope to accept our money in an exchange for our desired goods and services.

Wealth is created by people who produce goods and services. We use money as a middleman to satisfy our current and future needs. What we do not consume immediately we can store for later day, save (i.e. invest).

Basically anything can be used as a medium of exchange. History knows many commodities used as money. Currently we have accepted printed-paper notes as money which have no other productive use.

Demand for Money and Supply of Money from Human Action by Ludwig von Mises:

“A medium of exchange is a good which people acquire neither for their own consumption nor for employment in their own production activities, but with the intention of exchanging it at a later date against those goods which they want to use either for consumption or for production.

Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange. This is its only function. All the other functions which people ascribe to money are merely particular aspects of its primary and sole function, that of a medium of exchange.[3]

Media of exchange are economic goods. They are scarce; there is [p. 402] a demand for them. There are on the market people who desire to acquire them and are ready to exchange goods and services against them. Media of exchange have value in exchange. People make sacrifices for their acquisition; they pay “prices” for them. The peculiarity of these prices lies merely in the fact that they cannot be expressed in terms of money. In reference to the vendible goods and services we speak of prices or of money prices. In reference to money we speak of its purchasing power with regard to various vendible goods.

There exists a demand for media of exchange because people want to keep a store of them. Every member of a market society wants to have a definite amount of money in his pocket or box, a cash holding or cash balance of a definite height. Sometimes he wants to keep a larger cash holding, sometimes a smaller; in exceptional cases he may even renounce any cash holding. At any rate, the immense majority of people aim not only to own various vendible goods; they want no less to hold money. Their cash holding is not merely a residuum, an unspent margin of their wealth. It is not an unintentional remainder left over after all intentional acts of buying and selling have been consummated. Its amount is determined by a deliberate demand for cash. And as with all other goods, it is the changes in the relation between demand for and supply of money that bring about changes in the exchange ratio between money and the vendible goods.”

The purchasing power is based on the exchange of goods and services between individuals in any society. In order to get something you have to give something. One can do this directly by bartering fish to bread or use a medium of exchange in between. For example buy ‘money’ by selling the fish and then sell the money and buy the bread. (see The Pattern of Indirect Exchange from Man, Economy and State by Murray N Rothbard)

Provided that the society is based on trust where no one is cheating (i.e. getting something for nothing-stealing) in principal it does not matter what is used as money. Mises has theoretically proven (regressium theorum) that for example gold and silver evolved as the commonly accepted medium of exchange by having an alternative productive (i.e. economic = scarce) use first.  Later they became the de facto standard ‘money’. For example gold can be used for jewelry and semiconductors as well as a medium of exchange.

Our current fiat money is not backed by anything. This means that one can fabricate more money and thus steal/cheat from the society. By printing more paper notes one can exchange those notes to real goods and services (provided that people still believe in the money and are ignorant of the scam) without giving anything back. Thus getting something for nothing. The overall wealth in the society has not increased as a result of printing more paper notes, ‘money’. There are no more goods or services for the members of the society to enjoy and consume. (see What Has Government Done to Our Money? and The Mystery of Banking)

Alan Greenspan wrote in his article Gold and Economic Freedom in 1967:

“Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.”

No system is ever moral (or immoral) – only people are. Our current fiat monetary system is based on a governmental controlled banking cartel but it is not certainly the only option available (see e.g. free banking and Free Choice of Currencies). It is far stretched leap to state that no system will work because our current one is at fault. Money is only a tool, an objective means to ends, in itself it is a neutral carrier like energy that can be utilised to constructive or destructive purposes. (see Francisco’s Money Speech)

Abundant Resources and Planned Economy

“The premise upon which this system is based is that the Earth is abundant with plentiful resource; our practice of rationing resources through monetary methods is irrelevant and counter productive to our survival… It is only when resources are scarce that money can be used to control their distribution.”

I find this a bit confusing about the abundant resources if abundance is defined as something that is available in large quantities and available to all. It can be understood such a way by this quote: “Although air and water are valuable, in abundance they cannot be sold.” Our natural resources are limited on Earth. Certainly each individual’s time is limited – we cannot do everything, we have to make choices and decide upon different alternatives. The limitations we have mean that they are scarce. If we decide to build a house there is something else that we cannot do at the same time. The Resource-Based Economy does not remove scarcity. (see The Fundamentals of Human Action and Acting Man)

“In an economy based on resources rather than money, we could easily produce all of the necessities of life and provide a high standard of living for all… With automated inventory on a global scale, we can maintain a balance between production and distribution”

The key problem with the Resource-Based Economy is the fact that there is no economy at all. There is no money, which means that it is impossible to define prices for any resource, work, material, or production. And without any valuation method it is impossible to have a rational basis for selection and decision-making. This is the core problem in any planned economy. Somehow it has to be decided what is to be produced, at what quantity, when, by who, and for what purpose on behalf of the community. But there is no objective yardstick available that enables to satisfy individuals different and variant needs and desires.

The following are some quotes from Ludwig von Mises works where he has shown that planned economy results chaos and problems that cannot be solved by more planning: 

“The market is not a place, a thing, or a collective entity. The market is a process, actuated by the interplay of the actions of the various individuals cooperating under the division of labor. The forces determining the –continually changing–state of the market are the [p. 258] value judgments of these individuals and their actions as directed by these value judgments. The state of the market at any instant is the price structure, i.e., the totality of the exchange ratios as established by the interaction of those eager to buy and those eager to sell. There is nothing inhuman or mystical with regard to the market. The market process is entirely a resultant of human actions. Every market phenomenon can be traced back to definite choices of the members of the market society.

The market process is the adjustment of the individual actions of the various members of the market society to the requirements of mutual cooperation. The market prices tell the producers what to produce, how to produce, and in what quantity. The market is the focal point to which the activities of the individuals converge. It is the center from which the activities of the individuals radiate…

For monetary economic calculation is the intellectual basis of the market economy. The tasks set to acting within any system of the division of labor cannot be achieved without economic calculation. The market economy calculates in terms of money prices. That it is capable of such calculation was instrumental in its evolution and conditions its present-day operation. The market economy is real because it can calculate.” (http://mises.org/humanaction/chap15sec1.asp)

“The paradox of “planning” is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible [p. 701] attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.” (http://mises.org/humanaction/chap26sec1.asp)

“Picture the building of a new railroad. Should it be built at all, and if so, which out of a number of conceivable roads should be built? In a competitive and monetary economy, this question would be answered by monetary calculation. The new road will render less expensive the transport of some goods, and it may be possible to calculate whether this reduction of expense transcends that involved in the building and upkeep of the next line. That can only be calculated in money. It is not possible to attain the desired end merely by counterbalancing the various physical expenses and physical savings. Where one cannot express hours of labor, iron, coal, all kinds of building material, machines and other things necessary for the construction and upkeep of the railroad in a common unit it is not possible to make calculations at all. The drawing up of bills on an economic basis is only possible where all the goods concerned can be referred back to money. Admittedly, monetary calculation has its inconveniences and serious defects, but we have certainly nothing better to put in its place, and for the practical purposes of life monetary calculation as it exists under a sound monetary system always suffices. Were we to dispense with it, any economic system of calculation would become absolutely impossible.” (http://mises.org/econcalc/ch2.asp)

(see Socialism: An Economic and Sociological Analysis and Economic Calculation In The Socialist Commonwealth)

Even without the rational decision making problem the Resources-Based Economy raises several questions:

• who controls the resources and makes the decisions (and based on which criteria)?
• who allocates the work needed?
• who is behind the law and order, and their enforcement?
• By who’s standards, beliefs and values the society operates?

If the system is not based on voluntarily and mutual interaction between members of the society without any coercion and force against those who do not want to participate to the community it is no different from our current centrally controlled and manipulated (often tyrannical) structures.

For many of us it is not about saving the planet but reducing the guilt. We are bluffing ourselves and trying to be good citizens. However, this does not change the underlying facts and the ongoing destruction of the planet. Still, we are carrying on with our lifestyles and ways of working without changing anything radically. By our actions we are saying that we are concerned and I can do this and that but I don’t want to go any deeper. I’m not willing to do major sacrifices. This is my life—no matter how twisted or destructive its impact might be.

Buying carbon credits is easy. Following your carbon footprint and compensating it may sound like that you’re helping out in a big way. But what is it exactly that you’re trying to do? First you consume (destroy and pollute) and then you feel guilty or concerned about it and compensate by buying some credits that may either be someone ‘rights’ to pollute that have been sold to you or you are planting something back to nature that will take decades if not centuries to heal and compensate the loss you made. How can you be so sure that there is enough time left for future generations and your credits to ‘payback’ before the whole planet has been destroyed? You did not stop the destruction and pollution in the first place. What you said was that you’re continuing to do your mess now and you will fix it later somehow. And who has said that carbon credits or any other single concept is the right solution for the damages we are causing?

Regulators are keen to impose new taxes and restrictions on various items and processes. Energy is ‘bad’ in general and needs to be highly taxed. Some ‘alternative’ energy forms are preferred over others and there are sanctions and incentives for certain activities and actions. In an overall level we are forced to act in a unified and specific manner but in reality we may help out someone’s business interest more than save the planet—we just continue the destruction in another way that is more ‘socially’ accepted. How does it help the environment that governments impose taxes on energy? It certainly helps the government to get more revenues by appealing to our ‘responsibility’ to our living environment. At the same time the very same government is telling us that growing crops and other biomass for fuel are saving the planet and these forms need to be subsidised. What happened to the overall impact and energy input-output efficiency? We are just recycling the money and boosting business, not saving the environment. Guilty revealed and the new fashion trend harvested, mainly supported by coercion.

Money does not buy love. Neither can it buy nature. By looking around us it’s obvious that we have not learned this lesson. No matter how much money you have still you cannot undo the damage for rain forests, polluted water and land, corrupted crops and extinct species. We are good at destroying but very poor at creating. What has taken tremendous amount of time by nature to build we are destroying almost in seconds compared to the overall time perspective. We are irresponsible and ignorant of our support systems. What else can be said when we prefer short term at the cost of our children?

Guilt does not solve the issue, neither paying more. Something more profound is needed. We need to reconsider our priorities and values. We need to reassess our relationship with this planet, with nature. Now we consume. We use, utilise, and throw away. This is a one-way relationship that is not sustainable. We are living in a closed system called the planet Earth. We cannot pile up things forever and expect that our trash and pollution are well hidden and do not come back to us. Who do you think are already eating, drinking, and breathing hazardous waste? So far things have not gotten better. Our current solutions are not working. More regulation, more penalties, more subsidies, more forced ‘one right way policies’ are not the answer. The question is not what you do but why you do it. Everybody can do his or her own share. There is more than one way to live in this planet. Now it is time to explore and experiment other approaches that are based on a more balanced way of existence. What is it that you’re paying for?

Basically everything goes through a cycle of creation, sustenance, and decay. It does not really matter whether we talk about knowledge, skills, physical goods, or even our thoughts. The only constant is change. It stays and forces everything else into movement. Effort is required to keep up with the changes in the world around us.

Tangible things are relatively easy to produce—if you only know how. And this is exactly the point. We need ideas, innovations, experience, knowledge, and the right skills to get something done. A beautiful house/car or any other physical good or product does not last forever. They need either be replaced or maintained. This information is always within people. Persons make everything happen.

Diversity and specialisation are the means that enable our society to have a wide variety of different tangible items and products available to us. There needs to be people who have the required skill set and the production tools to create the items. They do not come out of nowhere—they represent the existing expertise and knowledge.

We often take services and products as granted, and can only start to appreciate them when they have first demonstrated their non-functional nature. If your bathroom pipe is leaking then suddenly a plumber is a very valuable person for you. Actually your life becomes pretty unbearable without the necessary reparation skills!

The richness is not in the goods and things around you. They are only the presentation of the wealth in the society. The future success needs to be earned every day. No money can buy you food if you are in an isolated island. Similarly the wealth of any society can be measured only by the richness and the variety of experience, knowledge, and interaction among its members. Specialisation is only available when there are enough goods and services available to take care of the more general needs of the members of the society. If you need to grow your own food and prepare it as well there is less time available for other activities. In a similar manner any specialist is dependent on the work and expertise of the other people in the production chain. We all need each other. If you are not contributing or loving what you’re doing everybody is worst off. Do you see how personal freedom is very closely linked to the well-being and the wealth of the society?

Wealth is created by people who produce goods and services. We use money as a middle man to satisfy our current and future needs. What we do not consume immediately we can store for a later day (save (i.e. invest)).

Basically anything can be used as a medium of exchange. History knows many commodities used as money. Currently we have accepted printed-paper notes as money that has no other productive use.

The purchasing power is based on exchange of goods and services between individuals in any society. In another words in order to get something you have to give something. One can do this directly by bartering fish to bread or use a medium of exchange in between. For example buy ‘money’ by selling the fish and then sell the money and buy the bread.

Provided that the society is based on trust where no one is cheating (i.e. getting something for nothing—stealing) it does not really matter what is used as money. Ludwig Von Mises has theoretically proven that gold, silver etc. were evolved as the commonly accepted medium of exchange by having an alternative productive (i.e. economic = scarce) use first. Later they became the de facto standard ‘money’. For example gold can be used for jewelery, semiconductors etc. as well as a medium of exchange.

Our current fiat money is not backed by anything. This means that one can fabricate more money and thus steal/cheat from the society. By printing more paper notes one can exchange those notes to real goods and services (provided that people still believe in the money and are ignorant of the scam) without giving anything back. Thus getting something for nothing. In other words the overall wealth in the society has not increased as a result of printing more paper notes, ‘money’. There are no more goods or services for the members of the society to enjoy and consume.

And how do we do this? By producing and consuming more, or should I say evermore, ever-expanding. And by consuming more we feed more needs to expand the business and acquire new resources to fulfil the needs of the growth. And so the cycle goes on and on—but not forever. Sole expansion is not natural, it pairs with contraction, in nature that is.

Seldom we start to question the basis of the assumptions and thinking underneath. What is the purpose of the growth and why is it needed? Some would say that it is because of money. And in many ways they are right. The fiat money system is built upon a hypothesis of ever-expanding promises of debt that are not paid back but rolled over. It requires more units of money to survive. As a result of this there are only raising prices and continuous inflation (expansion). For example US dollar has lost over 95% of its value since 1913 when the Federal Reserve was established. Does this create wealth for all the citizens using the legal tender?

But coming back to the question why the growth and what’s the purpose of it. More money does not answer the question; it only explains the way the current system is working. Actually money has nothing do with the real issue—it’s only a poor middleman that is often misunderstood to be the purpose when it can only be the means for something else. Money is used to obtain goods, services, or intangible needs such as security. We would not consume more simply because our monetary system requires so. There is something else underneath that feeds the requirements and keeps the wheels turning. And once again we are getting back to each and every one of us, individually. No company consume, buy, sell, manufacture, or invest—only people do. Structures are mere tools and vehicles for our purposes, ignore them long enough and they disappear. There is no one to blame but us. It’s not the economy, stupid—it’s us, the people!

We have bought the idea and assume that more is better. More money means something better, more consumption provides with something more and so on. Having more is the key and this having is the cause of the ever-expansion in our needs. But if you never consider why you need to have more you will never approach the real issue, you simply will act to gain more of something—forever and ever more.

Wanting is easy. Also having more is relatively easy, even though it takes its toll. But being happy has nothing to do with wanting or having. Confucius once said: “they must often change who would be constant in happiness or wisdom.” It looks that buying happiness does not seem to work despite all the consumption and material well-being. Maybe it is time to reconsider our assumptions and beliefs that define our current growth paradigm, individually?

Money and Inflation: The Tendency to Deny Reality by Frank Shostak.

“The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power.”
Ludwig von Mises, Human Action, 3rd rev. ed. (Chicago: Contemporary Books, 1966) p 421.

Read Gary North’s The Official Counterfeiter.

Frank Shostak explains global liquidity and whether there is such a thing: The Yen and Monetary Liquidity

A case in point: Fed’s Inflation Analysis Ranks With Zimbabwe’s: Caroline Baum