Commentary
The Emergence of Money
Money emerged because barter could not support the market economy. A butcher, who wanted to exchange his meat for fruit, might not be able to find a fruit farmer who wanted his meat, while the fruit farmer who wanted to exchange his fruit for shoes might not be able to find a shoemaker who wanted his fruit. The distinguishing characteristic of money is that it is the general medium of exchange. It has evolved as the most marketable commodity. On this process, Mises wrote, â⊠there would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money.â
Since the general medium of exchange emerged from a wide range of commodities, money is a commodity. Again, according to Rothbard, âMoney is not an abstract unit of account, divorceable from a concrete good; it is not a useless token only good for exchanging; it is not a âclaim on societyâ; it is not a guarantee of a fixed price level. It is simply a commodity.â
Hence, money is that for which all other goods and services are traded. Through an ongoing selection process over thousands of years, people settled on gold as money. In todayâs monetary system, the money supply is no longer gold, but coins and notes issued by the government and the central bank. This fiat-money still has exchange-value because of its prior connection with true money and the inertia caused by the fact that it is already accepted as a general medium of exchange. Consequently, coins and notes still constitute money, known as cash, which are employed in transactions. Goods and services are exchanged for cash.
Individuals keep their money either in their wallets, under their mattresses, in safety deposit boxes, or storedâdepositedâin banks. In depositing money, a person never relinquishes ownership over it. When Joe stores his money with a bank, he continues to have an unlimited claim against it and is entitled to take charge of it at any time. Consequently, these depositsâlabeled demand-depositsâform part of money.
At any point, part of the stock of cash is stored, that is, deposited in banks. Thus, in an economy, if people hold $10,000 in cash, the money supply of this economy is $10,000. But if some individuals have stored $2,000 in demand-deposits the total money supply will remain $10,000â$8,000 cash and $2,000 in demand-deposits with banks. Should all individuals deposit their entire stock of cash with banks, then the total money supply would remain $10,000âall of it held as demand deposits.
This must be contrasted with a credit transaction. Credit always involves the creditorâs purchase of a future good in exchange for a present good. As a result, in a credit transaction, money is transferred from a lender to a borrower. Such transactions include savings-deposits. These are, in fact, loans to the bank. With these deposits, the lender of money relinquishes to the bank his claim over the money for the duration of the loan. These credit transactions (i.e., loans), however, do not alter the money supply in the economy. If Bob lends $1,000 to Joe, the money is transferred from Bobâs demand-deposit or from Bobâs wallet to Joeâs possession.
Electronic Money
Does electronic money change this? Electronic money is not money as such, but a particular way of using existing money. For instance, by means of electronic devices Bob can transfer $1,000 to Joe.
He could also transfer the $1,000 by writing a check against his deposit in Bank A. Joe can then deposit the check into his bank, Bank B. Once the check clears, the money will be transferred from Bobâs account in Bank A to Joeâs account in Bank B. Itâs important to note that these transfers, whether electronic or through checks, are only possible because the physical cash of $1,000 exists. Without the actual cash, no transfer can occur.
If Bob pays for his groceries with a credit card, he is essentially borrowing from the credit card company, like MasterCard. When he makes a $100 purchase using MasterCard, the company pays the grocer $100 and Bob repays MasterCard. Again, all of this is made possible by the existence of physical cash. Without the cash, there would be nothing to transfer.
Even though cash wasnât used directly in the previous examples, it is still a crucial element in facilitating transactions. The existence of cash allows for various forms of transactions to take place through digital transfers and other technologies. While the methods of transferring money may evolve in a digital world, cash remains the ultimate medium of exchange.
The introduction of a digital currency by the central bank does not necessarily mean that cash will be replaced. Money must undergo market selection to become a widely accepted medium of exchange. Forcing a digital currency on individuals could lead to the use of alternative forms of money and potentially harm the market economy.
Removing cash would have negative consequences for the market economy as it would eliminate the market-selected medium of exchange. Money emerged as a solution to the inefficiencies of barter, and without it, the market economy would not function effectively. Advocating for the removal of cash could inadvertently lead to the destruction of the market economy and setbacks for society.
Claims that eliminating cash would reduce tax evasion and crime are questionable. Addressing the root causes of tax evasion, such as high taxes and government inefficiencies, would be more effective than simply removing cash. The fact that people rush to withdraw their money during economic crises suggests a lack of trust in the banking system, rather than a desire to engage in illicit activities.
In conclusion, regardless of technological advancements, cash remains the foundation of our exchange system. Any policy aimed at phasing out cash risks disrupting the market economy and undermining the principles of trade and commerce.
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