An Inquiry into the Relationship between
Wealth, Freedom, and Life
The advantages that you and your neighbor found respecting each other’s life and property and engaging in trade are multiplied many times in a market where many people can buy and sell. With many buyers, you might be able to sell as many turkeys as you can hunt. Your investment in the bow and arrows can be fully utilized and you can increase your income many times.
The Emergence of Money
When you were alone in the island, your time was your money. You would convert your time into products by working in the production processes of those products. With your neighbor, you could exchange a product of value that you produced for a product of value that he produced. This is called barter. For the market, a common media of exchange emerges naturally because it is difficult to find a coincidence of wants. It is difficult to find a person that will have the product that you want and at the same time that person will want the product that you have.
This common media of exchange that facilitates trade is called “money”. Any product that has demand in the market could be used as money but the market will prefer a product that is not perishable, that is portable, that is divisible, and that has a constant value. Instead of asking the buyers of your turkeys to give you a product that you want in exchange for your turkeys, you would be willing to exchange the turkeys for another product that would be accepted by everybody. You could later exchange this other product for the things that you really need.
Let’s say that to build an extra room in your shelter you would need several hundred bundles of palm leaves that can be tied up side by side to form the walls and the roof of your shelter. Let’s say that it takes one hour to build one bundle. If everybody in the market wants to build an extra room to their shelters, the bundles of palm leaves would be widely accepted. These bundles could be used as a common media of exchange. This common acceptance and their non-perishability make the bundles a good currency but their weight does not. Instead of carrying the bundles around to make transactions, assume that there is enough trust in the market such that everybody will accepts a piece of paper stating the number of bundles that you have available. The trust would be based on everybody abiding by the rule that all these paper notes are backed by a one hundred percent existence of the bundles. This would the start of paper money. The paper stating the amount of bundles that you have could be used as a common media of exchange and it would not be heavy. …
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