Foundations of Economics: The Exchange of Wealth

Editor’s note: Check out Part 1, Part 2, and Part 3 of this series on OCR.

In our division of labor economy, we each utilize savings and capital to produce one or a few things while we depend on everyone else to produce the majority of things we need and want [read on OCR: “The Forgotten First Tool for Creating Wealth”].  In short, we depend on others to produce needed wealth.  Such a division of labor is dependent on the ability to exchange wealth.   If Person A produced apples and Person B produces bananas, the two will need to come up with a way to exchange their products. In a simple economy, the two could simply partake in barter by exchanging apples for bananas.  However, as mentioned in OCR’s “Our Need for Wealth,” what happens when Person A doesn’t want bananas? If instead he wants carrots from Person C.  Person B must offer Person A something for his apples that Person A believes Person C will accept for his carrots. That something is money. Money is a good readily acceptable in exchange by everyone in a given geographical area that is sought for the purpose of being re-exchanged.

Money, accordingly, was a development in the private marketplace as a division of labor economy expanded [read on OCR: “Let’s Divide the Work”]. Throughout history, money has consisted of many goods ranging from sheep in nomad communities to salt and seashells in ocean-based communities to cigarettes in prison.  The key is that people began to exchange their products for goods that they wanted not for their personal consumption or for use in their own production, but for effecting further exchanges.  The larger the number of users of that good, the more the good could be used as money.  Once a person was in possession of that common good, it was more likely that he could find someone to accept the common good in exchange for a product rather than find someone to accept his own product. After enough people in the market accepted the good in exchange for their product, that good became money.

As a division of labor economy became more complex and increased in size, every such economy drifted toward precious metals as money.  Once an economy expanded over a larger distance and over a long period of time, perishable goods were unsuitable as money. Metals became an attractive money because they were durable and cost little to store.   Moreover, as larger and more sophisticated products were created, money needed to be divisible in order to make change. Metals could be melted down into various sizes and weights.  Most importantly, in order to make economic calculations and measure success in the marketplace, money needed to keep a consistent value.  When Person A accepts money from Person B in exchange for his apples, Person A wants an amount of money that he believes will purchase the same amount of carrots that he believes he could get for the apples he sold to Person B. In addition, Person A wants to be able to compare the money value it cost him to produce his apples to the money value he received from Person B for his apples. Precious metals maintained a relatively consistent value because their supply was limited to having to find it and dig it out of the ground.  The development of precious metals as money fulfilled all of these needs of a division of labor economy.

We will discuss money in far more detail down the road.  For the moment, it’s enough it to say that that money is a good that was privately adopted in the marketplace in order to exchange wealth.  Precious metals were the inevitable choice of the marketplace, particularly because of their consistent value and stable supply.  As has been examined outside of this series, our government’s manipulation of money has made our division of labor economy unstable. Furthermore, the various forms of stimulus have only complicated matters.  A division of labor economy is dependent on the exchange of wealth through a stable money freely chosen by the marketplace.  Unfortunately, our economic problems are deeply rooted in ignoring this reality.

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John Langenderfer is a practicing attorney with a focus in consumer and commercial law.  He can also be reached on his Facebook page.

All opinions expressed belong solely to their authors and may not be construed as the opinions of other writers or of OCR staff.

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