What It Is and What It Isn't
Money Part II - Purchasing
Douglas V. Gnazzo
March 22, 2006
In a free market, society
determines and chooses by consensus, the commodity deemed most
worthy to be the common medium of exchange - money. This medium
is the most saleable or marketable commodity. It also has the
least declining rate of marginal utility. In other words, the
Retains its purchasing
power better than all commodities available for exchange.
The above is very important
for indirect trade to function properly. Common sense alone shows
that if the medium that represents value between all other goods
is constantly changing, to use such a standard of value would
be ludicrous, as there wouldn't be a constant standard of measurement
to compare the value of other goods to.
It would be as if trying to
uniformly measure wool by the yard, when the number of feet in
a yard is constantly changing. The wool market would become completely
confused and non-tradable, as the unit of measurement it relies
on, the number of feet in a yard, would be constantly changing.
The common medium
of exchange must retain its standard of measure or value.
Individuals have wants and
needs that must be fulfilled. They come to market seeking various
goods and services. Once in the marketplace, participants make
value judgments based on the utility of the goods and services
offered. They compare the usefulness of one item to another.
Over time, the collective social
interaction within a free market determines what the most accepted
common medium of exchange is. Remember the point of free
choice, it is most important, and will be revisited.
Free choice and
free markets go
hand in hand - much as light is to day.
Although subjective use values
are the determinant by which indirect exchange occurs, the subjective
use value is concomitant with the subjective exchange value
of the media as well. This is but a reference to the anticipated
use value of the goods that are to be exchanged.
In other words, when a buyer
and a seller come together to exchange, they both must make valuations.
The buyer must determine what the values of the goods are that
the seller has for sale. The seller must determine the value
of his goods as expressed in the common medium of exchange -
Both the buyer and the seller must agree on a number of units
of money that the goods are worth or valued as. This is known
as the price. The buyer must be willing to pay this amount. The
seller must be willing to accept this amount. When they agree
- exchange takes place.
From the subjective use value
of money, to the subjective exchange value of money, comes objective
exchange value - the expression of the purchasing power
of the medium of exchange in regards to the ratio or amount of
goods that can be purchased with it.
vs. Quality Theory
The quantity theory of money
alone is not sufficient as a complete theory of money, and even
less so as a sound and working monetary system.
The quality theory of money is far superior to the quantity theory
It is not the quantity or number
of units of money that one has that is important. What is important
is the quality or purchasing power that the money has - the amount
of goods it can be exchanged for.
Money is only useful for one
thing, to exchange for other goods. The more goods you can acquire
with the same amount of money, the greater is your purchasing
power, and the greater is your wealth.
When one buys goods with money,
they are selling their money. When one sells goods, they are
buying money. The main purpose that money fulfills is to be a
medium of exchange to facilitate the trading of other goods and
Money is but the proof or evidence
of exchange that the buyer issues to the seller. For a monetary
system to function properly, the buyer must fulfill his inherent
obligation that at a future date he will offer his own goods
for sale in the marketplace.
Likewise, the seller must offer
his commitment that at a future date he will be a buyer in the
market. Such reciprocal changing of the roles of buyer and seller
is what makes a market.
Money is backed by the value
surrendered by the seller, and potentially backed by the value
in the possession of the next seller, and so on.
In other words, trade creates
money - money does not create trade. The market creates and stands
behind money, as the market is the sum total of all producers
of the goods that are the real value behind the money.
Money has no intrinsic value
in and of itself. The goods and services that money can be exchanged
for have value. The most important aspect of money is that it
can be exchanged for all goods and services.
The quality theory
of money places emphasis on the purchasing power of money. The
quantity theory stresses the number of units of the currency.
This is mistake by design. It is meant to purposefully confuse
Honest Money retains
its purchasing power - this is key to the quality theory of money.
One goal of the quantity
theory of money is to hide the self-destructive nature
of paper fiat debt-money from all unsuspecting users. Debasement
of the currency by inflation is another.
is the ultimate goal of paper fiat debt-money.
The greatest value of wealth
is life. Man's energy, utilized as labor, is the next
greatest value, as it provides the means to obtain life's necessities.
The next order of value are the goods and services needed to
sustain life: food, clothing, and shelter.
Labor is the means to produce
goods and services. Goods are produced to be consumed - to sustain
life. Money facilitates labor's production of goods for consummation.
It is the goods needed for
survival that is the value behind and represented by money. Man's
labor stands behind all goods and services, as without the power
of labor the goods could not be had. The following is the -
Natural Hierarchy of Wealth:
within which man moves and has his being
4. Man's energy
utilized as labor to procure
5. The basic
necessities of life: food, water, shelter, and clothing
Functions of Money
Money is an abstract concept
of a measure or unit of value. It has no value in and of itself.
The value lies within the goods and services that money can be
When money is exchanged for
other goods, we do not literally exchange the money for the other
goods, but the value that the money represents in other goods.
We exchange values for values.
Money is the medium of exchange
that represents the purchasing power by which other goods can
be exchanged for. Money is the standard for comparison - the
measure of value between all goods.
Thus, money is a receipt for
value. The monetary system is an agreement between traders to
regulate the issuance of money, to exchange values in terms of
the monetary unit, and to keep an account of all such exchanges.
As a common medium of exchange,
and measure of value, money transfers value through space. Money
as a standard of value transfers value through time. Money as
a store of value transfers value over time. These are all functions
Functions of Money:
1. Medium of
4. Store of
With the evolution
of indirect exchange from direct exchange, we witness the development
of money. We have seen that the purchasing power or quality
of money is far superior to the quantity or number
of units of money.
Money has been defined as the
common medium of exchange. The importance of the purchasing power,
or quality of money, over the quantity of money, provides a further
refinement of the definition.
We are starting to see the
qualities needed for a sound and workable monetary system unfold
before us. At the same time, we can see what policies have weakened
our monetary system and should be cast off.
Come visit my new website:
and read the Open
Letter to Congress.
-Douglas V. Gnazzo
email: Douglas V, Gnazzo
Honest Money: What it
is and what it isn't
I : Part II : Part
III : Part IV : Part
VI : Part V : Part
VII : Part
is CEO of New England Renovation LLC, a historical restoration contractor
that specializes in restoring older buildings that are vintage historic
landmarks. He writes for numerous websites and his work appears
both here and abroad. Just recently he was honored by being
chosen as a Foundation Scholar for the Foundation for
the Advancement of Monetary Education (FAME).
V. Gnazzo. All Rights Reserved.