Honest Money
What It Is and What It Isn't

Money Part V: The Functions of Money

Douglas V. Gnazzo
Apr 8, 2006

Abstract

Last week in part four, we discussed the importance of the purchasing power of money. We saw how the quality of money (purchasing power) is much more important than the quantity (supply) of money in regards to contributing to our overall wealth.

The greater the purchasing power of our money, the greater was our wealth (in monetary terms). In turn, we explained that the debasement of the currency by inflation resulted in a loss of purchasing power, and thereby contributed to a lessening of our wealth - a decrease in our standard of living.

This week we are going to discuss the money different functions that money possesses, both economically and juristically. The latter is a major cause of the problems inherent with paper fiat debt-money controlled by elite under the guise of legal tender or force majeur.

Functions of Money

With the development of commerce and indirect exchange, money evolved out of the desires and needs of society. Money performs four (4) basic economic functions:

• Medium of exchange
  
• Measure of value
  
• Standard of value
  
• Store of value

Note the word value appears quite often when discussing money: standard of value, measure of value, and store of value. Obviously value is of grave importance in understanding what money is - and isn't.
In the earlier articles on money it was shown that trade progressed from direct exchange (barter) to indirect exchange: the use of a third common medium of exchange: i.e. money.

With barter, three inherent weaknesses or inconveniences acted as impediments to furthering the division of labor and advancement of commerce. These three defects are:

1. The improbability that a mutual coincidence of wants between traders would occur.

2. The problems associated with the fact that different substances or goods were involved in exchanges.

3. The related issue of properly and proportionally dividing and distributing the substances or goods traded between the various parties.

Indirect exchange and the use of money offered ways and means to overcome the above three defects of barter or direct exchange. Money overcomes these inconveniences by the power of its four basic functions.

By acting as a common medium of exchange, money overcomes the coincidence of wants necessary between traders that rely on barter alone.

Money is an independent commodity that the market determines is the commodity that all other members of the market will accept in trade for...

...All Other Goods And Services

Once the market has accepted a common medium of exchange, market participants begin to compare the value of all other goods in terms of the money-unit: hence it becomes a measure of value.

Value

As people come together to trade, a market naturally forms. People trade for things they need, for items they find most useful. When individuals exchange goods with one another, they offer items that are of less utility or value to themselves, in exchange for other goods considered by them to be of more utility, and hence of more value.

Some refer to this as the theory of marginal utility. Both traders that exchange goods must have this same belief structure. All market participants use a subjective value system to determine the usefulness of the goods traded according to their every day usage - according to the utility they afford.

Neither utility nor value are intrinsic characteristics of various goods; they both are extrinsic relationships between different goods. Things have value or utility only in regards to their comparison with other things.
If utility or value were intrinsic to a particular good, then any additional quantity of that good always would be desired, regardless of how much one already possessed.

For example: water is one of life's most important necessities, however, if it rains during every day for a week straight, an overabundance of water occurs.

Suddenly the supply of water becomes not only an overabundance, but also a flood and destruction of crops, livestock, homes, and people can occur as well.

Not only is more water not desired or valued - a reduction in water is needed and thus valued. The story of Midas is worthy of consideration regarding this issue.

Furthermore, consider that gold trades for 50 times the weight of silver. Thus, gold is valued 50 times as much as silver. Gold trades for half as much weight as platinum, meaning that gold is valued less than platinum.

If value were intrinsic to gold, how can it be valued more compared to one thing at the same time it is valued differently for another? It is because value is extrinsic that this can and does occur. Value is but a comparison of the relation of one thing to another.

Exchange Value

In any exchange a definite quantity of one commodity or service exchanges for a definite quantity of another: one cow for three pigs, a bushel of wheat for a dozen eggs.

Thus in every exchange there is a ratio of two numbers or quantities. This ratio represents, and is, what some call value, and others call price. It is the relationship or ratio of the comparison of the different goods or services under consideration for trade.

Money is the measure of value of all other goods available in the marketplace. Money is the common denominator if you will. It has been said that value being subjective, that it cannot be measured. Others believe money acts as a price index, which measures the ratio or quantities exchanged.

Call it what you like, and place the measure where you will; the fact still remains that when two people make an exchange, at some point in time before the transaction is completed, it must be decided what quantities of goods and monies are to be exchanged.

Once society chooses a common medium of exchange, which also has a secondary function as a common measure of value, commerce increases to the point that people want to borrow or lend the common medium of exchange, money, to increase their ability to trade goods and expand commerce.

Standard of Value

With the advent of credit, man takes a leap into the future. What had originally begun, as direct exchange in the present, now became indirect exchange, not only in the present, but in the future as well. This involves present goods and future goods.

Money involves time preference - the present and the future, as man's life involves the present and the continuance of the present into the future as survival or living.

Money also functions as a standard of value. It is the common denominator used to compare all other commodities, to determine their value.

When one lends an item to another on credit, he obviously wants to receive repayment in the future, which is as valuable then as now.

Within a free market not restricted by forced legal tender laws, the common consensus of society will choose which money is the standard of value that is most likely to continue to exchange in the future, at the present ratio or value, thus retaining its purchasing power.

Store of Value

With the continued growth of commerce and the division of labor, the economy oscillates between supply and demand; buyers and sellers; producers and consumers; borrowers and lenders.

When through the course of wise and prudent commerce, one produces more than one consumes, an individual will begin to accumulate the excess of his production - the fruits of his labor. The same holds true for the group, society, nation, and world.

The accumulation of the excess production of goods, beyond the amount consumed, results in savings, or the accumulation of wealth. It can be the accumulation of land, forest, lumber, metals in the ground, crops, livestock, silks and linens, goods of any kind.

Excess goods are saved for future use. Some refer to this as storing or even hoarding. The name matters not - it is the intent that matters: the preservation of wealth.

Thus, money is stored or hoarded for future use, to transfer from savings back into income, to exchange for life's necessities, especially in old age when work and income become difficult to attain.

Time and Money

As a common medium of exchange and measure of value, money transfers value through space within the present.

Money as a standard of value transfers value through time.

Money as a store of value transfers value over time.

These are all important functions of money. They are attributes of the quality theory of money.

Some say these functions may be secondary; nevertheless, they still exist and serve a purpose, be it primary or secondary, concomitant or sequential.

Even the casual observer must acknowledge their importance. To disregard the different functions of money is to disregard what are perhaps its most important qualities.

Juristic Money

Money has a juristic or legal function as well: it is that which is used to discharge debt. This is what the term legal tender means - it is what the State decrees by the enforcement of law as acceptable for the legal payment of TAXES and other debts owed to the State.

The people are free to use whatever they want as a medium of exchange between themselves, but the State will only accept what they have dictated as LEGAL TENDER for payment.

As we will see, the issue of legal tender is a major contributor to many of today's problems with our paper fiat debt-money of Federal Reserve Notes. There are others as well. They will all be discussed in due time, and a plan to remedy will be presented near the end.

April, 2006
-Douglas V. Gnazzo
email: Douglas V, Gnazzo
website: HonestMoneyReport

Honest Money: What it is and what it isn't
Part I : Part II : Part III : Part IV : Part VI : Part V : Part VII : Part VIII

Douglas V. Gnazzo 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).

©2006 Douglas V. Gnazzo. All Rights Reserved.

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