What is Money by jackshepherd


									What is Money
 Desirable properties of money
• Intrinsic value
• Easy to measure
• Slow in decay of value
               Intrinsic value
•   Value is a function of scarcity
•   Value is a function of effort
•   Value is a function of energy
•   The relation between scarcity, effort and
• Historically, money is gold, silver or
  copper, which are scarce.
   The scarcity of commodities
Element         Percent by weight of
                earth’s crust
Gold            0.0000005

Silver          0.00001

Copper          0.007
         Scarcity and Value
• Among gold, silver, and copper, which is
  most expensive, which is least expensive?
         Price of commodities
•   Gold ($US per Troy oz.)744.00
•   Silver ($US per Troy oz.)13.62
•   Copper ($US per lb.)3.59
•   or Copper ($US per Troy oz.) 0.246

• Troy ounce = 31. 103g, lb = 454g
          Scarcity and Value

                                inverse of scarcity
         scarcity      price      (normalized)

Gold      0.0000005       744                   744

Silver      0.00001     13.62                   37.2

Copper         0.007    0.246                 0.053
           Scarcity and Value
         (update at Jan 22, 2008)
                              inverse of scarcity
         scarcity   price       (normalized)

Gold      0.0000005 891.00                    891

Silver      0.00001 16.085                  44.55

Copper         0.007 0.2182                0.0636
• Some products need a lot of effort, such
  as rope, grease, which are used by BC
  native people as money or stone on Yap
  island. (Stephen Hawrys, Eric Muller and )
• If a product needs a lot of effort, it will be
  scarce. Hence effort and scarcity is highly
• A system tend to move from less probable
  state to a more probable state. This
  tendency is the energy source for all living
• A system of low probability is scarce.
  Hence scarcity is often equivalent to
  energy source for human beings, which
  we value very much.
 Equivalence of scarcity, effort and
• A commodity is scarcer needs more effort
  to locate them. More effort is highly
  correlated to more energy.
  Hence, scarcity, effort and energy
  resource are largely equivalent.
   Money not backed by intrinsic
• For most of the history in most
  places, money is represented by means
  with intrinsic value. It is only in brief
  periods, money is not explicitly
  represented or backed by means of
  intrinsic value. We are in such a period
• We will discuss later the consequences of
  paper money not backed by means of
  intrinsic value.
           Easy to measure
• Gold, silver become universal
  representation of money not only because
  of their scarcity, but also or mainly
  because of their easy measurability.
• It is easy to measure the purity of gold and
  silver, difficult to counterfeit.
           Standard coinage
• Standardized gold and silver coins are even
  easier to measure than gold and silver bullions.
  Hence coins become money, which reduces the
  transaction cost.
• Coins, instead of the weights themselves,
  become the measure of value, which increase
  the temptation to debase metal content of the
• The debasement of metal content provides an
  easy financing to the government.
• Tradeoff between easy to measure and
  intrinsic value
             Slow to decay
• Most metals will rust. But gold and silver
  are not very reactive.
• Fresh fish or meat degenerate very fast.
  But grease is stable. Hence grease
  becomes money. This is also why it is so
  difficult to lose fat.
 Evolution of monetary systems
• In the early stage, resources are abundant and
  governance is easy.
• In late stages, with the resource
  depletion, government finance becomes
  increasingly difficult. Debasement of coinage or
• War and famine greatly reduced population and
  consumption level, which enable natural
  resources to regenerate themselves. A new
  cycle starts.
      Modern Monetary system:
       Bretton Woods system
• After WWII, USA emerged as the
  dominant force in the world.
• Major currencies pegged to US dollar
• US dollar fixed at 35 dollar per ounce of
  gold. So US dollar is “as good as gold”.
 The decline of a dominant power
• The currency of a dominant power is in
  such a great demand that it is tempting to
  print money instead of doing the real hard
• In 1958, US balance of payments swung
  negative. Other countries hold more and
  more dollars, there is a pressure for them
  to redeem gold at 35 dollar.
• In 1971, costly Vietnam war, US
  government print money to finance it.
• Nixon announced dollar no more
  convertible to gold.
• Today, gold is over 700 dollars per ounce.
           Related events
• US oil peak at 1970
• Arab Oil embargo 1973.
       Currency peg:
advantages and disadvantages
• Chapter 3.   2, 4, 6

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