# What is Money by jackshepherd

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• pg 1
```									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
energy
scarcity
• 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?
Why?
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
Effort
• 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
correlated.
energy
• A system tend to move from less probable
state to a more probable state. This
tendency is the energy source for all living
organisms.
• 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
energy
• 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
value
• 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
now.
• 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
coins.
• 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
currency.
• 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
work.
• 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: