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The Origin of Basic Value Foundation on Money by: Haidir Aulia Reizaputra United (States) Parcel Service. (Photo credit: matt.hin...

The Origin of Basic Value Foundation on Money

The Origin of Basic Value Foundation on Money

by: Haidir Aulia Reizaputra

United (States) Parcel Service.
United (States) Parcel Service. (Photo credit: matt.hintsa)


Economist defined three different types of money:  fiat money, commodity money, and credit money. Commodity money value  come from their self value of exchanges. Gold, Silver, or even a Cattle at the historical time are example of commodity money. Nowadays, commodity money has mainly replaced with fiat money. Fiat money is a good, of which value is less than the exchange value it represents as money as the results they have distinct value of real and nominal value. Dollar and Euro bills are example of fiat money because they have different distinctive value real value and nominal value. Credit money consists of the book credit that banks extend to their depositors. Transactions made using checks drawn on deposits held at banks involve the use of bank money. Money is a good that acts as a medium of exchange in transactions. Classically it is said that money acts as a unit of account, a store of value, and a medium of exchange. 

Short Summarize About History of Commodity Money

English: Japan_commodity_money before the 8th ...
English: Japan_commodity_money before the 8th century (Photo credit: Wikipedia)

Around 1000 B.C Bronze and Copper  imitations were manufactured by China at the end of the Stone Age and could be considered some of the earliest forms of commodity money using metal as the main sources. Outside of China in 500 BC, the first coins developed out of lumps of silver. They soon took the familiar round form of today, and were stamped with various gods and emperors to mark their authenticity. Unlike Chinese coins which depended on base metals, these new coins were made from precious metals such as silver, bronze, and gold, which had more inherent value. The first form of Bank Note can be found on china at the 118 BC in the form of leather money with one-foot-square pieces of white deerskin and colorful borders. China experienced over 500 years of earliest use of fiat money, spanning from the ninth through the fifteenth century. The main problem is the same an inflation ceased because the fiat money production is more than the demanded value which in turn made their value rapidly decline. In The 19th century gold was officially made as the standard measurement of value in the United Kingdom. At this time, guidelines were made to allow for a non-inflationary production of standard banknotes which represented a certain amount of gold.The  great depression in the 1930 which ignited the world crises is marked as the end of the gold standard. In the United States, the gold standard was revised and the price parity between dolar and gold was devalued and  move from $20 to $35 for an troy oz also the decline of British economy also make international gold standards soon ended. 

The Emergence of Bretton Woods

The Color of Money (Explore)
The Color of Money (Explore) (Photo credit: Lon Fong Photography-trying to catch up!)

Established in 1944 and named after the New Hampshire town where the agreements were drawn up, the Bretton Woods system created an international basis for exchanging one currency for another. It also led to the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, now known as the World Bank. The former was designed to monitor exchange rates and lend reserve currencies to nations with trade deficits, the latter to provide underdeveloped nations with needed capital — although each institution's role has changed over time. Each of the 44 nations who joined the discussions contributed a membership fee, of sorts, to fund these institutions; the amount of each contribution designated a country's economic ability and dictated its number of vote. In an effort to free international trade and fund postwar reconstruction, the member states agreed to fix their exchange rates by tying their currencies to the U.S. dollar. American politicians, meanwhile, assured the rest of the world that its currency was dependable by linking the U.S. dollar to gold; $1 equaled 35 oz. of bullion. Nations also agreed to buy and sell U.S. dollars to keep their currencies within 1% of the fixed rate. And thus the golden age of the U.S. dollar began. ritish economist John Maynard Keynes, who drafted much of the plan, called it "the exact opposite of the gold standard," saying the negotiated monetary system would be whatever the controlling nations wished to make of it. Keynes had even gone so far as to propose a single, global currency that wouldn't be tied to either gold or politics. The Bretton Woods system itself collapsed in 1971, when President Richard Nixon severed the link between the dollar and gold — a decision made to prevent a run on Fort Knox, which contained only a third of the gold bullion necessary to cover the amount of dollars in foreign hands. By 1973, most major world economies had allowed their currencies to float freely against the dollar. It was a rocky transition, characterized by plummeting stock prices, skyrocketing oil prices, bank failures and inflation.

Mises on Money

English: Cover art for the 2009 edition of The...
English: Cover art for the 2009 edition of The Theory of Money and Credit by Ludwig von Mises (Photo credit: Wikipedia)

Ludwig von Mises (1881-1973) made a major contribution to the theory of money with the publication of his book, The Theory of Money and Credit (1912). He followed this path-breaking book with what has proven to be one of the most important essays in the history of economic theory: "Economic Calculation in the Socialist Commonwealth" (1920). In it, he argued that without capital markets based on private ownership, socialist central planners are economically blind. They cannot know either the economic value or the price of capital goods. Therefore, they cannot know which resources should be allocated to meet the desires of consumers, including the State itself. He expanded this essay into a book, Socialism: An Economic and Sociological Analysis (1922). A second German edition appeared in 1932, the year before Hitler became Chancellor of Germany. This was the edition used to translate the English-language edition, published in 1951 by Yale University Press. Mises added an Epilogue, which began with these words: "Nothing is more unpopular today than the free market economy, i.e., capitalism." It ended with these words: "Not mythical 'material forces', but reason and ideas determine the course of human affairs. What is needed to stop the trend towards socialism and despotism is common sense and moral courage." Mises delimits the realm of money by indicating in which economic situations money would have a function, and in which economic situations money would not have a function. First, there is no need for money in autarky economic condition. In such conditions there is no exchange and therefore no use for money because the people will only produced what they will consumed. While in socialism, though money would have no role with regard to the means of production, it could still have a function with regard to consumers' goods. Thus money, according to Mises in 1912, is only useful under capitalism: the state of affairs in which means of production are privately owned. In capitalism, the function of money is to facilitate exchange by making indirect exchange to be possible.

The Evolving Development of Money

Personally i define the evolution of money into three steps which came from Mises statement which is: The need of exact measurement from Commodity  goods to Medium of Exchange, The perception evolution from Medium of Exchange to Common Medium of Exchange, and From Common Medium of Exchange to Money. Mises notes that "indirect exchange becomes more necessary as division of labor increases and wants become more refined." The more people specialize, the less likely it is that any individual can acquire the various things he wants in exchange for the niche product that he brings to market.The second steps come from the perception that high marketability commodity will draws more demand, though the increases of  marketability the commodity will draws forth still more demand, and so on. This continues until a few goods are selected as "common media of exchange" or we can say this as the survival of the fittest to be selected as the commodity on the exchanges of goods and service. According to Mises, through the process of what is now called "globalization," moneys tend to die out as markets merge and competition begins anew among the moneys of the various markets. This process leads toward the establishment of a single money for the whole world.

Recent Conclusion

A 1914 half-sovereign minted in Sydney
A 1914 half-sovereign minted in Sydney (Photo credit: Wikipedia)

According to Mises, the "secondary functions" of money, which many theorists write about, are really just instances of For example, the facilitation of credit transactions is not a separate function, as is often supposed, because credit transactions are simply exchanges of present goods for future goods. its primary and sole function: to facilitate exchange by making indirect exchange possible.The transmission of value across space is not a separate function either. Exchanging "a good here" for money, in order to exchange money for "a good there" is, again, simply another instance of acquiring a good via indirect exchange that would have been impossible to acquire via direct exchange.  The emergence of money need not involve such selflessness in the first place. As Mises tells, the economic actor benefits at each step of the way: when he first resorts to indirect exchange, when he first uses a common medium of exchange, and when he first accepts money for his wares. The "market-process" theory of the origin of money is often characterized as a "spontaneous order," as against the "deliberate order" of the etatist theory.

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