Some commodities fare better on these criteria than others.ġ2/ Network effects mean that the more widely a currency is accepted by others, the more likely is it to get accepted by others. ![]() You need money to be easy to store, transportable, divisible, and durable. Which one wins depends on two factors: a) marketability of the currency b) network effects.ġ1/ Marketability is simply how good a commodity is in functioning as money. Salt, tobacco, wheat and many other commodities have been used as mediums of exchange.ġ0/ When multiple possible commodities are being used as a medium of exchange, only a few emerge as winners. But butter is not the only possible medium of exchange. You accept it in exchange for the shoes you’ve made because you know you can find someone who wants butter easily and can pay him with a fraction of the butter weight you think is worth what that person is selling.ĩ/ Butter gradually becomes a widely used medium of exchange. Transaction costs of finding someone who wants what you have becomes too high.Ĩ/ To solve this problem, people gradually start accepting a commodity that is divisible into smaller units and which they believe are widely demanded. As the number of people who want to trade expands, the lack of coincidence of wants becomes a bottleneck for general prosperity. But as you can imagine, this doesn’t scale well. You can find a shirtmaker who wants shoes and use your newly acquired shirt for a loaf of bread. how many loaves of bread you both agree on for a pair of shoes?)ģ/ But with more people involved, barter collapses because of two reasons: indivisibility and lack of coincidence of wants.Ĥ/ Indivisibility means that if you’re a shoe-maker, you can’t barter half a shoe for a loaf of bread (if that’s all that you need and you don’t want to overpay).ĥ/ Lack of coincidence of wants means that you may want a loaf of bread but the other person doesn’t need shoes, he needs a shirt and you don’t know how to make one.Ħ/ Of course, this can be solved via an indirect exchange. Even with two people, an exchange rate emerges (e.g. ![]() directly exchange) what each one of them has with what the other one needs. Different folks specialize in producing different things and each one of them desires different things.Ģ/ If there are only two people, they can barter (i.e. ![]() Money as a medium of exchangeġ/ In an economy, there’s a variety of people. But in case you want the key insights, here are my notes. It’s available on the Internet for free and I highly recommend reading it. I recently finished this excellent short book titled What Has Government Done To Our Money.
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