Money as a Unit of Exchange

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Introduction

Money is so unique because it has no inherent worth, yet it represents value. People who have a lot of money are perceived as fortunate and considered wealthy, but at the end of the day, all they have is a bunch of paper. Money serves as an intermediate for exchange; just because you have money does not mean you have something valuable, it simply serves as a tool to acquire something valuable. Without it, exchanges would become extremely difficult because other goods and services do not necessarily have a worth that society imparts upon them in the way that money does. The value of a good may be vastly different to one person than another. A currency where the value is the same to every individual is necessary for efficient transactions. In this sense, money is a middleman.

Exchange

Money holds zero value outside of exchange. It can’t help you to cook dinner, take a shower, take notes for class, or anything else. So why then is so much emphasis placed on having lots of money? We are all enrolled in school to get a college degree which, in theory, will afford us more opportunities to make higher wages when we enter the workforce. So much of life is geared around making the green paper that is little more than fire kindle in practice. However, money represents something to whoever holds it. Money could represent a new TV, a nice dinner, a full tank of gas, and pretty much anything else. Each person views money differently and it can change day to day or even minute to minute. In his novel Atlas Shrugged, Ayn Rand writes:

But money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. It will give you the means for the satisfaction of your desires, but it will not provide you with desires (1957).

This quote nicely sums up how money has little use outside of exchange. Money makes free exchange so much more efficient and expansive. Without money, to do any sort of exchange you have to find an individual with exactly what you want, that also happens to want exactly what you have more than they want what they currently have. This is an arduous process and can be nearly impossible. Money allows you to sell what you have, then buy what you want. That way the seller does not necessarily have to want exactly what you have. Currency simplifies the exchange which makes it a powerful tool that represents an economic good to society (Bylund, p. 16, 2016).

Value of Money

Who decides what money is worth? It is a simple question but one that requires some thinking. Because money can be used to purchase such a wide array of goods and services, it is hard to define a numerical value to a currency, especially in the current day when money is not tied to a commodity such as gold. Back then you could say one dollar is worth X ounces of gold. Nowadays you almost have to work backward from the product purchased to determine what the money is worth. Over time, an obvious pattern forms based on what society is willing to pay for different goods, and the value of the dollar is understood. In “The Money Confusion”, John Tamny states:

capitalism presumes a stable measuring rod of value. We know this because wherever goods are traded, it’s inevitable that the medium most known for stability as a measure of value emerges as the unit that referees most exchange (pp. 34-35, 2022).

For capitalism to work, it is imperative that the unit of currency is universally agreed upon. Now this is not to say that every person in the world will pay one dollar for a slice of pizza, but rather enough people are willing to pay one dollar for a slice of pizza that it is profitable for the owner of the pizza shop to set the price as such. Once everyone in a society understands the value of money, then transactions can occur freely.

Determination of Price

It’s one thing to determine the value of the money, but it is another to determine how much money various goods or services should cost. In “The Seen, The Unseen, and The Unrealized”, Bylund states:

“bidding to buy products forces buyers to offer prices higher than they think is worth it, which means they will always offer prices in money that they value lower than they anticipate the product they aim to purchase is ‘worth’ to them, they would probably offer higher prices than they otherwise would have. They are still better off, but not as well off as they would have been had they been the only customer. What this means, from a societal point of view, is not a loss but a gain: the person who values a good most highly, in terms of his or her subjective valuation of money, will come out on top in each bidding. The realized value of each good, therefore, is the highest possible” (p. 22, 2016).

Bidding is a type of transaction where multiple prospective buyers are competing with each other to purchase a good or service, and the one who is willing to spend the most money will get the item. Bylund states this is the optimal outcome because the individual who bids the most values the good or service more than the others, and the seller will make more money than had there been no competition at all. It is likely that had there been no competition, the purchasing price would have been lower. Of course, this is not the only type of transaction we see in our daily lives. At stores, prices are fixed and non-negotiable. These prices may seem somewhat arbitrary but are actually the result of in-depth supply and demand research. How much of this product is available? How many people want it? How badly do they want it? What are they willing to pay? How do I maximize profit? These are all questions that go into determining price. At the end of the day, people will pay less than what they deem fit for a product and they will be better off for it. The reason any purchase is made is because the buyer thinks that the good they are purchasing is worth more than the money they are giving up. If they didn’t, they would not enter the exchange.

References

Rand, A. (2020, April 13). "Francisco's money speech" by Ayn Rand. Capitalism Magazine. Retrieved February 24, 2023, from https://www.capitalismmagazine.com/2002/08/franciscos-money-speech/Links to an external site.
Bylund, P. L. (2016). Chapter 2: The Price Is Right. In Seen, the unseen, and the unrealized: How regulations affect our everyday lives (pp. 15–26). essay, Lexington Books.
Tamny, J. (2022). Chapter 2: The Meaning of Stable Money. In The money confusion: How illiteracy about currencies and inflation sets the stage for the Crypto Revolution (pp. 29–41). essay, All Seasons Press.