Tuesday, October 14, 2008

Money: More Than a Piece of Paper

Talifaitasi W. Satele

The origin and role of money in the economy is one of the most important lessons we need to learn. A lack of proper understanding often leads to public policies that have disastrous consequences such as hyperinflation or just inflation period.

Money, as Adam Smith put it, is a "medium of exchange". Economists Thomas Sowell and Alan Greenspan both pointed out that even sea shells were used as a form of money. Mr. Sowell explains in his book, Basic Economics, how cigarettes from Red Cross packages were used as money among prisoners in P.O.W camps during World War II. He notes that the least popular brand of cigarettes circulated as money, while the most popular were smoked.

But what makes money, money? First, people with whom you want to trade with have to want to accept it. "Want" being the key word here. If there is ever a mass consensus that the US dollar, for example, is useless, there is little government can do to force people to accept it. That will be especially true on the international market and with foreign governments who hold the Dollar as reserves.

Any form of money has to be tied to what people consider valuable. For Europeans, it was gold; for Samoans, it was the ie toga. Gold, as Mr. Greenspan puts it, has both artistic and functional uses. The ie toga represents honor, history and pride to the Samoan.

The other aspect of money is that it is limited. If there is more gold coins or paper bills or ie togas floating around than there are goods and services in the economy, prices will go up.

The point I want to make is money is whatever most people find valuable and will accept as payment for their property; is limited in supply and ideally represents the amount of products and services being demanded and supplied in an economy.

When we ignore the nature, origin and role of money in an economy is when we start getting into some serious trouble.