Everything You Know About Money Is Wrong!

Some interesting observations about money from Washington’s blog.

Bloomberg notes this week that the conventional theory of why money was created is wrong:

There are, broadly speaking, two accounts of the origin and history of money. One is elegant, intuitive and taught in many introductory economics textbooks. The other is true.

The financial economist Charles Goodhart, a former member of the Bank of England’s Monetary Policy Committee, laid out the two views in a 1998 paper, “The Two Concepts of Money: Implications for the Analysis of Optimal Currency Areas.”

The first view, the “M View,” is named after the Austrian 19th century economist and historian Karl Menger, whose 1882 essay “On the Origins of Money” is the canonical statement of an argument that goes back to Aristotle:

As subsistence farming gives way to more complex economies, individuals want to trade. Simple barter (eight bushels of wheat for one barrel of wine) quickly becomes inefficient, because a buyer’s desires won’t always match up with a seller’s inventory. If a merchant comes through the village with wine and all a farmer has to offer is wheat, but the merchant wants nuts, there’s no trade and both parties walk away unfulfilled. Or the farmer has to incur the costs of finding another merchant who will exchange wheat for nuts and then hope that the first merchant hasn’t moved on to the next village.

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2 thoughts on “Everything You Know About Money Is Wrong!

  1. Money was the compliment of Aristocracy traditions in order to keep a society functioning without too much politics getting in the way, which when faced with primitive challenges, otherwise would mean certain death for the Group in short periods of time.

  2. The C View, presented as the “correct” alternative to the M view, is heavily biased towards a centrally managed, command economy. And it’s claim that it describes the origin of money only really makes sense if you accept the assumption that money isn’t money until a nationaly coercive force has put its stamp on it. Otherwise their story is just Menger’s story continued.

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