Money –Its Origin

& Its Importance

ECO 473 – Dr. Dennis Foster

Backstory – The “Austrian” SchoolMenger

(Principles of Economics)

Böhm-Bawerk(Capital & Interest)

Mises(Theory of Money & Credit; Human Action)

Hayek(Individualism & Economic Order)

(The Road to Serfdom)

Rothbard(Man, Economy & State)(The Mystery of Banking)

The Origins of Money• Arises in a market setting …

– Direct exchange (barter) gives way to …

– Indirect exchange• Goods serve as mediums of exchange.

• When we settle down to one = money.

– Characteristics:• Portable, store of value, relatively scarce, divisible,

widely used, easily recognized.

• If available, gold and silver.

Money solves problems …• Double coincidence of wantsDouble coincidence of wants– Allows for specialization of labor.

• IndivisibilitiesIndivisibilities– Even with barter, discrete units may

still be difficult.

• Calculation of profit and loss.Calculation of profit and loss.– Business formation is possible.– Division of labor Economic growth

Rising living standards.

Is Money “Invented” by the State?• No.No.– Even with the idea, it is difficult to image

how a king could create the institution of money.– Governments have long been involved w/money.• Minting (income=seignorage) & debasing.• Issue unbacked claims to money – FR Notes.• Supplant the market money – FR Notes.

• Note that money unit is some weight of …Note that money unit is some weight of …• Pound sterling – a pound of silver.• Dollar – an ounce of silver.• POW camp & cigarettes as money.

ECO 473 – Dr. Dennis Foster

Money –Its Origin

& Its Importance