Money – Credit and Banking

Money, Credit, and Banking Theories

The twentieth century is frequently referred to by econ­omists as a period of money economy. The point they empha­size is that in order to get even the necessities of life, people must have money. In contrast to the self-sufficiency of the early agricultural communities, people today make directly or com­pletely very few if any of the things they use. The adage that men must work for a living has changed. Men work for money to buy a living, and there is no other way in modern society to live and do the things which people want to do. It is not the intention of this chapter to discuss the merit of the emphasis upon money which is so common today, although modern literature is full of opinion upon that subject. Our interest lies in a statement and an explanation of what the great economists of history have thought about money in its relation to economic activity.

As Adam Smith pointed out so forcefully, although he was not the first to do so, money originated as the counterpart of specialization. When people ceased to make everything they needed, and began to emphasize the production of those articles in which they had special ability, exchange became an important aspect of economic life. As long as group A could exchange its grain for meat produced by group B in quantities satisfactory to both, ordinary barter was sufficient. When direct exchange was not possible the next best arrangement was for group A and group B to exchange this grain and meat with other groups for some one item that was generally desired by most people. Just suppose, for example, it were skins. Groups A and B then would hold the skins they got for their meat and grain until they could be exchanged for other commodities which they desired to use. In that way skins, while having some value in use themselves, ac­tually would be in greater demand because they had become a medium of exchange, or money. This explains the origin and—as Othmar Spann suggests—perhaps the fundamental nature of money. Some objects are better adapted to this function than others. Perishable and extremely bulky commodities would not do. In the inevitable weeding out process objects such as shells, cattle, skins, tobacco, and beads proved serviceable as money. Due to their greater convenience modern society has grown ac­customed to the use of precious metals and paper for money.