Economics Tutorials – Page 5

As we have continue our journey into the cryptocurrency world, holding crypto on our balance sheet and our small mining operation, we have thought about what money really is. To this end we looked into the four functions of money and thought how will our crypto holdings, perhaps more into the future, help serve this and replace the fiat we currently earn and hold. A Medium of Exchange The use of money as a medium of exchange makes it possible for man to specialise to a much greater extent than would be possible under the system of barter. In a highly developed economy we can so easily exchange one hour's labour for a haircut, a takeaway, a coffee, a train journey or an almost unlimited variety of other goods and services. We rarely stop to consider the wonderful service that money renders in making these transactions possible. Or how difficult in most cases such exchanges would be without the use of money. When I stop and think about the goods and services I use each day and how I would otherwise pay for them. For example we operate a small crypto mining farm. I know how to put one of these machines together, but I don't know how to manufacture the very complex hardware or code the application software, operating system or BIOS. And we haven't even got to the supply of electricity or internet services that are critical to making them operate ... and make us a few dollars a day. A Measure of Value The second of the four functions of money deals with how establishing a standard of value. It is probable that one of the first steps in the use of money was the adoption of some commodity as a unit of account or standard of value. Money probably came into use alongside the use of barter as a means by which the values of various goods could be compared. The direct exchange of goods for goods would raise constant problems of valuation. For example, how many kilograms of corn is equal to one sheep? How many sheep are equal to one cow? This problem of exchange ratios is easily solved when all commodities are valued in terms of one given commodity which then acts as a standard of value. When all commodities have money prices we know the value of one good in terms of the other. A Store of Value Once a commodity has become universally acceptable in exchange for goods and services it is possible to sore wealth by holding this commodity. Hence whatever is used as money must not be subject to deterioration, neither must it be costly to store. The great advantage of storing in the form of money is that its possessor has immediate commend over resources of any kind. He holder has complete freedom of choice whenever they choose to consume their wealth. Consider the disadvantages of holding wealth in the form of wheat. It may deteriorate; it is costly to store; it must be sold before the owner can consume wealth in a form which is attractive to the. It should be apparent that money can only serve effectively as a store of value if its own value is stable. This function of money is what drew me into crypto currency and in particular Bitcoin. In seeing the enormous growth in inflation in the western world, inflation being the growth in the money supply rather than price movements, money in the form of western currencies is depleting. Of particular note is the growth in US dollar M1 money supply. In February 2021 this stood at approximately $6.8 trillion. Come March 2021 it was 18.4 trillion (source: take-profit.org). Now true, I was already invested into crypto in 2020, before this huge increase, but it did confirm what I saw coming as modern monetary theory (MMT) seeing the merging of monetary and fiscal policy and the lightly veiled separation between executive government and central banks being lifted. A Means of Deferred Payment An important function of money in the modern world, where so much business is conducted on the basis of credit (ie debt), is to act as a standard of deferred payment - the last of the four functions. Contracts are made now which will be fulfilled at some future date. The manufacturer buys raw material promising to pay in three months time; a company borrows money which it promises to repay at a future date; a customer buys their new car on a hire purchases agreement; these are all examples transactions that require future payment for goods and services that are transferred in the present. A complex trading organisation based upon a system of credit is only possible in a monetary economy. A seller could not accept a promise to pay, expressed in terms of some specified commodity, at some future date, because they cannot foresee their future wants in terms of that commodity. They will be prepared to accept future payment in terms of money because no matter what the pattern of future wants they can be satisfied by money received and held. It is interesting to see this changing for cryptocurrencies, in particular for Bitcoin. Just recently Tesla announced the acceptance of Bitcoin for their car sales - and worth noting they intend to not convert the Bitcoin received but rather hold it; just as they would if receiving dollars. This is an example of another form of money being slowly accepted as a means of deferred payment. Tesla, along with their also recent $1.5 billion long position in Bitcoin, must be bullish about Bitcoin's ability to meet their future needs. Conclusion I hope this article has helped you think more about what money is and what function does it serve in today's modern economy. With the growth in MMT and discussions around a global financial reset, will our traditional fiat currencies continue to serve the four functions of money or will they be replaced with new digital forms, such as central bank digital currencies. We welcome your comments below, or if you would like to get in touch please use our Contact Us page.