 Good morning, ladies and gentlemen, boys and girls. My name is Mark Thornton, and I am a senior fellow here at the Ludwig von Mises Institute, and I wanna welcome you to the Institute and our seminar this morning, what has government done to our money? The Mises Institute is an educational foundation set up to provide education about the free market economics. Needless to say, you're gonna hear some stuff here today that you won't hear anywhere else. It's gonna be enlightening for all of us, I think, here at the seminar, and our audience on the World Wide Web today, which I also wanna welcome you here this morning to our seminar. Our first speaker this morning is GP Minesh. GP is from India originally, one of the world's largest populations and one of the world's largest economies. He came to the United States and studied economics at Suffolk University in Boston, Massachusetts, where he recently earned his PhD in economics. GP was a summer research fellow here at the Institute for the past three summers, and he was recently hired as an assistant professor of economics at Troy University here in Troy, Alabama. His talk today is titled, where does money come from? GP? So the topic for my talk today is, where does money come from? Before we get into answering that specific question, let's take a step back first and think about a situation where there is no money. What a situation which economists call, what's called barter. So a barter economy is a situation or an economy in which we don't use any money to make exchanges. So in a sense, you engage in what's called direct exchange. That is where you exchange goods for goods. And to understand it better, let's just imagine or think of a primitive tribe or a little community somewhere, again, like where they don't use any money and think of a farmer in a community and let's say he's growing some corn and he wants butter. So he goes and tries to find somebody who has butter, who will give him butter in exchange for corn. This kind of exchange is called a direct exchange where on the one hand, the farmer who has the corn is exchanging it for butter, a good which he wants, which he wants to use for satisfying some need. And at the same time, the person who gives him the butter, the milkman, let's say, he wants the corn to satisfy some need of his own. This is different from a situation of indirect exchange. That is where there is money. In that kind of scenario, what the farmer would do would be to exchange corn for money and then use the money to buy butter, right? Well, there are some difficulties or inconveniences which exist in a world of butter or this kind of direct exchange. Now, again, let's take the farmer's case again. Now, when he wants butter, right? He has to find somebody, the milkman, who has butter, the good that he wants. But he also, the milkman has to want corn, right? So unless both of them want what the other one has, there is no room to make any exchange, right? So for whatever reason, let's say the farmer goes to the milkman and he says, okay, I have some corn. I know that you make butter. Can we trade? Now, the milkman might say, well, okay, I don't want corn right now. I want corn only two months from now, not right now. I have all the corn I need right now. I don't need corn from you right now. Well, then there's no room to make that exchange, right? This, I mean, the technical term for this is what is written up there, double coincidence of wants. So when both the corn farmer and the milkman both want what the other one has, then we call it, there is a double coincidence of wants. Each of them has what the other one has. But think about it, I mean, in a world without money where people have to make these kind of exchanges of goods for goods, there might be many situations where this double coincidence of wants just doesn't exist. So like I just said, like maybe the milkman doesn't want the corn. Now think on the other hand about someone with a horse, right? He has a horse, he wants all kinds of goods in exchange for the horse, right? He has a horse to sell, he wants milk, he wants butter, he wants eggs, he wants meat, you know, all these things which he wants to consume. Now all he has is a horse, right? And maybe people want horses in this community because they use it for farming and leisure riding and all of that stuff. But think about the problems which this person with a horse would face. He would go in there and maybe the milkman says, well, I don't want a full horse right now, right? He can't break up a horse into one tenth or one hundredth of a horse, he can't make that exchange because one tenth of a horse is useless, right? And not only that, he wants with a horse, he wants butter, he wants milk, he wants eggs, he wants meat, he wants all these different goods, but how can he sell one horse multiple times, right? So once again, you see that because of the indivisibility of goods, again, exchanges become very hard. What will this horse, this person who's rearing horses for a living, what would he do? Well, he can't really make too many exchanges using horses, you know, with the horse that he has. Or even goods which are perishable. So take the milkman, for example. Well, he has milk, he has butter, he has eggs, but all these goods will perish, you know, maybe two days, three days is all he has to find somebody who can give him something he wants in exchange. But maybe those people don't want to make exchanges in those two days. Or even the corn farmer, right? Corn is also gonna last only whatever, a month, let's say, in the best of weather conditions. Well, he might not find someone who is gonna offer him anything which he wants during that one month. Again, you find, you know, the same thing. It's very hard to make exchanges in a world without money, right? There are very high costs to conducting these exchanges in a world without money. Of course, in a world with money, it's so easy. All the corn farmer or the milkman or the butcher has to do is find someone who has money who wants their goods. He doesn't have to find someone who has what he wants and wants what he has, right? There doesn't have to be that double coincidence of wants. The corn farmer can just go and say, find anyone who has some money who wants his corn. And that's it. Then he can take the money and then he can make exchanges for all the goods that he wants whenever it pleases him, right? And same for the guy with the horse. All he has to do is find someone who has a horse. I mean, who wants a horse but who has money to give an exchange. And then once he has that money, then of course he can buy all the different goods he wants, something which would have been very hard for him to do in a situation without money. Also, think of the problems in making payments to, I mean laborers, right? And other factors of production is the technical term for all the different goods that we use in production. So labor is the best example. So think of, again, the corn farmer, right? Let's say he wants to hire a few laborers to do his farming. What's he gonna pay them with in a world without money? One laborer says, I want apples and bananas. The other guy says, no, I want meat, you know, in exchange for giving you my labor. What is the corn farmer going to do? Right? Again, very difficult to engage in even productive activities in a world without money. So for all of these reasons, because of all these difficulties, because of the fact that we don't have money in making exchanges in this world of barter, right? The extent of specialization in the division of labor in the economy suffers. So the guy who's rearing horses will just abandon, you know, rearing horses because it's something which he can't make any, he can't make those exchanges. Similarly, the corn farmer will not be able to hire any workers. So he can't expand his production, right? In a world without money, you'd have a lot more people who would be much more self-sufficient. They would have to produce everything for themselves. And so they would not be able to engage in trade and therefore specialize. They would, in a sense, all be, I don't know if you've seen the movie Into the Wild, I think it came out a few months ago or something. You know, this guy who takes off into the Alaskan wilderness, I think. He completely abandoned civilization. Well, think about his situation or let's say one of us just takes off into the woods around here, right? And decides to live like a hermit. Well, we would have to produce everything for ourselves, right, our food, clothing, right? Everything, all our necessities. Think of how much our standards of living would fall if we had to make everything which we consume on a day-to-day basis ourselves. Well, that would be the scenario in a world without money because of the fact that it's so hard to engage in trade and make exchanges, right? So because of that, people would not have the incentive to engage in, you know, to specialize. And therefore they would have to be much more self-sufficient and with the result that we'd all be a lot poorer, right? So in this primitive community, which we're imagining, everyone's really poor. They have to do a lot for themselves. They can't really engage much in specializing, right? They can't do things for each other and trade. So they're all a lot poorer for it. But like I said, with money, lots of these problems can be overcome. So now we come to the topic, you know, which is really the topic for my talk. How does money arise, right? How do we get from a place where we have no money and where all these exchanges are so difficult to make and, you know, the extent of specialization is so low? How do we come from there to a situation where there is money? What is the cause which gives rise to money? Right, what is the chain of cause and effect? How do we, how can we theorize about it? How do we understand that phenomenon? And probably the best work on this topic was written by the founder of the modern Austrian school called Karl Menger. It's called The Origins of Money, written in 1892. It's available for free on Mises.org. I encourage all of you to read it. It's a great work, one of the classics. So this is precisely the question which Menger was addressing in this work. And he started by making some observations. He said, all philosophers and economists, right, all the famous ones, Plato, Aristotle, you know, all the other medieval philosophers, they've all pondered this question. Where does money come from? How does it arise? Right, how do we get from a state of barter to a state of money? And they all said, look, of course, a state of money or in a situation in which we can use money benefits all of us, right? World is, I mean, we can make exchanges, we can specialize, we're all richer for it. But there was one stumbling block to what people before Menger had, how they theorize or they understood the origins of money. There was one stumbling block. And that stumbling block was, they said, look, it's easy to understand why people have an incentive to make exchanges, right? So the corn farmer, it's easy to understand why a corn farmer would approach a milkman for butter because he wants butter. Similarly, it's easy to understand why, you know, the milkman would approach the butcher for meat because he wants meat and he has something to give an exchange. But why do people wanna hold money? Money is something which they don't consume, right? There's no wants which are directly satisfied by money. We only hold money to give away in further exchange. So all these, you know, great philosophers and economists, they couldn't understand why somebody in butter would have the incentive to hold money, right? Why would somebody, if money's not serving any direct purpose for us, well, why would anybody begin to hold, you know, anything like money? So as far as they were concerned, they reached the conclusion that, well, there is no way that money can spontaneously arise on the marketplace, right? Because so the conclusion they reached was, well, money must have arisen because of some kind of decree of the government, some prints, some smart prints, one day realized, hey, you know, the world would be better if all of us engaged in trade with money. And so then he passed a decree or a law and said, well, from now on, all my subjects will engage in trade with money, right? Or they thought that, well, maybe a primitive community came together, they sat down, they had a discussion, you know, a talk, and they said, you know what, life is really hard, let's start trading with money. And so they kind of bicovenant, you know, they arose, I mean, you know, they decided to trade with money. That's what people before Manger generally, that was, you know, the prevailing opinion. But Manger pointed out in an insight amounting to genius, he said, look, no, that there are all the conditions required for the emergence of money are present on the marketplace. So it is possible for money to spontaneously arise in a world of barter, right? So in a world where there's no money, all the incentives are there for people to somehow start trading with money. And he said, the most important thing to understand, to understand this process of the origin of money spontaneously on the market, is to realize that there are differences in how marketable, or to use a more colloquial term, how the saleableness of goods, right? He said, look, different goods have, you know, different levels of marketability. So to take an example, let's go back to our primitive barter community, right? And think of the difference in the marketability between a good like a horse and salt, right? Now both these goods are scarce in the sense that they're not like air, right? The supply of them is not greater than our need for it. So for example, I mean, air, nobody would give anything in exchange for air, right? What if I came up to one of you and tried to strike a deal, you know, give me some money, I'll give you a room full of air. Well, you're gonna think I'm a con man, right? Some kind of rogue, right? He's trying to con me. There's something wrong here with him, right? Well, so, you know, air is not a marketable good because it's, we can all breathe it anytime we want. But, you know, goods like horses, salt, milk, eggs, all these are scarce goods, right? Someone, somebody is willing to give something in exchange to obtain it because it is scarce. But, amongst these scarce goods, there are different levels of marketability. So, again, think of the horse versus salt. It's much harder to market a horse as compared to salt, right? Firstly, not everybody might want a horse, but everybody would want salt. Maybe the demand for a horse is seasonal, you know? Maybe people don't want horses in the winter because, well, they can't feed them anything, they're gonna die anyways. So, there's demand for horses only in the summer. But also, think of the indivisibility of a horse, right? Which we talked about before. You can't sell one-tenth of a horse unless this community eats horse meat and we'll assume they don't, right? But, as long as they use full horses, a complete horse, right? It's, there's no way he can, anybody who has a horse can break up that horse into one-tenth, one-hundredth of a part and sell it. But, on the other hand, salt is divisible, right? It's easily divisible, right? They can easily, you know, trade in little bits of salt, little cubes, you know, bigger chunks, right? Also, salt is easy to transport. A horse is much harder to transport, right? So, this guy who has a horse or horses, if he's trading, he'd have to carry them around or lug them with him all around the town, right? Saying, okay, you know, I have a horse, will you give me something in exchange? Right, on the other hand, salt is easy. He could just carry it maybe in his, you know, in a little pouch on his waist or something. So, Manger said, look, because of these differences in the marketability, you know, how easy it is to find a market, for example, for salt as compared to a horse, that is the condition or the necessary and sufficient condition for the origin of money spontaneously in the marketplace. Now, what exists between a salt and a horse also, you know, you can think of the difference between corn and salt, right, corn, too, might have only a seasonal demand, right? Also, corn has only a seasonal supply, right? You only harvest corn so many times a year. The rest of the time, the supply of corn fluctuates a lot, right? Now, all of these things make a difference and corn perishes maybe much easier than salt. Now, I'm not a chemist, so I don't know what are the chemical properties of salt exactly, but I think that salt would last longer and would be more durable than corn, right? At least in a primitive situation without refrigeration and all of that stuff, right? So again, it's easier to find any time to find a market for salt. It's easier to find somebody who will give you, you know, who will accept salt in exchange for something you want as compared to a horse or corn. And then Manger said, look, given that this exists, that these differences of saleableness or marketability exist, some smart guy in this primitive community will say, you know what? I have a horse. Why should I go around hawking my horse for butter, corn, eggs, meat, all of this stuff? Instead, I'll just butter my horse or sell my horse for salt. I'll maybe take a full mound of salt, I'll keep it at home, and gradually I will make exchanges which I want with that, you know, I'll run down that mound of salt gradually over time, right? So I can get over my problems of making exchanges. I don't have to divide my horse, right? All I have to find is somebody who has a lot of salt who wants my horse. And what the horse guy, or the horse seller realizes, the corn farmer also realizes. He says, well, you know, I don't need to sell corn for every good I want. All I need to do is get salt. And since salt is so highly marketable, people are always willing to make trades, you know, for salt. Well, I'll just keep salt, I'll keep it in reserve and gradually over time, I'll run it down, right? So I can get over my problems of exchange. Now, this is just a few guys, but realize that once these few smarter guys in the community, you know, realize this, the salt becomes even more marketable. The difference in marketability between salt and the other goods increases, right? Because a few smart guys realize, hey, I can trade my good for salt and then use the salt for buying everything that I want. The fact that salt was initially more marketable, more saleable, it's now even more so. And therefore, a virtual cycle begins. And more people start imitating these guys because they say, hey, you know what? These guys can, I don't have to struggle. You know, maybe the milkman says, in the corn farmer and the horse seller have exchanging things for salt and then making their life so much easier, I should do the same thing. Maybe he's not that smart. He takes time for them to realize. He copies what the other guys do. And so then the whole, and then you can see that salt then becomes money, the medium of exchange. All trades in this little primitive community would take place with salt, right? Now, it's through this kind of process that money emerged in many different communities and through history, many different goods have been used as money. Salt, it has actually been used as money in some communities. So has, for example, tobacco in the Southern American South. Beaver skins, it to trade with Native Americans, right? You've had cowrie shells, which were used as money in Africa. Iron, if I'm not mistaken, in ancient Greece. And of course, the two commodities which most of the world decided came upon as the medium of exchange, gold and silver, during the late 19th and early 20th centuries, most of the world, all exchanges were being made either against gold or against silver, right? And gold and silver too emerged like this the same way. As these communities started becoming, as little village communities started becoming regional communities, regional markets. As regional markets became national markets. As national markets became world markets. All the different participants in these markets chose gold and silver as their ideal or optimal money, right? Now why, what are some of the properties which gold and silver have that make it such a good money? Now, firstly, they're scarce, right? They're divisible, they're amazingly durable, right? So you can, I mean, gold and silver last, it's very hard to destroy them, they're very durable. And the fact that they're durable means that there's a huge stock of it in existence at any time. And that means that any new production is a very small or negligible proportion of the total stock. So if there are either new discoveries of gold or silver or for whatever reason, some supplies of gold and silver run out, the value of gold and silver doesn't fluctuate much because it's so durable that the proportion of new production is very small as compared to total production, right? It's also easily portable. And very importantly, it has a high value-to-weight ratio. So what that means is that one of the problems which could arise, for example, with salt is that, well, it's great, salt is very marketable. But people want a little bit of salt in exchange, right? And so to make any kind of purchase, you have to carry around a huge amount of salt with you. So you kind of have problems to make exchanges again. Same thing with iron. Iron had a very low value-to-weight ratio, which means that the amount that you could buy with, let's say, 10 grams of iron was not much. So to make any daily exchanges, you had to carry around bricks of iron and irons heavy, not a nice medium of exchange, not a nice money. On the other hand, gold and silver have a very high value-to-weight ratio, which means basically that you can buy quite a bit with a little amount of gold and silver. So you don't have to carry around much to make exchanges, right? It's easy, just slip a little coin into your pocket or whatever, or if you've seen movies, you have those guys with those little pouches with gold and silver coins, right? So that's enough to make your daily exchanges, right? So for all those reasons, gold and silver was chosen as good money, right? So to kind of just conclude everything which I've tied all together, the great insight of Manger was that we don't need, money didn't arise because some smart prince thought of it one day in the morning and then told his courtiers that make sure that my subjects trade in money from now on. Not that it arise because a group of villagers or people just sat together and said, well, we will from now on start trading with money. There are all the incentives, all the necessary and sufficient conditions for money to arise spontaneously on the market. And in a sense, what Manger did was basically to say that one more of these institutions, which we know in our daily life, arose spontaneously on the market. Just the way the very fact that we engage in the division of labor and specialization, right? Also arose spontaneously on the marketplace. Like we all instinctively realized that it's better to be in the division of labor in a city or in a town where we can get things from other people, which we don't produce ourselves and therefore will be better off. That's why we don't drive off into the woods, right? We're all here in civilized life, right? A few people might like to drive off into the woods and test it out, right? But then they soon realized that, okay, my standard of living is really low. I have to do everything myself, right? So again, you didn't need any great prince to realize, ah, my subject should engage in specialization and the division of labor. People realize that and instinctively because they want to make, they want to improve their own welfare, their own well-being, satisfy more wants. They realize, well, this is a good way for us to satisfy more wants, to specialize in something and then to trade with other people. Just in the same way, Manger pointed out that money too arises just the same way. It arises because everybody has an incentive or has, you know, the realizes that well, by using money, right, we can make ourselves better off. Right, so that's all I have to say for that topic. Just before I hand over the mic, I'd just like to point out that, well, you know, like Dr. Thornton told you guys, I'm at Troy University down the road, down 231 South, right? We have a new center called the Manuel Johnson Center for Political Economy. Me and four other of my colleagues are all free market professors. We believe in the free market and we study, we want to study the free market. That's the goal of the center. We're also getting an econ major starting fall of 2013. So any of you who are seriously considering, you know, college or pursuing economics, please give Troy University serious consideration. Thank you for your time. Thank you. Thank you.