[bnhinchman]

Hello Dr. Herbener,

Before going into my question, and to give a brief background of my sources, I’ve read What Has Government Done To our Money? as well as the first part of Human Action as well as Chapter 17 entitled Indirect Exchange. As well as reading these, I’ve listened to the lecture on money in the AE Step-by-Step.

I find money fascinating, and I’m addicted to learning more about its origins. Mises, I’ve found, doesn’t go as into about money’s origins as Rothbard does, but what has me perplexed is not so much thinking of gold as money and money as a commodity, but why gold (or any similar commodity) has any practical use beyond mere ornamental appeal.

Rothbard discusses how gold, before becoming money (in the sense of it being a society’s most marketable commodity) can be used as a practical commodity (which I see as a synonym for a good of any sort) in the form of fillings and ornaments. I understand that part just fine, but the trouble I’m having is understanding how gold, being used for relatively few things, can become so desired that it dominates any other forms of currency in a society. Perhaps the example Rothbard uses of sea shells, or as in the example from the lecture, cattle. Cattle I could see having even more purposes than gold, although nowhere near as malleable yet durable: there’s meat to eat, leather to be used for clothing, perhaps bone could be used as weaponry in a primitive society, et cetera.

But as for gold and silver, I just don’t understand why these two precious metals have been the most common forms of media of exchange used throughout human history when they seem to have a relatively low function in terms of how many ways people can use them and thus they would seem to not appeal to people as much as more marketable commodities.

Since history has proved that gold and silver are the most marketable commodities used as media of exchange, am I correct in assuming that the fact that they are malleable yet durable account for this appeal? I suppose that if this is the case, I’m detecting what could be considered circular reasoning: a valuable commodity that is valuable is one thing; a commodity that becomes valuable only after being shaped and proved to be durable is a whole other, and if the value of gold and silver lies primarily in its ability to be shaped and its durability, the value is presumed and not actual (as in the form of other commodities).

I remember Mises talking about this, tracing the value of gold used in exchanges to its worth used in prior transactions (defining its price), and perhaps I’m worrying too much about causality of the commodity’s worth than the presumed function of the commodity itself. Hence, the presumption alone that the commodity will be valuable because it can be easily shaped and because it’s durable is enough to propel it to being the most marketable commodity available for a medium of exchange.

Am I right in viewing gold and/or silver as a commodity this way?

[jmherbener]

How widely traded a good is depends on the number of people who trade it. It’s possible that a large number of people trade in something because each of them puts the good to a different use, but it’s also possible that a large number of people trade a good who put it to the same use.

Of the small number of commodities that are most widely traded, precious metals are preferred because they possess properties that make them more suitable media of exchange: portability, durability, divisibility, and so on. Living things, like cattle, are inferior media of exchange on these grounds.

There’s no circularity, but there is an historical dynamic of money’s development. People trading in a barter world would select a widely traded good to make indirect exchanges. If they select cocoa beans, then they can come to replace cocoa beans as a medium of exchange with gold nuggets (once they perceive the superiority of gold over cocoa beans) by introducing gold as a redemption claim (i.e., a money substitute) for cocoa beans at the market rate of exchange. Then cocoa beans and gold nuggets as media of exchange would compete for users. At the next step, entrepreneurs could introduce gold coins as a form of certification, produce them and see if people preferred them over gold nuggets sufficiently to make their production profitable.

[bnhinchman]

I see. Thank you.

I also meant to ask, are there any texts you recommend that go through a detailed history of money? Rothbard hooked my interest, but he only discusses it in one chapter that I know of. It would be interesting to know all the different forms of money and to determine why certain monies went out of circulation.

[jmherbener]

Here are a few titles:

John Chown, A History of Money (Routledge, 1994)

Arthur Burns, Money and Monetary Policy in Early Times (Augustus M. Kelly, [1927] 1965)

William Gouge, A Short History of Paper Money and Banking in the United States (Augustus M. Kelley, [1833] 1968)

Elgin Groseclose, Money and Man (Frederik Ungar, 1961)

A. Barton Hepburn, History of Coinage and Currency in the United States (Mcmillan, 1903)

Jonathan Williams, et al. Money: A History (Palgrave Mcmillan, 1998)

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