The blood of the economy

Imagine that you live on a simple subsistence farm at the same economic level as existed at about the dawn of civilization. Your kinsmen break the ground with ploughshares they have to shape themselves. They also have to build the harness themselves. Your kinswomen make their own baskets from reeds they collect on the riverbanks, and they gather their own firewood for cooking. Weaving takes some specialized tools. Some of the women trade food or baskets for ready-made cloth. They are bartering. It's already a step up from doing everything themselves, because it allows a certain amount of specializing to take place. Only a few women need looms, and yet the whole village benefits from their weaving. The funny thing about free exchange is that unless there is some sort of deception involved, both parties benefit. It seems like it should be a zero-sum game, but it isn't. One woman has extra baskets but wants some cloth; the other woman doesn't want to spend time gathering reeds and making baskets when her cloth is in high demand. Both parties to a free exchange get what they want. Now suppose that you notice that my Pomegranate trees are just loaded with a bumper crop of pomegranates. You would like some to give to your sister. You have extra meat to trade but there are two problems: I don't want it (I am, in fact, a vegetarian), and my pomegranates aren't ripe yet! So you talk to your cousin. He'll take the meat now and trade you some metal for it. Metal is always in demand, and unlike meat it keeps indefinitely. You'll trade me the metal when the pomegranates are ripe. I'll accept the exchange, because even if I don't need the metal I can exchange it to someone who does. Eventually bits of metal are universally accepted as a means of exchange. Now standardize the size, shape, alloy, and weight of the metal so that we don't have to weigh it every time we exchange it, and you have coins. In some parts of the world the metal was made into other standard shapes, but the concept was the same. In the New World and Oceania, metallurgy never developed among the native populations, so they traded other tokens of value such as beads and seashells. On Yap Island the token was in the form of large stone wheels. The important point was that they developed similar ideas on their own in order to facilitate trade. Money facilitates trade. Trade facilitates a division of labor, which in turn makes more efficient use of tools and resources. Here's how it works: if all of us do everything for ourselves, then we all need a plough, a loom, an oven, and a few other tools that are hard to build. Once we start trading, then we can stop arguing about who gets to use the plough, the loom, and the oven when and how often. The farmer gets the plough all the time, the weaver gets the loom, and the baker gets the oven. They specialize in one product, and keep the tools needed to make those products busy the entire workday. If not, then a new specialty will spin off. For example, rather than the wheat farmer grinding his grain, or the baker grinding the grain, a great many farmers may send their wheat to a single miller, who can supply a great many bakeries. This is the same principle that makes a factory work much more efficiently than a cottage-industry operation: every process is going at roughly its optimal rate. Instead of stopping a process to let a slower process catch up, tasks are divided up among many different people, with slower jobs being assigned to more people. The entire economy operates somewhat like a huge factory. The equipment itself can be traded. The farmer who is too old to push a plough and has no sons can sell his farm, live off the proceeds, and leave the remainder to his next of kin when he dies. The farm remains in use because it is tradable. In pre-civilized societies, assets are likely to be wasted when the owner can't make use of them. Money makes possible not only efficient scheduling of land and equipment, but also efficient use of resources. If there is an oversupply of wheat, it doesn't have to rot just because the baker can't use it all. Someone else may buy it to feed her chickens. If the wheat supply drops again, the price of wheat will rise and she'll go back to feeding her chickens scraps. Alternative uses for resources (that no one person could know about or be able to implement) make it possible to deal with surpluses and shortages in an efficient way. Money makes it possible to not only decide who can make the best use of resources, but to schedule them according to when they are needed. Someone who has saved up money to support herself in her old age can loan money to the weaver whose loom is broken and needs to be repaired. The weaver will pay back the money with interest from proceeds of her business when the loom is back in operation. Both women benefit from the exchange. Unfortunately, this idea is subject to abuse. Suppose the village weaver's loom breaks down, and no one has enough money to lend her to have it repaired. What if someone just wrote on a piece of paper "This note is worth 1 ounce of gold", and loaned her that? Well, there are several problems, including that letting a privileged someone collect interest on money that is created at will isn't honest. It isn't honest because it hurts the rest of us. If anyone is willing to accept it at face value, then it dilutes the value of our real gold. That's bad enough, but something worse is going on. When there isn't enough money to lend to everybody who wants to borrow, it's because resources really are limited. If there is not enough to lend to the weaver, it's not just a matter of having fabric or not; it might be a choice between having new clothes and starving. Consumption must be balanced against production, and choices must be made to allocate resources according to what you care about most. Increasing the money supply above and beyond the increase of goods and services in the economy doesn't make anyone richer. It simply diverts resources away from future production and towards current consumption. When money breaks down, all the organization that money makes possible breaks down. Money that loses purchasing value over time encourages over-consumption and discourages savings. Money that is subject to sudden illiquidity causes trade--the big factory--to cease operations. It wasn't until roughly the 18th century, that anyone became fully conscious of how money makes civilization possible by facilitating organization of people on a scale far larger than any one person could organize. Unfortunately there are a great many people who still don’t understand this today, and some of them are in positions of power! The Roman Emperors who debased the money supply blamed "greedy merchants" for the hyperinflation they themselves had caused. Many historians blame the fall of the Roman Empire on the invasion of northwestern Africa by the Visigoths, which cut off the Empire's supply of wheat. But why was wheat grown on the very edge of the Empire, and not in the heartland that was easier to defend? The reason is that the money supply increased in the heart of the Empire, and spread from there outwards to the fringes. Prices rose along with the money supply, meaning that they were always highest in the heartland and lowest on the fringes of the Empire. It was always cheaper to import from the hinterlands into the heartland. The same thing is happening today. Production has fled from the Imperial homelands where dollars and pounds sterling are created, to the lands outside the control of the Empire, which are the last to get them. The contemporary Empire will probably collapse the same way the Roman Empire did: when it loses its supply of critical products it can no longer produce because of dysfunctional money. Money facilitates organization of an economic system too complex for a central leader or committee to handle. It does it without coercion and without the need for consensus that would be impossible to achieve. When money breaks down, so does the organization it made possible.