Last modified on January 30, 2019, at 23:23


Money is defined as something which serves as a means of exchange, a store of value, and a unit of account and represents only an extremely small fraction of the real wealth of any given society or country where it is used.

Money fundamentally represents a quantity of labor. Adam Smith, writing in 1776, said "a quantity of labor is difficult for many people to understand," however anyone who has ever examined the number of hours on a paystub in the 21st century should have no problem grasping the concept. Aristotle said money is the unit of measure used to represent how many shoes a shoe cobbler must make to equal the labor of the carpenter who built his house.[1] Money is a fiction used to express the exchangeable value of equal quantities of labor.

A failure to understand what money is results in socialism. For example, Rep. Alexandria Ocasio-Cortez has proposed "free" healthcare, education, housing etc., essentially promoting the non-sensical idea that people have the right to consume goods and services that have not yet been produced by other people's labor. To implement such a system, which has been tried by various societies at times,[2] results in one group of people performing labor for which, by law, they will not be paid, and another group entitled to the benefit. In short, a slave system.

The currency which serves as money may be backed by some tangible commodity, such as the gold standard, or may be fiat money, such as Federal Reserve notes. Alternatively, trade may be carried on using commodity pay, wherein existing commodities are assigned exchange values but not explicitly designated as money.

The Development of Money

The earliest discovered forms of money were easily carried items with some inherent value, such as salt (used in ancient Rome) and fishhooks (used by American Indians). This replaced or supplemented pre-existing barter systems. Precious metals, such as copper, gold, and silver, have made good coins, being both easily transportable and having inherent value. In 1933, the United States abandoned the gold standard,[3] switching over to fiat currency, which has no inherent value beyond the government's assurance that it has value.

Money Neutrality and the Money Market

Money may be viewed as neutral or non-neutral regarding the real economy; it is disputed whether changes in the money market cause changes in real markets. The money market itself consists of a money supply (typically fixed for any given period) and a demand function for money. Because the quantity of money is typically exogenously given, the only variable determined in the money market is the price of money.

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  1. All prices are ratios, for example 1 gal. of gasoline that sells for $2.89, is expressed as 1:2.89, or a wage rate of $15 per hour would be 15:1.
  2. e.g., USSR, PRC, North Korea, Venezuela, Cuba, etc.
  3. The Gold Standard