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The Essence of Money

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In Medieval times, just like today, people had problems with money. In those days, gold and silver coins were the universally accepted form of money. Precious metals were used as money because their scarcity made them valuable, even in small quantities. Unfortunately, it also made them scarce. Two other qualities made precious metals useful as money: they didn't spoil and they did not get consumed. So, they were ideal for saving. Unfortunately, the same properties made them ideal for hoarding. Hoarding worsened the problem of scarcity. Those who had wealth beyond their needs, could acquire the metal coins and hold on to them. Thus depreving everyone else of the money they needed to enable the convenient trading of real goods and services. As a result the weekly market always offered a wealth of goods and services to be traded. There was often very little coin available to make trade work efficiently. So, what did medieval folks do to solve their coin shortage problem? They invented market money. And this is how they did it. Each seller had a pretty good idea of what his or her sells would be if sufficient coins were available. The sellers had a basis upon which to issue credit to themselves. The self issued credit could then be used as money to buy other sellers' wares. People could do this because the participants of the weekly market were both producers and consumers. They went to the market to trade their products, literally. But what happened when the butcher wanted to buy something from the seamstress but the seamstress wanted something from the shoemaker, not the butcher, and so on. Trading goods and services for other goods and services required coordination of many traits. It often required several steps before a seller could acquire what he or she really wanted to buy. Bartering like this has always being a cumbersome process. That's why money was invented. And sometimes money has to be re-invented. So, one day, during an economic slowdown caused by a serious shortage of precious metal coins, that happened. Anton, the baker, whose bread was always in demand could easily count up the people he knew would buy his bread if they had the money. Anton could reliably expect to sell at least twenty silver pennies worth of bread at each market. Therefore, he reasoned he could safely issue 20 silver pennies worth of Anton's Bread vouchers and persuade his fellow sellers to accept this virtual bread in trade for their actual wares. Anton was a good man trusted by all. So he had little trouble spending his 20 pennies worth of bread vouchers on the wares of the other merchants. Most were able to understand the elegance of his idea right away. So, those who had traded their wares for Anton's vouchers were, in turn, successful in trading sellers' vouchers for other seller's goods and services. Because the bread voucher's value was expressed in silver pennies everyone knew what the voucher was worth, relative to everything else. And they knew that every voucher was backed by the abundant supply of Anton's delicious-smelling bread. So Anton's bread vouchers were soon recognized by all as reliable money, based solely on the proven demand for Anton's bread. Throughout the day, Anton’s vouchers would be returned to him in exchange for bread. Each voucher had completed a unique journey through the market, some short, and some long. And, all along the way, the vouchers facilitated trades that had nothing to do with Anton. It wasn’t long before other producers began writing vouchers against their products and services. Soon the market was flooded with money in the form of virtual goods & services, all of it backed by the abundance of actual goods and services available at the market. With no shortage of money, everyone had unrestricted opportunity to sell their products or special skills to whatever extent there was real demand for them. This led to general prosperity and happiness. The only purpose silver served in this system was to provide a widely understood measure of value, in the same way that inches and feet, pounds and ounces were necessary for measuring lengths and weights. Anton liked to explain to the amazed people from other markets, “No one is ever stopped from building a house due to a shortage of inches. And, similarly no one in this market is ever stopped from making a trade by a shortage of silver pennies.” At the end of each market, outstanding vouchers were reconciled amongst the market merchants,

with payments made in three ways, in product, in vouchers for the next market or, as the final resort, in coin. This system was very successful. That’s because it fulfilled the essential purpose of money. It guaranteed the existence of enough purchasing power to purchase all goods and services in demand.

Video Details

Duration: 7 minutes and 36 seconds
Country: Spain
Language: English
Genre: None
Views: 168
Posted by: ang_ruiz on Dec 18, 2011

A Medieval Tale that illustrates the principle of "market money" used in medieval trade fairs.

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