Tuesday, October 13, 2009

Money is Risky

Holding money does not guarantee that I will receive back the same value that I gave up. I bear the risk of the money devaluing between the time when I give up my goods or services in exchange for money and the time when I use the money to purchase other goods or services.

If prices have risen I may not be able to obtain goods or services of the same value to me as those I have given up. Of course, if prices have changed in my favour, I may gain additional value. My only risk is the effects of changing relative prices between the time of selling and the time of buying. However, I can be certain that if I sell my goods or services, I can buy some goods and services from some other people (provided I can find someone willing to sell at a price agreeable to me).

Trade will only expand in a society if this risk is relatively low. This is why reliable money is so critical for economic development. If the risks associated with holding money are too high, then people will tend to make do with what they have, rather than attempt to sell it and buy something better. This will have a limiting effect on economic activity.

Money is a social phenomenon. No one has their own personal money. Money only functions if it is recognised and accepted throughout society. If it loses this property, because the owners are no longer unwilling to exchange it for their goods and services, it has ceased to be money.

The problem with any form of money is that people will only accept it if they are sure it is reliable. In a fallen world, there will always be some people who try to obtain money without working to produce goods or services, which can be exchanged for it.

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