Saturday, October 10, 2009


From an individual point of view, every trading transaction has two parts. In the first part I sell something, which I no longer want, in exchange for money. However, I really don’t want money. I want something else that I can use. I use the money to buy the thing that I really want. The full transaction is not complete, until I have bought it. Buying is the second part of the transaction.

A transaction consists of two parts: selling and buying. After the transaction is complete, I am better off because I have replaced something that I did not want with something that I wanted more. Both the buyer and the seller are better off, because they end up with something they value more than what they gave up.

A link with the first part of the transaction that allows the second part of the transaction is essential. In the example above, money provides the link between the two parts. When I sell my goods, I accept money in return, because I expect that I can use the money to get what I want to complete the transaction.

I only hold the money for a short time. I start with something I did not want. I end up with something that I wanted more. The money is my security for the short time between the first part of the transaction and the second part. Money allows exchanges to to happen.

Holding money is quite risky. Once I have handed over my thing to the buyer, I cannot get it back, but I cannot be certain that I will be able to buy the thing that I want with the money. If no one will accept the money in exchange for what I want, I will be left with nothing useful (I did not want money). Once I have made my purchase, the risk is gone, because I have the thing I wanted. The risk has passed to the person who takes the money from me.

The possession of money is a sign to other people in the society that a seller has completed half a transaction, by giving up something. It allows him to buy something from someone else to complete his transaction. Money is a record of a half-completed transaction.

More at Trade.

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