Resource Mechanisms: Stores of Value

In order to facilitate exchanges of goods and services from common economic interest, humans need a tool.

Commodities as Store of Value

Historically, the tools for exchange have been commodities:

Homer says that the armour of Diomede cost only 9 oxen, and that of Glaucus cost 100 oxen. The following were the common instrument of commerce:

• salt in Abyssinia
• shells in some parts of the coast of India
• dried cod at Newfoundland- tobacco in Virginia
• sugar in some of our West India colonies

I am told that to this day, workers in a village in Scotland can carry nails instead of money to the baker’s shop or the ale-house.

Adam Smith

Wealth of Nations, Book 1, Chapter 4

These were exchanged based on volume or weight:

The following people trade by exchange:

• savages who have few merchandise
• civilized nations who have only two or three species.

The caravans of Moors who go to Timbuktu, in the heart of Africa, do not need money. They exchange their salt for gold. The Moor puts his salt in a heap. The Negro puts his gold dust in another. If there is not gold enough, the Moor takes away some of his salt, or the Negro adds more gold, until both parties are agreed..

Montesquieu

Spirit of the Laws, Book 22, Chapter 1

Basing value on weight is really basing it on its material density, since denser bodies are heavier. This is really a quantitative way.

Money as a Store of Value

Gradually, as humans became more civilized, they chose precious coins as their tool. The preciousness is the qualitative way.

Coins standardized the value and prevented fraud:

Mints are institutions exactly of the same nature as the aulnagers and stampmasters of woollen and linen cloth. Through a public stamp, they ascertain the amount and uniform goodness of those commodities when brought to market. The first public stamps affixed to precious metals were intended to ascertain the goodness or fineness of the metal.

Adam Smith

This money system was used by the commercial system and mercantilism.

• This disrupted native modes of valuation and exchange of using commodities and weights.

Coinage was later standardized into silver, and augmented by paper bank notes and paper stock certificates. This allowed rapid economic growth because people could now increase money nominally by writing bigger numbers.

This manifests as paper assets and paper wealth that can be created or be made to vanish quickly, through:

• hyperinflation and financial crisis during the Mississippi Scheme
• stock bubbles like the South Sea Bubble
• poverty and inequality during the industrial revolution

These problems persist even today.

Why Money Causes Problems

Money causes these problems because:

• it is a monopoly product by the central bank (wholesale)
• banks and financial institutions control its flow (retail)

Cryptocurrencies were supposed to address these problems by:

• having a constant, predictable supply not controlled by banks
• using market forces alone

However, the lack of control in cryptocurrencies made it susceptible to hacks and fraud.