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CHAPTER THIRTEEN

How Do We Measure Value?

How do we measure value? In each exchange, by what mechanics do we appraise the value of a trade in terms of something that is not
the final object of exchange but an independent third factor, or an intermediary of exchange? What is an intermediary, or medium, of
exchange? What is money?

When exchange reaches a level of complexity or sophistication that takes it beyond mere barter, it needs to employ a third factor that
works as an intermediary, or medium, of exchange. This medium of exchange, money, requires only that it be more tradeable, more
easily transferable in exchange, than would be the case of other goods or things traded. It needs to be more universally acceptable, to be
more easily divisible, recognizable as being itself, transportable, and non-perishable over time. Of the many things that could have been
used as money, what had been advanced as money through time was usually a metal commodity. Through a natural selectivity, the
commodity that best fit the above requirements was a precious, non corrosive metal, namely gold. Because of gold's properties rendering
it easily recognizable, divisible, consistent in quality, non-perishable, and, at a cost, transportable, it became universally acceptable as an
exchange commodity useful in its function as an intermediary of trade, as a money.

With a commodity money, it became possible to transact a trade without having to acquire the desired end product directly, since it could
be gained indirectly. In exchange for a good or service, depending on agreed upon values, was accepted an agreed upon quantity of gold.
Later, in exchange for this gold could be received the good or service ultimately desired. Thus, money can be seen as a store of exchange
value over time. Regardless of whether it is a commodity, such as gold, or agreed upon to be in some other form, it must be readily
exchangeable and store value over time. Then, it becomes a convenient tool with which one can store the value of one's exchange until
such time that it could be used again and transferred for some subsequently advantageous trade. In this way, all monies and currency
have this in common, their basic principle: They have the ability to be universally acceptable and store value over time. If for some
reason the money used fails to store value over time, it becomes exchanged for another money or commodity that can do so better; then
it so becomes displaced. If this cannot be accomplished, the exchange economy returns to a barter system.

Now, imagine the following: That for each unit of money, regardless of its form, there exists in the economy a good or service which is
valued by it. For example, if the money had been received in exchange for labor, then the products so produced by this labor can be,
indirectly, said to be represented by that money. Or, if the money so received had been gotten through trade, then the products so
surrendered for the currency received can be said, in effect, to be represented by that amount of money. This is only a mental exercise,
but it is a useful one. Thus, it can be said that each unit of money, indirectly, is a representation of an equivalent unit of good or service
available somewhere in the economy. It does not lay claim to it, it is not a direct certificate of ownership, but it can be viewed as an
indirect claim, valued in terms of prevailing and agreed upon prices of exchange, on those existing goods and services. Because the claim
is recognized only when there is an agreement of exchange, then money can be said to be a fluid certificate of representation of value in
the economy. For each unit of good or service, there is a unit of money that corresponds to it, when it is agreed upon in exchange.

Now, imagine that the origin of this money, a metal commodity in particular, started with the miner who had retrieved it from the
ground. Its value to him, in still unrefined state, was less than to the smelter who had refined it; thus, the miner sold it to the smelter at a
lower price than the smelter would resell it to a jeweler. But, in addition to the value added through smelting, the metal went from where
it was valued less, at the mine, to where it was valued more, at the jeweler's. The jeweler could then resell it at a still greater price, if
there is a market for his jewelry. In the case of gold, that portion of the metal mined that will not have usefulness either industrially or for
decorative jewelry will find itself in a surplus valued most as a money. There, it will either trade within the value of its monetary function
or be exchanged at a still higher price if it is desired for its industrial or decorative uses. As a jewelry or other manufactured form, it will
remain there unless it should happen that the value of gold become such as to attract either more gold from the mines or to recycle gold
from its other uses. Thus, unless the higher price of gold as money should warrant it, it would remain out of circulation and be formed
either into a work of art, as in jewelry, or used for its industrial properties. Somewhere below that level, it would serve the economy in
its function as a commodity money. Thus, while still in its primitive form as a commodity, we can already see money conforming to the
principle where it can be seen to represent in addition to its intrinsic value, a unit of good or service for which it is exchanged; it can also
be seen to flow from where it is needed less to where it is needed and desired more.

When money is advanced still further in a more complex market economy, it can be stripped almost entirely of its commodity value and
become a unit of value representing its equivalent good or service available, through exchange, in the economy. At the limit, money can
become merely an entry in a bank ledger, as authorized by the social agreement and as its exchangeability is insured by that agreement.
Then, in addition to being represented as a coin or money certificate, it can also be represented as a claim against assets deposited at the
bank, as a draft, and transferred from owner to owner merely through an account entry. Money need revert to its commodity origin only
if this more sophisticated money fails in its function, as would happen if the social agreement that defines its quantity and insures its
exchangeability is broken. Then, the market exchange once again reverts to a commodity medium of exchange, a commodity store of
value over time. Thus, money can be any agreed upon unit of exchange.

Modern money need not be a commodity, unless the social agreement that insures its value is broken and it becomes devaluated; then it
can be a commodity to insure its value over time. As a more advanced money, however, it can become purely what it is: A store of value
over time; then, as a representative of goods and services in the economy, each unit of money can be understood to represent an
economic good stored somewhere, or in the process of being created, in the economy. If these goods, through economic failure, should
become scarce and less abundant, then their cost in terms of this money will rise; if the economy is healthy and productive and succeeds
in creating more such goods, then such money can succeed in buying more per unit. As a successful money, it merely becomes a legal
claim to goods and services, if and when they are exchanged, for an agreed upon price; then money is but an agreed upon representation
of value.

Now, if money is a representation of economic goods, then it must stand to reason that how we spend this money is an indication of how
we wish to direct or allocate those economic resources. If, for example, we spend a certain quantity of money on particular goods for the
purpose of satisfying some human need, some need of consumption, then we are, in effect, directing which goods will be chosen for this
consumption by what and how we buy; but we are also isolating those goods from the economy for consumption. The money that gets
exchanged for those goods, through our choices, chooses which goods are to be removed from the economy and subsequently
consumed. Thus, that money has acted, through exchange, to represent goods that are to be so consumed. It is hoped, under the
circumstances, that these goods so chosen are not products of a static economy but rather are also in the process of being replenished
through human productivity; otherwise, they being the last of their kind, their price would be forced up astronomically. Now, if on the
other hand, the money in our possession is not spent on consumption but rather saved in a bank or invested in some other institution or
asset, such as stocks or bonds or real estate, then it can be understood to represent an act where an equivalent amount of economic
goods had been isolated from consumption and conserved for future use. This can be interpreted as an investment either through a
financial intermediary, such as a bank or a fund, or directly by purchasing any asset or service that will continue to have value over time,
any representation of capital. Then, what that money so invested in, or saved from consumption, buys also saves an equivalent amount
of economic good and conserves it for the future.

Thus, of that money that is in our possession, either as as consequence of it having been received as wages in exchange for our labor or
as the proceeds of an exchange, if a portion is not spent on consumption but rather is saved, then at that time an economic good
somewhere or in some sector of the economy is simultaneously isolated from present use and saved for the future. This could be a piece
of machinery or a tool or an amount of raw material, or unfinished product, or an amount of energy not consumed or an equivalent
production of human labor, all reserved from being presently exhausted but reserved for a future use: they all represent a form of
economic capital that had been conserved as represented by that money saved. It must be understood, however, that this savings cannot
occur if the economy functions at such a primitive level that all must be consumed daily; then there can be nothing saved for the future
and there can be no capital formation. Without economic capital to be saved, we would be forced daily, without tools, to gather or in
some other way procure our food in order to survive until the next day. In a more sophisticated economy, investment is a natural act.

Thus, it is natural for us to isolate a portion of our income and apply it towards savings and investment. In addition to the benefit of our
having a reserve for future use or as protection against the risk of future emergency, we also aid to isolate within our economy an
equivalent amount of capital that will somehow be saved for a future use or for future production. How that money will be invested then
rests with those individuals who have either directly or indirectly been entrusted with that decision. If that money belongs to an
entrepreneur whose success allows reinvestment of his or her income or profits, then the decisions of what equipment or materials or
labor will be purchased with that money rests with them. If it is deposited at a bank and reinvested there, either through loans or through
purchases of investment assets, such as corporate stock or bonds, then the decision of what will finally be purchased with that money
rests not with the original depositor but with the final user; he or she could be an industrialist or buyer or farmer or miner, manager, or
whatever. The merits of that money's final investment will have been decided upon through many levels of successful agreements and
exchange, in effect, collectively by all the individuals who had been involved with it. In any case, for each unit of money saved from
income or from profits will be isolated in the economy an equivalent amount of goods or economic resources that will become, until
consumed, capital.

In a dynamic economy, as opposed to a static economy, the state of the real market is characterized not by the state of being but by the
state of becoming. Same as money tends to go from where it is needed and desired less to where it is needed and desired more, it also
tends to go towards where it will be needed and desired more in the future. The future implies risk, and it is a natural consequence of a
real economy that this risk must show up in the market as a cost. What things cost has built into it the risk of what things will cost in the
future. What a farmer or miner will receive for his goods today, before the goods are sold, may be different from what they may receive
in the future, when they are sold. There is a risk that today's costs of production may not be covered by tomorrow's price in the market.
To correct for that risk, it would be natural to raise the price received today. This higher price, however, would represent less value, a
lower purchasing power of money. The competitiveness of the market may narrow price within a certain band, but no closer; it would
have to leave a gap for risk. Thus, risk can be seen as an economic cost that would go up with the greater the associated risk in
exchange. If this risk is so great as to virtually prohibit transaction, then that economic function stops.

Investment of any kind implies risk. What is isolated in value today may not retain its value tomorrow. Then, it may no longer be useful
or productive or profitable under changed circumstances. The decisions associated with evaluating risk require a unique intellect, almost a
talent. Not all savers are suited to becoming investors; it is sometimes advantageous to pass on the responsibility of investment risk to
those who are both willing and able to assume that risk, while one's own funds remain in a relatively safe vehicle, such as a savings
account. A farmer or miner may not wish to stake his income on the vagaries of future demands for their products; it may be more
prudent for them to avoid risk and hedge as much as possible on a futures exchange. Then, the risk of exchange can be passed on to
those speculators willing to assume that risk with hopes of future gains the hedger of necessity forfeits. Then, if the speculator either
makes money or loses it is of no concern to either the farmer or the miner or the processor; they are free to perform their functions
relatively unburdened by risk, at a lower cost. What happens to the speculators, whose assets are committed to this risk, ceases to affect
the economy as a whole, since the otherwise necessary higher price had been assumed by their speculation, and the successes or failures
of their ventures gravitate entirely around them. Then, in exchange for their labors of assuming risk and making decisions in relation to
these risks, they earn income through the transfer of these assets from those whose decisions are valued less to those whose decisions
are valued more, from those who lose to those who gain.

When speculators enter a market exchange, whether it be a capital market or commodity futures market or money market, they enter it
with the understanding and implicit agreement that they may face either gain or loss. What will be gained may be at another's expense;
what another gains may be at one's expense. These are understood implicitly and agreed upon by the fact that they accept participation in
such risk of exchange. What the speculator hopes to accomplish, in addition to assessing risk correctly and gaining from it, is also to take
advantage of any price aberration and profit from that; they seek to profit from any discrepancy in another's judgement and assessments.
This is a skillful function and one which helps maintain best value in exchange. But, most of all, they hope to amass, from their correct
judgements and good fortune, a greater fortune of wealth than that with which they had started. They wish to make money, and that is
their original purpose for being there. The rest only follows.

If the future were known and if markets were free of price discrepancies, then speculators would not need to exist; because they are not,
if there were no speculators, their function would have to be invented. Without the professional speculator, it would be necessary for all
individuals to share in, or pay for, this cost of risk. This universal assumption of risk, in itself, may be harmless, if it were arrived at
without the need to force those individuals able and willing to assume risk from doing so, and if those who did not wish to did not have
to. Because there are those who would rather not have to assume risk and actually shrink from the discomfort of that responsibility, it is
best that this ability of investment and future decision be left to those who seem to be particularly qualified for it. Speculators thrive on it.

In the speculator's sector of the market, there is a natural process of selection of those speculators who are most successful; they are the
ones who make money. The money they make comes, of necessity, from those who had, in effect, agreed to lose it, the other
speculators. The general level of wealth committed to the market's speculative activities may or may not rise, but it is generally
transferred to those who assess value best from those who succeed at it least. However, there is a rotation; not all individuals who are
successful speculators remain forever in that enviable position, unless they use their wealth to coerce the market to suit their purpose;
then it must be proven that they are so guilty of this coercion. However, that position of success normally goes to those individuals best
at assessing and taking successful action in the face of risk; then it is those same individuals whose decisions will most affect market
costs and influence the future course of the market direction. If not at the limit, their decisions will tend to become, through the process
of selection of correct decisions, the future course of both the market and ultimately the economy as a whole. If it is they who lower
economic cost through successful evaluation of risk, it is also they who, through their successful decision of future events, will indirectly
influence the shape those events will take; they will direct their money, and the corresponding economic goods represented by this
money, in that future direction. Speculators cannot influence the future; how individuals act in the future rests entirely with that
population of individuals. But they can help the market and economy move in that general direction as they assess it to be. They are the
spear point. The fact that they can do this well attests to their market success; they gain wealth. If they fail, they lose. If, because market
risks had reached such enormity, they fail consistently, then society suffers loss as a whole through lower value. But if uncoerced, free to
assume risk, they tend to perform their function well. If done by agreement through the mechanics of exchange, if free from coercion,
economic value is gained from the resulting lower costs and society benefits as a whole.

Money, as do assets, flows from where it is valued less to where it is valued more. How this value is assessed, both in the present and
into the future, depends on a mechanism of exchange where individuals are free to exchange both for the present and into the future.
Then, depending on how they exchange will depend how economic resources will be allocated within that society. The more productive
the society, and the lower the costs associated with the risk of exchange, the greater the value that will be defined by that society's
money. Then, what things cost in that society becomes indicative of the values the individuals of that society had placed on their
economic goods and resources; they become a reflection within that society of things as they are agreed upon, as they are. When free
from coercion and free to create, values increase and money goes from those things we value less to those we value more.

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