Pure Monetary Exchange


JP Koning has a interesting post discussing the extent to which modern economies are “pure monetary exchange” economies. His key point is that money is not homogeneous thing:

In Canada we have the $1 dollar coin, or the loony, which is issued by the Royal Canadian Mint. If you try using loonies to pay for something worth over $100, say a washing machine, there’s a good chance that you’ll be turned away by the shopkeeper. To buy the washing machine, you’ll first have to barter your loonies for larger-denomination paper dollars. Banks typically engage in this sort of barter. They’ll either sell you paper dollars for your coins, or they’ll sell you an electronic bank deposit. If you buy the paper dollars you can head back to the store and get the washing machine.

JP concludes that since you are exchanging one fiduciary media for another that we are halfway between a pure barter economy (JP’s definition is autarky) and a pure monetary economy (a single exchange media transacted universally).

I would argue that an important step off the half-way point and toward pure monetary exchange was severing convertibility of exchange media into a fixed (basket of) commodity(ies). I have argued elsewhere on this blog that we have passed a point where money is too homogeneous an asset. I take JP’s point that exchanging one fiduciary media for another is technically barter…but my main push back is that in a modern economy (i.e. in the US and Canada), it would be under only extraordinary circumstances that one would want for exchanging their $100 paper note for 100 dollar coins. I think that is important because it shields people from having to think about how they are going to transact. Very few — if any — people go out to WalMart and think, “I wonder if they accept coins, paper, or electrons? And where am I going to get electrons?!”* That is an important part of “moneyness”.

No doubt that JP would say that is simply due to what we call “money” offering a very high level of liquidity services, and that there should be no distinction. I’m not disagreeing with JP, but I think we’re further along the continuum.

*Certainly some of this still exists in a marginal way; for instance you may need cash to transact at certain stubborn ethnic restaurants, soda machines, or at a laundromat.

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4 thoughts on “Pure Monetary Exchange

  1. I’m fooling around with Ripple right now and one of the first things that is apparent is that dollar IOUs are not homogenous. You’ve got to “ripple” through IOUs until you get the right one.

    The consumer’s perspective (ie. people shopping at Walmart) will always be a naive one since the creators of the system want to promote usability. Behind the curtains is where most of the barter in various sorts of dollars happens. As consumers we just never get to see it.

    Ripple puts us behind the curtain, so to say.

    1. I have been meaning to play around with Ripple, but I have no XRP…nor do I have any friends or acquaintances who do.

      I was excited about Ripple when it was proposed.

      Wouldn’t you agree that much of what is “liquidity service” is specifically the curtain that hides “how the sausage is made” so-to-speak? Never mind the logistical hurdles to having a single exchange media — I don’t think it’s desirable, but there would still be a lot of mechanics that people don’t need to see.

      1. Even consumers experience the finite liquidity services provided by the various types of dollars. Like when they want to buy stock, but realize there is a lag between selling dollar deposits at their bank and buying them at their brokerage. The more financially sophisticated the consumer, the more they’ll experience the non-homogenous nature of dollars, since they’ll be more familiar with shuffling between the various types of dollar media. Someone dealing purely in cash will never see more than a single exchange media.

    2. Sorry for the delay in replying.

      When I started my brokerage account, there was no delay between opening and trading…but that was likely due to the brokerage extending me credit for the amount of my deposit (which can easily be verified by a depository institution, as you know).

      I agree with you that as you become more sophisticated in finance, you start to draw back the curtain and see the inner workings of money. Just like as you become more sophisticated in culinary arts you begin to see more of the prep process.

      What I’m claiming is that our sophisticated ability to hide such mechanisms from people actually moves us along the barter -> money continuum toward pure monetary exchange in a real way. I interpret you as arguing that as long as there is a machine behind the curtain, we simply fool ourselves into thinking we are further along the continuum than we actually are.

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