Specialization and the Emergence and the Value of Money

Abstract

Why did money emerge? And how is the value of money determined? These are two of the fundamental questions in monetary economics on which distinguished economists of earlier generations have provided numerous insights. Adam Smith (1976, Chapter 4) identified specialization as the driving force behind the emergence of money, and suggested that the choice of commodity-money depends on the marketability of the commodity. Menger (1923) emphasized that the emergence of money is a natural consequence of decentralized actions of self-interested individuals. Jevons (1875) suggested that ‘double coincidence of wants’ — one not only has what one’s trading partner wants but also wants what one’s trading partner has — is hard to obtain, thus in the absence of such happy coincidences, the completion of trade needs to be assisted by a medium of exchange, money. Von Mises (1924) indicated that the value of money is based on the quantity of commodities a given amount of money can exchange for and that the value of commodity-money depends on both the commodity’s use as consumption or production goods and its use as a medium of exchange.

I would like to thank Professor Yew-Kwang Ng and Dr Xiaokai Yang for their very helpful comments, I am responsible for all remaining errors.