Friday, December 23, 2011

If all savers put their money in holes in the ground, how would people manage to exchange goods? Could an industrial economy function well under...

If everyone put their money into holes in the ground, we would eventually run out of cash.  This would be a disaster for the economy. 


One of the most important functions of money is to serve as a medium of exchange.  That is, we can give people money, and they will give us goods or services in return. This makes things easier because we can just carry money around with us and exchange it for things that we need.


Now imagine that we no longer have money. Now how do we get things that we want? Imagine that I want to buy a haircut. If I cannot give the barber money, I have to give them something that they want.  I have to find out what the barber wants, try to get it, and bring it to the barber so he or she will cut my hair.  This makes it very hard to buy and sell things.


An industrial economy could never function well in these conditions.  It would be too hard to buy and sell things.  How would a company be able to buy machines?  How would people be able to buy stock in companies?  All of these things would be impossible in an economy without money. Money makes industrial economies (and all large economies) possible.

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