Revised November 13, 2013
Production is the basic thrust of all mankind toward prosperity. Production and prosperity go hand in hand. Production by the Producer creates or generates prosperity. Production enhances the prosperity of the Producer. Production increases the Producers ability to exist. The prosperity thrust of the individual demands production take place to forward the individual in his quest to exist. This production has exchange value. This exchange value is determined or generated by the needs and wants (demand) of each producer in the societies. This exchange value is found to be inherent in what the individuals of each society have agreed to be defined as “their” money unit.
We will examine how money is created through production. If one person produces milk, another person produces eggs, another produces coats, another produces computers and another producers cars. We then have these people producing in their specialties. Each of these Producers needs and wants (demands) the production created by the other Producers. Each Producer needs and wants (demands) the production of other Producers for his or her prosperity, consumption or esthetic admiration and/or pleasure.
Producers have developed a system of exchange among themselves to accommodate their demands for each others production. At first a barter system was set up where producers traded commodities, trades, goods and services with each other based on the value they assigned to each commodity, trade, good and service. The value was generated by the amount of commodities, trades, goods and services available in respect to the demands for the commodities, trades, goods and services. If there was an abundant supply of a specific good and the need was low for it, the demand was low. A low demand would give a lower value for that good. If there was a low supply of a specific good or service and the need for it was high, the demand would be high. A high demand would give a high value for that good or service.
From this working together of need, demand and supply, the Producers worked out an exchange ratio among all commodities, trades, goods and services on the Market. This ratio is the exchange relationship among all commodities, trades, goods and services on the Market. The exchange relationship shows the number of times the value of one commodity, trade, good or service is contained within the other commodities, tradies, goods and services on the Market. This is called the exchange rate.
We may find one hundred dozen eggs being traded for one coat, two dozen eggs being traded for on gallon of milk, fifty gallons of milk being traded for one coat, five hundred dozen eggs being traded for one computer, two hundred gallons of milk being traded for one computer or ten computers being traded for one car, etc. These are the trading ratios which are being used by the Producers to achieve equity in product value when trading their products directly. These ratios have established exchange value in terms of one product to another.
From this information or data it can be deduced that products have exchange value, generated by demand from Producers, which can be defined in terms of all other products. In fact, all products created by Producers, throughout mankind, have exchange value which can be defined in terms of each other.
For example; one dozen eggs is equal in value to one/one hundred (1/100) of a coat. One coat is defined to equal one hundred (100) dozen eggs in value. One car is defined to equal one hundred (100) coats or ten thousand (10,000) dozen eggs or five thousand (5,000) gallons of milk or ten (10) computers. We could define the exchange value of all production based on each product and determine how to exchange commodities, trades, goods and services based on that specific product. The selected product could be dozens of eggs. We could determine the exchange rate of all products based on the value of dozens of eggs. As we can see this would be very unworkable. The egg production would go wild. Everyone would be growing eggs as a short cut to having money. This would lead to a constantly expanding medium of exchange (eggs) and a collapsed economic system.
Do you see how the value of commodities, trades, goods and services are determined on the Open Market? One could go on and complete tables and tables defining the exchange value of each product produced by all members of mankind in terms of all other products produced by all of Mankind. This becomes a very, very bulky and unworkable system. We need some sort of simplification and standardization here.