Habit is a funny thing. On the one hand, it allows us to get through our day without having to waste brainpower on all kinds of mundane activities. Once you're accomplished at it, you don't think about how to drive your car, check your email, or even walk upstairs. These activities are etched into your neural synapses as an automatic program.
The downside of such habit, though (everything has its trade-offs), is precisely this unthinking acceptance of the given as natural. Most people's attitude toward money illustrates the potential pitfalls.
If queried for an explanation of money, most people would refer to pieces of colored paper or metal coins. Some might be a little more sophisticated and mention the purchasing power encoded in the magnetic strips on the back of rectangular plastic cards they have in their wallets. Though, the latter is basically just an accounting device for the former.
And, in one sense, they'd be right. The etymology of the English word money refers back to the minting of coins. There is an important distinction lost in this, though. Those ancient coins had a value determined on the market.
Those coins were literally composed of precious metals: e.g. silver or gold. The amount of rice or cotton or saffron a coin could purchase was determined by the value of the specific amount of precious metal in it, as priced by the valuation of the supply-and-demand process of the market. Thus, we can see that money was really just another exchange commodity. And like any exchange commodity it was valued for its benefits. Money was money though because it had a special quality.
History provides all kinds of examples of commodities employed as money. We have archaeological evidence that prior to the agricultural revolution sea shells were commonly used. Afterward, cattle was the most common currency for a very long time. In various periods and locations, salt, peppercorns, different grains, and tobacco, have served as money: a currency of exchange commodity.
These commodities were embraced as exchange commodities because they were widely sought out. If a carpenter built a table and wanted to trade it for chickens, he might have a hard time finding a chicken farmer who just so happened both to have chickens to sell and was in need of a table. However, given the much more common need of salt, not only for flavor, but as a preservative, it was much more likely to find a chicken farmer in need of salt.
Likewise, given this popularity of salt, the likelihood of finding someone holding some salt that was in need of a table was also pretty high. Consequently, it made good sense for the carpenter to turn his table into salt, likely increasing the number of chicken farmers with whom he could exchange.
Facilitating exchange between traders with incompatible preferences was the virtue of exchange commodities as currency. (Take note, though, all the items involved - tables, chickens and salt - were valued by market supply-and-demand.) Over time, pretty much everywhere, once they were available, precious metals became the money of choice. They were both widely and highly valued, which allowed for small amounts, with high value, to be easily transported. Additionally, they were subject to precise measurement, easily molded into convenient shapes and sizes, and able to be stamped with the information of their proportions.
Again, though, everything has its trade-offs. While this metal money had benefits, it also had drawbacks. Those who have ruled societies have usually gained their power through military strength. An army though requires wealth and one way of accruing that wealth has been to plunder the money supply.
Coercive rulers claim control over the money supply (which is usually not too difficult to do when you have the majority of guns - or swords or spears, etc.). Once in control of the coins, they debased the currency. The most popular practices for such debasement have been either clipping the edges of the coins or recasting them with reduced proportions of the precious metal that ostensibly gave them their original market value. In any case, the coercive rulers kept the "excess" precious metal, generated by their currency debasement, to spend on their armies.
As if by magic, the number of coins multiplied, but only as a function of the rulers imposing on the market coins whose actual value, measured in amount of precious metal, was less (sometimes vastly less) than what was claimed by the official stamp of the ruler's mint placed on the coins. Value for such coins was determined not by the market, but by fiat, or legally binding assertion, enforceable through violence, of the ruler. The result of such "magic" everywhere leads to calamities and shenanigans. The fall of the Roman Empire itself can be traced back to the impact of such fiat currency.
This story points to the origins of monetary inflation. Understanding fiat currency means understanding inflation. That's a story we've told elsewhere, Understanding Fiat Currency and the Inflation Beast . And it's a story you have to understand to appreciate the circumstances of our fiat currency, today.
The downside of such habit, though (everything has its trade-offs), is precisely this unthinking acceptance of the given as natural. Most people's attitude toward money illustrates the potential pitfalls.
If queried for an explanation of money, most people would refer to pieces of colored paper or metal coins. Some might be a little more sophisticated and mention the purchasing power encoded in the magnetic strips on the back of rectangular plastic cards they have in their wallets. Though, the latter is basically just an accounting device for the former.
And, in one sense, they'd be right. The etymology of the English word money refers back to the minting of coins. There is an important distinction lost in this, though. Those ancient coins had a value determined on the market.
Those coins were literally composed of precious metals: e.g. silver or gold. The amount of rice or cotton or saffron a coin could purchase was determined by the value of the specific amount of precious metal in it, as priced by the valuation of the supply-and-demand process of the market. Thus, we can see that money was really just another exchange commodity. And like any exchange commodity it was valued for its benefits. Money was money though because it had a special quality.
History provides all kinds of examples of commodities employed as money. We have archaeological evidence that prior to the agricultural revolution sea shells were commonly used. Afterward, cattle was the most common currency for a very long time. In various periods and locations, salt, peppercorns, different grains, and tobacco, have served as money: a currency of exchange commodity.
These commodities were embraced as exchange commodities because they were widely sought out. If a carpenter built a table and wanted to trade it for chickens, he might have a hard time finding a chicken farmer who just so happened both to have chickens to sell and was in need of a table. However, given the much more common need of salt, not only for flavor, but as a preservative, it was much more likely to find a chicken farmer in need of salt.
Likewise, given this popularity of salt, the likelihood of finding someone holding some salt that was in need of a table was also pretty high. Consequently, it made good sense for the carpenter to turn his table into salt, likely increasing the number of chicken farmers with whom he could exchange.
Facilitating exchange between traders with incompatible preferences was the virtue of exchange commodities as currency. (Take note, though, all the items involved - tables, chickens and salt - were valued by market supply-and-demand.) Over time, pretty much everywhere, once they were available, precious metals became the money of choice. They were both widely and highly valued, which allowed for small amounts, with high value, to be easily transported. Additionally, they were subject to precise measurement, easily molded into convenient shapes and sizes, and able to be stamped with the information of their proportions.
Again, though, everything has its trade-offs. While this metal money had benefits, it also had drawbacks. Those who have ruled societies have usually gained their power through military strength. An army though requires wealth and one way of accruing that wealth has been to plunder the money supply.
Coercive rulers claim control over the money supply (which is usually not too difficult to do when you have the majority of guns - or swords or spears, etc.). Once in control of the coins, they debased the currency. The most popular practices for such debasement have been either clipping the edges of the coins or recasting them with reduced proportions of the precious metal that ostensibly gave them their original market value. In any case, the coercive rulers kept the "excess" precious metal, generated by their currency debasement, to spend on their armies.
As if by magic, the number of coins multiplied, but only as a function of the rulers imposing on the market coins whose actual value, measured in amount of precious metal, was less (sometimes vastly less) than what was claimed by the official stamp of the ruler's mint placed on the coins. Value for such coins was determined not by the market, but by fiat, or legally binding assertion, enforceable through violence, of the ruler. The result of such "magic" everywhere leads to calamities and shenanigans. The fall of the Roman Empire itself can be traced back to the impact of such fiat currency.
This story points to the origins of monetary inflation. Understanding fiat currency means understanding inflation. That's a story we've told elsewhere, Understanding Fiat Currency and the Inflation Beast . And it's a story you have to understand to appreciate the circumstances of our fiat currency, today.
About the Author:
Fiat currency threatens to destroy your family's savings; follow the latest news pertinent to protecting yourself and your family at The Fiat Currency Review . Wallace Eddington's recent piece on Bitcoin exchange trading funds has been an online hit: don't miss it!
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