Let’s back up a little from last week’s article and get back to the definition and history of money. The most basic definition of money is a medium of exchange and a store of value. Before money was barter: You have something I want; I have something you want, and so we exchange. But the problem is clear and apparent; if A has something B wants, but B doesn’t have anything A wants, they cannot trade. Possibly B can find C, who has something A wants and if C has something B wants the three of them may be able to trade among them. Clearly, this is not a viable solution to trade within even a small tribe, much less in a complex national or world economy.
But if there were something that lots of people wanted, something that most people would readily trade of their surplus goods, maybe that could be used as a standard currency. Let’s say everyone wants corn. If that is the case, you could produce an excess of goods from your talents and then trade the excess for corn, which you could then trade for something else of need. If you are very productive you could amass a huge amount of corn that could be used for future needs.
The problem with this scenario is easy to see: corn does not last very long. Soon your storehouse of corn is full of bugs and mold and no longer usable for consumption, and therefore not usable for trade.
How about this. Everyone wants water, so why not use that as a medium of exchange? You could build a storage tank and exchange your excess production for water. But water is heavy and a person requires, on average, about three gallons per day for various uses. At ten pounds per gallon, transportation is a serious problem.
We could use glass beads as money, but they can be created in virtually infinite amounts. One-hundred billion glass beads in circulation this year could become 200 billion next. Without a doubling of goods and services desired by all participants in the economy, the price of products would increase in proportion.
We could use sea shells as money, but they have very little intrinsic value; there are only so many things you can do with sea shells.
We could use tree leaves, but they’re not in limited supply. In fact, every fall they increase by the trillions. They’re divisible, but they’re not durable. A few transactions, a few weeks in someone’s pocket and they would be crumbling, brown dust.
Only rare metals have stood the test of time as currency. Only gold and silver have been accepted as money over virtually the entire span of human existence since the discovery of the process of smelting.
Why have gold and silver become the go-to substance to use as currency for thousands of years?
- They are durable, not susceptible to rot or decay.
- They are scarce, but not so scarce that there cannot be a sufficient supply for world trade. Scarcity ensures that the supply won’t outstrip the production of products and services for which it is exchanged. Availability, even after thousands of years of mining, assures that there will always be enough to accommodate trade.
- They are divisible. Various size coins easily represent different values. Furthermore, the purity is readily discernable so users need not be concerned with whether they are receiving the genuine article.
- They are portable. The high value of a single gold coin enables a person to easily carry a large store of value.
- They are highly valued for purposes other than money; they both have intrinsic value.
In response to those who say that gold and silver are just relics of an ancient world, no longer applicable to modern society, I would respond, so is gravity. Yet, we still have to live with it. Not that the use of gold and silver as currency has anything to do with physical laws of the universe, but practically speaking, if we can observe that gold and silver have maintained their value throughout history about as consistently as gravity has maintained its effect on us, then it seems fruitless to try rationalize our way out of recognizing that these two metals will continue to be used and trusted regardless of man’s laws. Politicians can make rules and regulations saying gold and silver have no value for trade, as they can make laws saying gravity has no effect. Neither attempt at controlling nature and natural man will be of any use in the real world.
There are those who also say there is no difference between precious metals and the U.S. Dollar; both have value only because a large number of people say they have value. If anyone says this to you I suggest you turn around and walk away. Someone that crazy is not to be trusted with life or property.
It’s true, gold and silver are normally stored in secure locations, and receipts for that metal were traded as if they were gold and silver because the receipts represented something real and tangible that satisfied the five requirements for money.
The dollar, on the other hand, represents nothing without confidence and trust in the government that issued it. So consider this: A dollar bill your great-grandfather had in his pocket in 1913 (the year the U.S. government gave itself the ability to create money out of thin air) is worth less than three (3!) cents in 2018. As we mentioned in our last article on this topic, an ounce of gold in your great-grandfather’s pocket still has the purchasing power today that it had in 1913.
Today, money is created for political expediency. The fact that a dollar in 1913 is worth less than three cents today is representative of the decrease in the confidence and trust in the government over that period.
It’s only a matter of time before the remainder of that dollar is reduced to zero. We can thank Congress and The Federal Reserve. In the next installment, we’ll look at how the government, in cahoots with the Federal Reserve (a private corporation) creates money out of nothing.