Saturday, January 10, 2009

The Origin of Money

Money. Everybody wants it, and you can always use more. But what is money? Where does it come from? Is it really the “root of all evil” as the Bible and Pink Floyd have said? Do we really need it? How did we all come to value little slips of paper with portraits of dead presidents on them? Why can’t they just give everybody a million dollars and make us all rich? And why is any of this important to those who are concerned about human liberty?

I’ll anticipate some conclusions here: Money is vital to a prosperous society, without it mankind could do no better than a primitive agricultural society. Money originates and evolves privately, in the market, as a solution to the problems presented by direct barter. Governments (in collusion with large Banks) around the globe have forcibly taken over and monopolized the creation of new money, and abolished the natural gold standard for the sole purpose of expanding their own power and confiscating wealth. All other “justifications” for government money are lies based on completely discredited economic hogwash. The unprecedented and artificial “fiat money” imposed on us now represents a grave threat to civilization itself.

What is Money?

Money can be defined as: A generally accepted medium of exchange. Theoretically, money can be anything that people desire to own, not for its direct use, but rather for its later value in trading for things that are useful. In practice, around the world and throughout history, one substance emerged as “the people’s choice” as the best money, and that substance is gold.

In the Beginning . . .

Imagine a primitive village with a fisherman (Mr. Fisher), a baker (Mr. Baker), a wagon maker (Mr. Wagoner) and a berry picker (Ms. Berry ). Even in primitive societies, workers tend to specialize like this, because of what Ludwig von Mises called the two most important facts about humans(!!):

  1. That a group of people can produce more goods by specializing and trading than they can in self-sufficient isolation.

  2. Man’s ability to recognize fact #1.

So trading goods with others is a mutually beneficial, natural way for humans to improve their situation. If Fisher wants bread and Baker wants fish, they will want to trade, say one fish for two loaves of bread. So far, so good. But what happens if Fisher wants bread, but Baker doesn’t like fish? This is the first problem with barter, the so-called “double coincidence of wants.” Fisher has to want what Baker has at the same time Baker wants what Fisher has.

To solve the problem, Fisher might go visit Ms. Berry , the berry picker, because he knows that almost everybody likes berries. He trades his fish for a basket of berries, not because he wants to eat them, but because he thinks that Baker will trade loaves of bread for them. When this happens, berries are beginning to function as money, because they are being demanded not just for their value as food, but for their value in exchange.

So we see that money has a function. It solves problems. And like anything else that has a function, it stands to reason that some items will work better than others. You could pound a nail in with a rock, but a hammer works better, because it has certain qualities (leverage, flat surface) that make it superior to a rock for that purpose. And so it is with money. Some things will possess qualities that make it a better money than other things.

Good Money vs. Bad Money

What are the properties that make for a good money? One we’ve already touched on, and that is that money must be something that nearly everyone values. Another problem with barter is divisibility. Mr. Baker and Mr. Wagoner might agree that a nice wagon is worth 1,000 loaves of bread, but Wagoner doesn’t want 1,000 loaves, he only wants one. He can’t whack off 1/1000th of a wagon, that would be useless. So a good money must be something which is still valuable even when divided into very small amounts. Other qualities that make for useful money include durability and also interchangeability, where one unit is the same as any other.

It’s very unlikely that anything extremely common, like sand, could ever become money because people just don’t value common things as highly as rare things. That’s good, for another very important quality of good, sound money is that it should be costly to produce. Briefly, this is because the ability to create money without cost carries with it the extraordinary power to redistribute real wealth to whoever is allowed to create it. More on this later.

What began to happen, over centuries, in separate societies all over the world, is that people tried out all sorts of things as money - salt, seashells, cattle, etc. This was a spontaneous, natural competition to determine the best money. That is, the best according to function, as determined by the market, not the whim of some tyrant.