What is Money?

Do you know what money is? Yes, the stuff in your bank account or wallet is, indeed, money, but there’s more to say.

We need money because barter is inherently inefficient. If you have some sort of “common store of value,” you figure out one price for your own offerings, and then everyone else does the same, instead of negotiating an exchange rate for every pair of goods or services that could be exchanged. You only have to carry money with you, instead of a wheelbarrow full of whatever you make.

The simplest definition of money is: a common store of value, the common element used to describe all prices.

Anything can be money, and a surprising number of things have been money. Cowrie shells are one example that most folks have read about. Wampum made of drilled shell beads is another. But there have been dozens of different things used as money.

So far, so obvious, and so very uncontroversial. But from here on, the going gets complex, and the controversy starts.

There is nothing that has any exchange value in and of itself. It only has an economic value if someone wants it, and if two (or more) people agree that “so much of thing X” is worth “so much of thing Y.”

This is far more true of money. Money is entirely a social construct. You can’t have money without having a governing body that stands behind it. Even if you use an object that has value on its own, someone has to standardize the weights and measures, and someone has to certify that the thing is genuine or pure. If you don’t have standardization, you’re back to barter, with separate negotiations every time.

Money, by definition, has to be controlled by a governing body.

Common sense says that an object that has a lot of value on its own is a better form of money than one that does not. The most popular example is precious metals. Gold and silver are real things you can hold in your hand, and they’ve been used as currency for centuries. They’re valuable in their own right for use in chemical and industrial processes, as well as for jewelry. Surely, then, they’re better, more stable, more effective as money than a piece of paper we’ve declared to be currency? No, they’re not.

Gold and silver do have value. But that value is not different in kind than the value of any other thing. It rises and falls as the uses for the metals gain or lose importance.The value also rises or falls with the discovery of new sources of gold or silver, as well.

Precious metals trading, like all other commodities trading, is a very risky form of gambling. Fortunes are regularly lost this way.

If you base your money on something that is riding its own roller coaster, your economy follows suit. On top of that gyration, you add the economic cycles that come from the rest of the activity that’s happening.

Remember the machines that medieval astronomers used to calculate the motion of the stars? The ones with wheels on wheels on top of wheels, all spinning madly around? That’s what an economy based on an item with a volatile value of its own does. It’s pretty to watch if you’re standing to the side and the motion is abstract. But roller coasters like that are only fun to ride if you’re in an amusement park. It’s absolutely no fun when the roller coaster is your economy, and the thing being turned upside down is your livelihood!

This is all theory, right? Nope. We’ve seen it in practice. In the times when gold and silver coins were the currency, economies regularly crashed or soared because of fluctuations in the intrinsic value of the metals (as vs. their value as currency).

For just one example: Spain went through one paroxysm after another when the treasure galleons were bringing bullion back home. The value of gold and silver, as metals, dropped precipitously, because the supply spiked. And this happened independently of all the rest of their economy. Its after-effects meant that Spain missed out on most of the Industrial Revolution.

Back then, gold and silver were most valuable as jewelry or coinage. But these days, we’re using them for so many things that there are many, many more reasons for the value of the metals to be volatile.

If traditional currencies aren’t ideal, what is? If you want to avoid “extra” bubbles and crashes, you need a currency that has almost no intrinsic worth — one that is valuable only because we have all agreed to use it as currency.

But it has to be rock solid.

Today, that’s a currency backed by the “full faith and credit” of a major economic powerhouse. Examples are the paper or electronic money regulated by the US or the EU. The paper itself has little intrinsic value, and what value it has is ignored by all who use it. When the paper changes, the value of the currency does not.

These forms of money do shift with the economic strength of the countries sponsoring them, but only with the economy and economic forecasts. (Yes the political strength of the countries involved has an impact, but only as it is expected to impact the economy.)

The problem with this type of money is that it gives those governments a great deal of power over their economies. And no one likes to be controlled.

So now, is that power is a bad thing? Governments are run by politicians. Elected politicians are predictably prone to doing the expedient thing, rather than taking an unpopular but necessary course. Elected politicians tend to be good at politics, but can’t possibly have a deep understanding of every thing that the government controls. So, they’re likely to choose an emotionally appealing, but ultimately stupid, course of action.

Fortunately, our politicians are aware of that, and many decades ago, they took themselves out of the day to day, or even year to year, control of the money supply. Instead, they select a board of highly qualified, experienced, and highly educated specialists who in turn do the controlling. These few people aren’t elected, so they’re not vulnerable to the type of short-term pressure that politicians are. And they don’t have to know anything except how their own actions in regulating our money will affect the economy.

Is it bad that they have this kind of control? Shifting from the gold standard to paper currency did reduce economic volatility. With time and experience, the US Federal Reserve Board has made great strides in reducing the number and severity of our panics, depressions and recessions. It may not seem that way, since this has been happening over more than any one person’s life time. But it is true. The more control over the money supply that our government has had, the better off we have been, over the centuries.

Is it better to avoid economic consequences or to have less governmental interference in things that affect us? Each person has to answer that question for him or herself.

For me, the control is beneficial, and its control is not such that I feel any negative impact.

Comments? Countervailing evidence?

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