WHY IS MONEY?
Back in June we wondered out loud, “What is a dollar?” That exercise—as well as the recent schizophrenic behavior of the currency market and the lamentations regarding the Fed’s “printing press”—has led us to wax philosophical on this Friday in August, and ask the question that is the title of our post today.
We tend to give the concept of money very little thought. For example, how many transactions does the average person engage in every day, and in how many forms? Our first transaction of the day is handing $1.25 in cash to a guy in a cart on 47th Street for our morning coffee. Throughout the day we buy lunch with a debit card, buy a book online with a credit card, transfer money to pay bills online and write a check to pay ConEd. In this parade of transactions, the relevant questions are “How much money do I have?” and “Do I have enough of it to pay for these things?” At no point during the typical day do we question the unit of exchange for all this activity, the US Dollar, or even wonder if it will be accepted as a form of payment (regardless of the form—cash, check, megabytes over an internet line).
The typical complaint about the dollar is that it is a fiat currency, one that is backed by nothing but the faith in America and its institutions. Some feel more comfortable knowing that their paper money can be exchanged at any time for a set amount of gold; it seems more grounded somehow, less faith-based. But a quick look at gold, despite it having a limited quantity (it can’t be printed at will), reveals that the major drawback of fiat money also applies to gold, meaning it only has value because we have always ascribed it value. Essentially, it is a malleable and ductile metal with a limited range of inherent utility. At the end of the day, you can’t eat it, or live in it (but you can wear it). As Willem Buiter, the chief economist at Citigroup and a gold bear, said, gold has benefitted from “the longest-lasting bubble in human history.”
So, with money, backed by gold or otherwise, what do we really have? Maybe we have something of a modified “greater fool” theory where we expect that it will have a value to somebody else in the future. If people start doubting the future value of money, then people will be less likely to take that money today. This is starting to sound like a very fragile system. It may or may not be, but nevertheless there is a natural tendency towards developing and using some form of money, like water flowing downhill. It makes things easier. A barter system is cumbersome, constrained by a double coincidence of wants requirement (i.e. for two people to trade, they both have to have exactly what the other person wants). That is why it is necessary for groups of people to form their own currencies. Think about cigarettes in US prisons (actually, now that smoking is banned in prisons, mackerel is the new currency). The natural first step is commodity money, where the form of currency typically has an actual use (cigarettes), but is different from barter because there is a fixed unit of measurement that goes along with it (i.e. 10 cigarettes for a sandwich). Commodity money makes transactions easier, but some forms aren’t very durable (like fish), and can be hard to transport and store. Gold (and dollars) as commodity money fixes the issue of transportability, storage and durability, but why would we have developed a system of money based on something that is inherently worthless when it comes to sustaining actual human life (unlike milk or codfish)? In short, because doing so is beneficial to us. The value of money/gold stems not from any specific utility but from the options that it presents to its holder.
Consider a haircut and a movie ticket in a world with no money. In this world, a barber will only get to see a movie every few weeks, or every time the movie theater owner needs a haircut. He has no other options. What he eats for dinner depends on what the farmer who needs a haircut that week grows or raises. But when the same haircut is purchased with money, the barber can then use that currency to purchase whatever he wants. He has options. He can go to a movie whenever he desires, he eats what he wants for dinner. The value of any currency derives from the options it affords its holder, and the flexibility and opportunity that come along with those options. “Wealth” really means that we have enough money to access many options. Whether people realize it or not, at its most atavistic level the propensity to accumulate large amounts of money stems entirely from a desire for choice. When we desire those extra bills in our pockets or the additional zeroes in our bank accounts, what we are really after is access to more options for ordinary and fundamental wants and needs: more clothes, educational options for our children, more living space, future financial stability, the ability to satisfy more philanthropic impulses, etc. We value money not for what it is, but for what we believe it can obtain in exchange.
Money, whether gold or fiat currency, is at its essence a belief system. And like anything based on beliefs, certain events over time can call those systems into question. The seeming capriciousness of cancer or Alzheimer’s can test some people’s faith in religion, and the events of the last three years certainly tested our belief in this system of money. Nevertheless, there is a natural tendency in human society towards the use of money. It makes things easier, greases the wheels of everyday life. In the essay “I, Pencil,” Leonard Read describes the coordination of productive forces to create a simple item that we use every day:
“I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire…”
It is impossible to imagine this process without the use of money. The act of cutting down trees and trimming wood, mining graphite and zinc, the creation of machinery and the organizing of workers to run those machines, would simply be impossible without a readily acceptable currency to grease the wheels.
It may not be an exaggeration to extend this idea to the success of humans themselves as it relates to money as the ultimate form of cooperation and tolerance, allowing us to come down from the trees and populate the world. Thus, there should be a fairly strong tendency for a monetary system not to break down, similar to mutually assured destruction, but it does happen, and it can happen in different ways, such as a group of people choosing an alternative, like the euro for the dollar, or creating an alternative. This is happening today in different parts of the world, from California to Brixton and from Ithaca to Ireland, as well as that small kingdom known as Disney.
As faith wavers in the current system of money and exchange, and as people contend with swings in the value of their local currency, it is worth remembering that the world needs money—the concept and the thing itself. Moreover, it needs a form of money that people will continue to have faith in, because we all want to know that the pile we have in our bank account today will be able to afford us the same options in the future. It isn’t a store of value that we need as much a store of faith and an instrument of cooperation. It can be the dollar, gold, or the yuan, or it can be Ithaca Hours or Disney Dollars.
Why is money? Because we’re humans.
No mention of common stock as money. How odd. Must we be restricted to the choices of the past?
Common stock as money:
1) requires no borrowing or lending; capital and labor are merely bought with new stock issuance.
2) Deflation is not a problem because the money (common stock) does not go out of existence as is the case with FRL.
3) Any price inflation is born by the corporation’s owners since all money recipients are by definition part owners of the corporation.
4) The amount of new money to be issued is under the authority of the current money holders since they can vote their money ( common stock).
5) Common stock as money shares wealth as it purchases it thus precluding the social problems associated with wealth disparity (bad) while allowing capital concentration (good).
Then why isn’t common stock used as money today?
1) Capital gains tax applies to common stock.
2) Corporations have no need most of the time to issue more stock since they can borrow from the government backed banking cartel.
Thus, there should be a fairly strong tendency for a monetary system not to break down, similar to mutually assured destruction, but it does happen, and it can happen in different ways, such as a group of people choosing an alternative, like the euro for the dollar, or creating an alternative. Annaly Capital Management
Liberty in money creation would (counter-intuitively) lead to greater overall stability. Just recently we have suffered a single point failure since the US is virtually compelled to use FRNs exclusively. As for the government, it could issue money that was legal tender for government debts only with floating (free) exchange rates between it and private monies.
We can agree to liberty or risk the breakup of the country.
ref Deuteronomy 23:19-20
Then why isn’t common stock used as money today?
2) Corporations have NO need most of the time to issue more stock SINCE they can borrow from the government backed banking cartel.
—- If you remove the monetary printing press then it will be replaced with the corporate printing press. You yourself verified this through the above statement and this statement below:
Common stock as money:
1) requires no borrowing or lending; capital and labor are merely BOUGHT with NEW stock issuance. – Goods BOUGHT with NEW printing!!
If a corporation goes into debt guess what will happen? THEY WILL START PRINTING MORE COMMON STOCK!!! What is the difference then between the Fed printing the dollar because of debt and corporation printing common stock because of debt? Anwswer – NO DIFFERENCE AT ALL!!!
AND WORSE YET:
Who’s going to guarantee the value of the common stock? ONE corporation that can print just as freely as the Fed. Would you put all your faith in ONE corporation? What happens if that corporation goes BANKRUPT? Where is the guarantee of that value? Is the common man holding the stock as money suppose to KNOW the risk of that corporation? Sorry Joe worker, your common stock is now worthless. YOU Joe worker SHOULD have KNOWN the corporation was going bankrupt. But because YOU DIDN’T KNOW your money and wealth are now worthless.
Replacing our current currency with common stock would be like replacing a pervert that fondles you with one that can outright sodomize you.
Would you put all your faith in ONE corporation? J Dukate
The critical point you miss is free market competition. Of course I would diversify. Over time the crooks would be reduced to insignificance.
Look. It’s logical; we can’t claim to have free market capitalism if the most important part of capitalism, money, is controlled by a government backed banking cartel. Or we can continue with what is essentially a fascist system and hope to compete with China and the other fascist countries.
Then why isn’t common stock used as money today?
It effectively already is. A dollar effectively represents a share of the US government’s claim on the US economy. The dollar is as good as the economy that it monetizes and the government that manages it. Being the world’s largest economy with continued good long-term growth prospects helps us and the dollar a great deal.
The dollar even trades like a share, as its value floats. If you want to exchange a dollar for other things (stuff at the store, other currencies, assets and commodities, etc.) the resulting price or exchange rate will vary from time to time.
Beard still doesn’t understand what money is, hence these various posts. I presume that he believes that having numerous currencies will allow the cream to rise to the top, but that’s an inherently flawed premise that honestly doesn’t make a whole lot of sense. I’d suggest that he come to grips with what a dollar is, and then go try to earn more of them so that he doesn’t need to worry so much about it.
I’d suggest that he come to grips with what a dollar is, and then go try to earn more of them so that he doesn’t need to worry so much about it. Angry MBA
Actually, I benefit more by the present system. My interest in money is a theoretical and patriotic one, not a personal one.
But if y’all insist on fascism well at least I’ll know I did my part to suggest an alternative. And I won’t weep for the loss of the free market seeing as how we don’t have one.
The gradual devaluation of money could go on forever and never pose a serious threat to survivability so long as adequate inflation adjusted income mechanisms are maintained . Uncontrollable hyperinflation could pose a serious threat to survivability . Maintaining adequate inflation adjusted income mechanisms , in a nonhyperinflation environment , would not be difficult and you could depend on people doing that – but the ordinary banking system would have to be socialized ( ie. nationalized ) in a manner similar to electric utilities so as to eliminate the structural and potentially catastrophic ponzi effect of monetary debasement that exists in the current system .
Money also equals debt. When you hold money, you hold a marker that somebody owes you something. When we think there is too much debt, we are saying there is too much money.
The point: the problem today is neither debt nor money, it is inequitable distribution.
Neither Beard nor Annaly confers much to one of the requirements of money – that it not be subject to counterfeiting. A simple google search lists some key characteristics of money (see http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=money+characteristics):
According to this source, the four primary characteristics of money are: (1) durability, (2) divisibility, (3) transportability, and (4) noncounterfeitability. Although a number of items or assets have served as money, those that best match these four characteristics are the ones that best function as money, the ones that best operate as a medium of exchange.
Fiat currency gets expanded through counterfeiting by banks who “print” new money when the make loans. These are funds that circulate which are created out of thin air on the presumption that depositors will not choose to claim their funds. No bank has all its depositors money available for redemption – most have one tenth or far less available in liquid short-term assets that could be quickly exchanged for base money. For more details, read Rothbard’s The Case Against the Fed, available for free from the Mises web site http://mises.org/books/fed.pdf. This is a classic very short read.
In Roman times, even reliance upon silver caused inflationary excesses and real estate speculation, because mine supply was prolific for years leading up to the birth of Christ. This would then lead to a contraction of credit and a plunge in real estate prices, but periodically booty from wars would cause base money to expand and counteract the deflation of asset prices.
For mor of this historical perspective, try reading my book, Endless Money (www.readendless.com).
All money is govt debt. You pay your debt once a year.
All bank loans net to zero. When your loan matures it nets back to zero. No new money was ever created. TPC
It nets to zero over time. Meanwhile it drives up prices just as permanent money does. Also, the fact that credit money goes back to nothing makes it worse than real money since money supply shrinkage or even failure to grow is a cause of depressions.
Furthermore, the credit is extended in other peoples goods and services not the banks by virtue of the government backed monopoly money supply.
Interesting article and comments.
TPC I had to work through the FRN are debt thing, as in a McDonald’s gift certificate is debt of Mickey D? FRNs are nothing more than tax coupons issued by the gvt?
All money is government issued debt. You essentially pay that debt back by paying your taxes. Banks don’t actually create this money. They simply leverage it up. Only the government can create the currency.
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