Category Archives: Money: The Basics

Money: The Basics– Part III: “Currency Debasement”

In the first installment of this series, we discussed what money is. In Part II, we analyzed why historically, gold and silver make the most stable forms of money. In this installment, we will begin to discuss how governments ruin money.

Currency Debasement

Throughout the history of civilization, governments have sought control over their civilization’s money supply. In practically every case that they have achieved this monopoly, catastrophe has followed.

In the days before fiat currency and central banking, governments primarily used a process called currency debasement in order to raise money for their state projects–usually warfare. In this process, the king/emperor/czar (pick your poison) called for a re-coinage of all the kingdom’s money supply.

Throughout the process of reissuing the currency, the state reduced the precious metal content of the coins and added it to the treasury. They then gave the same amount of debased coins back to the populace with a new stamp on them. Theoretically, everyone received the same amount of coins as they initially had given. The king then used the gold he stole to mint extra coins for his own use. Through spending this coin, he essentially increased the overall supply of money.

Because the king was the entity that first introduced the new coins into the money supply, he was able to enjoy low pre-inflation prices. Once he spent his stolen loot however, the effects of this increase in the supply of money then drove prices up for everyone to the tune of whatever percentage that he stole from the populace during the debasement process. As you may imagine, this process affected the middle class and the poor most of all because they were the last to get their hands on the new money.

As the money inflated, the lower classes continued to become destitute. The value of their money (or savings, if they had any) depreciated because the number value of their holdings did not increase in accordance with the increase in the money supply. Rinse and repeat this process ad nauseam  and people began to lose faith in the value of the kingdoms money. Pretty soon no one would accept the money and the kingdom would collapse from internal or external means.

Thankfully, the process of currency debasement was a relatively inefficient way to steal from the public. The process was long and tedious and therefore only performed once or twice in a generation. Unfortunately, governments have wised up since then.

In this installment of our series, we discussed the process of currency debasement. In our next issue, we will begin to tackle the horrific evils of central banking.

As always, thanks again for reading and check out the source material through my Amazon affiliate link:

The Mystery of Banking; Murray Rothbard                                          Chapters I-IV

Money: The Basics– Part II: “What Makes Good Money?”

In the first installment of this series, we tackled the question: “What is money?” To reiterate, money is a medium of indirect exchange and satisfies the double coincidence of wants. Next, we will tackle the question: “What makes good money?”

Sound Money

Throughout history, many commodities have been used as money: Ancient Sumerians monetized clay tokens, Native Americans  used strings of quahog shells (wampum), and at times, southern colonial Americans used tobacco. However, some of the most common–and most successful–monetized commodities are precious metals . . . specifically gold and silver.

Which commodities make the best money, and why does the market choose silver and gold?

In order to be successfully used as money, a commodity must: 1) be in high demand, 2) be highly divisible, 3) retain its value when divided, 4) be portable, with a high value per unit weight, and 5) be highly durable. (These factors taken directly from pgs. 6-7 of The Mystery of Banking)

Because of their ability to satisfy these qualities, markets have historically selected gold and silver as the best commodities for use as money. Because of their scarcity, silver and gold are almost always in high demand. Their chemical properties cause them to be highly malleable, and allow them to retain their value throughout division. Gold and silver coins have a high value per unit weight, enough so that they may be conveniently carried on one’s person. Unlike wampum or tobacco, gold and silver coins retain their value indefinitely and are easy to test for legitimacy.

Recently, the world has popularized the use of bank notes instead of gold and silver. Bank notes are not commodity money, because they have no intrinsic value. Bank notes (when redeemable) merely represent a promise to pay a debt with money. In essence, they are fancy IOUs.

In 1971, the United States completely severed the dollar’s connection with gold, switching it from a representative currency (currency that is redeemable) to a fiat currency. This simply means that the dollar is not redeemable in gold and therefore has no intrinsic value. It is simply state-issued “Monopoly” money.

The Keynesian justification for this removal of intrinsic value is that it gives money “flexibility.” Simply speaking, it allows for easier “money creation.” For those of us that know better, it allows central bankers, (for us–the Federal Reserve) to create money out of thin air.

In this installment, the second in our “Money: The Basics” series, we tackled the question “What makes good money?” In doing so, we have added to our definition of what (commodity) money is: a medium of indirect exchange which satisfies the double coincidence of wantsand that has intrinsic value in addition to its value as money. 

In our next installment, we will discuss how governments ruin money. Thanks for reading!

Once again, for a more in-depth analysis of money and other associated topics, please refer to the experts through my Amazon affiliate links (you’d be helping out a poor law student in the process):

                 

The Mystery of Banking; Murray Rothbard                                           Chapter I: Money–Its Importance and Origins

Principles of Economics; Carl Menger                                                                     Chapter VIII: The Theory of Money

Money: The Basics– Part I: “What is Money?”

What is money? How did it come to be? Where does new money come from? These may seem like trivial questions, but the fact is that the average person knows very little about their money.

In fact, one of the first steps in becoming economically literate is understanding what money truly is and why it goes bad. In this post we will discuss what money is and how it came to be.

The Origins of Money

No one “invented” money. Money did not come about by the decree of some Egyptian pharaoh or a Sumerian King. Rather, money is the result of billions of singular economic transactions.

Before money, economic exchange took place in a bartering system using surplus goods. But, as you can imagine, this system placed severe limitations on the scope and complexity of economic exchange.

For instance, the barter system does not solve the double coincidence of wants. This basically means that both parties must have an interest in what the other party is offering. For example: If you are selling a goat, I have to offer you something that you want.

Other limitations of the barter system include: 1) the indivisibility of certain goods, 2) the impossibility of performing accurate business calculations, and 3) complications associated with long-term savings.

In the first case, it is true that some goods are unable to be divided for exchange. If I want to sell my house, I cannot cut it into three pieces and use each piece to get what I want. In the second case, it is hard for businesses to calculate whether they are making or losing income if their assets are made of commodities. In the third case, some commodities are impossible, or very difficult to store for a prolonged period of time.

Money came about as a medium of indirect exchange; it presents a third object which satisfies the double coincidence of wants. Money represented a gigantic leap forward in human evolution. Businesses could now divide complex assets for sale, pay their workers with universal value, and create a comparable market of prices. Civilization followed.

In the next installment of our series on money, we will tackle the question of “what makes good money?”

For a more in-depth analysis of money, refer to these titles through my Amazon affiliate links:

                 

The Mystery of Banking; Murray Rothbard                                           Chapter I: Money–Its Importance and Origins

Principles of Economics; Carl Menger                                                                     Chapter VIII: The Theory of Money