Sunday, October 14, 2007


Money. Dough. Bread. Mazoolah. Cha-ching. Greenbacks. The Green. Benjamins. Sweet Georgie Pea-Pod. Shim sham shadoobie. All of these are the names we give to money. Some were coined by me just now. Regardless of what we call it, money performs the same function. Why the heck do we have money, and what exactly is it? This is important, and I swear I'm not just coming up with filler material for my blog.

Without understanding money you can't really understand the economy, and since you work eight hours a day for the stuff, wouldn't you like to know what it is?

First, let's imagine an economy without money. It's not hard, because we used to have economies without money. They used the barter system. Bartering was when you exchanged stuff for other stuff. You might buy a meal at an inn with a big sack of grain, or use a dozen eggs to buy a new fork.

Imagine the complications this would lead to, since each barter exchange is negotiated on a one-to-one basis. For a shopkeeper to fix a certain amount of eggs as being worth a fork, or any other item, would be impractical if there happened to be an abundance of eggs. Suddenly his forks are all sold out and he's left holding huge bushels of eggs. He's eating omelets for a week, but after that some of his eggs will have gone bad. Maybe he could find enough buyers for all of his eggs in time, but it's a gamble, and he'll have to accept whatever the egg-buyers will take in trade.

You can't be sure what your goods will get you in trade, or that your goods will last long enough to be traded to somebody who has something you want. And what about big stuff? How many eggs does it take to buy a car? How many horse shoes does it take to buy a railroad? Land sakes, how many thimbles does it take to buy a space shuttle?!

And what about governments and businesses? How do they pay people? With beaver pelts? The ancient Roman government paid its soldiers in salt, or salarium as they called it, from which we get the word salary. So they were on the right track, they were sticking to one thing, and soldiers could plan their household budgets according to the amount of salt they expected. Salt had many uses. It could preserve meat, be sprinkled on food to heighten the tongue's sense of taste, and I guess that's it. All I can think of anyway. Doubtless Roman soldiers used the salt they didn't use around the house to barter with local shopkeepers, colosseum hot dog sellers, and any number of pomade outlets. I believe English soldiers were paid with beef, so this type of thing wasn't uncommon before blessed money was invented.

"Just a darn minute," you say. "I know they had money back then, they had gold coins and silver coins and stuff!"

That's true, they did. But not everybody did. Early money was based on precious metals (precious meaning "rare," not "aw, isn't that gold vein precious?"), and you carried around little pieces of the stuff with you that had been stamped with some emperor's mug on it. These were like the twenty or hundred dollar bills of their day, and most peasants carried around their salt, beef, chicken beaks, eggs, thimbles, and whatever else stood in for their dollars, quarters, nickels, and Sacajawea dollars.

Whether it was an actual good that had a use, or a precious metal (can't do much with them), both were mediums of exchange, like how CDs are a medium of music.

Eventually people discovered "credit," and that by "writings notes" of this "credit," you could travel from the place where the guy wrote the note, carrying this piece of "paper" which contained the "credit," to the place where the "credit" could be "redeemed" by somebody with gold. They were the early banks, and they gave the velvet rope industry a reason to exist. Although they didn't call themselves banks really, and instead of making people wait in line they just punched them in the head and instead of having inconvenient hours they just stabbed you in the chest. How I miss that system.

I'm kidding, of course, but this whole credit doo-hickey took the world by storm, and next thing you know people with lots of money are printing their own paper money, which was really just a less personalized and non-autographed version of the note of credit. Leaving aside the complications of different states with different money and different countries with their own money (I know, how crazy is that?), let's just say that eventually we Americans got to where we are today, with our dollar bill.

So up until the 1970s, instead of carrying around a huge store of goods with you when you went to the store (in case they don't want any eggs in exchange for their matches), you could hand them dollars, for which they could go and exchange with a federal bank for a dollar's worth of gold. In effect, each dollar was a note of credit saying "IOU a dollar's worth of gold."

Then they took us off the gold standard, so currency wasn't worth a certain amount of gold any more. Gold standards are sort of impractical these days. So now, instead of dollars being a little note of credit saying "IOU one dollar worth of gold" they are.....well, what the heck are they worth now? What makes money valuable if it's not worth gold?

Let me change your thinking here: what made gold valuable in the first place? Certainly not its uses, since they were limited. Jewelry alone can't account for the high value placed on gold. The value of gold is the same as the value of paper money--it is valuable because people are willing to accept it for trade. Why are they willing to accept it? Because they expect others to accept it also.


Nothing has "inherent value." Gold itself isn't valuable without somebody placing value on it, and its value as money (i.e. an exchange medium) derives from the expectation that others will put value on it as well. Money is the same way. It's just printed paper. It's value comes from our expectation that we can buy things with it. The real value of money is what can be bought with it, not the money itself. Once you start thinking of money as a paper representation of actual goods and services, you understand money better and you understand the economy better.

Gold was durable, scarce, and others valued it as an exchange medium, which made it good as money for its time. But it's impractical today because it is heavy, not easily divisible, and I frankly don't like the idea of my country's money supply being partly tied up in peoples' necklaces. Control of the money supply is important to prevent monetary problems, and having paper money makes that easy. Paper money is pretty tough (for paper), is hard to duplicate (making it scarce), and others see a lot of value in it. Paper money is what's called "fiat money," meaning it has value by government fiat, or command. The government says "this is money" and if we don't expect the government to fall then we can rely on it.

Fiat money is worthless if nobody accepts it, such as when Iraq was invaded in 2003. There were pictures in the media of Iraqis cheerfully burning their Iraqi money with Saddam's picture on it, because his government was no more. That is the main weakness of fiat money, but I still like the system (easy for me to say, in this country). Some countries actually tie their currency into the US dollar, the way we used to tie ours into gold.

The big weakness of gold, apart from the ones I already mentioned, is that when they invent replicators like on Star Trek, elements like gold will be easy to replicate, making gold abundant and worth a lot less. Hey, it'll happen!

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