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Just What is “Money” ?

September 23, 2009

Two Dollar BearMoney Basics 101

In this article we will examine just what is “money” and hopefully have a little fun in the process. As many know, money is an essential ingredient for today’s commerce and modern life. In the developed world we take this for granted, since we all use money and it has been around globally for eons in various forms. In the simplest terms, think of money as a form of exchange for goods (products) or services. So just how did it become so?

We will also briefly examine what the future may hold for such a concept as money.  What a great way to enlighten your understanding and viewpoint on the subject!  However, in the process of enlightenment on the subject, we must go into the time machine called history. I promise to make the trip enjoyable rather than seem as though you’re reading a history textbook.

A quick trip back in time

To understand just what money is today, let’s travel back in time to gather a recorded, historical overview. Money or, better yet currency as a form of exchange, according to archaeological records originated in Sumeria & Mesopotamia approximately 3500 BC.  The Babylonian civilization around 1700 BC is credited with the first currency system and became the precursor to modern-day economic systems which established laws regarding money including rates of interest. All this and more is found in the infamous “Code of Hammurabi”. We will explore more about currency systems later in the article.

Up to that point, exchange and trade had and continued to be for some time, transacted using actual commodities; that is to say- livestock, grain, seeds, textiles and other objects of intrinsic value. While at first this method of exchange proved effective, as commerce expanded rapidly beyond communities and boarders, the barter method soon exposed its inherent limitations- convenience and valuation of the actual items being exchanged.

By way of example, consider what happened when you could not agree on the value of an item of exchange or worse yet, the commodity was hard to transport or was perishable!  Not to mention, the difficulty in marketing through trade, excess commodities you possessed or those you had no interest in. Now all these burdensome limitations demanded a solution to replace actual commodities with one form of exchange all could agree on regardless of boundaries.

Replace “money” as the commodity

So ingenious the human mind! Now before you start thinking printing presses or coinage, to create money as we know it today, objects first used as money possessed certain value characteristics. Those objects chosen where all accepted because they were either very useful, a rarity, or simply had an aesthetic appeal. A good early example is the Chinese use of Cowrie shells beginning around 1000 BC. These shells were also the most popular form of money in Africa as well. In the infancy of “money” creation, its only requirement was that objects deemed as money must have a perceived value.

In this beginning stage, commodity-based monies were traded (bartered) for other items of similar value. This was a watershed moment because now, these early forms of money could be easily converted. However, another issue soon became evident!   Given the geographical limitation imposed by what was deemed acceptable money-currency in one area, could easily become in a worst case, worthless to someone living elsewhere. Advancement in forms of currency was needed as trade expanded rapidly.


Cowry shells as money

Precious metals- the great equalizer

Precious metals soon became the preeminent form of commodity-based exchange. The primary reason was an easier exchange across boarders and stable valuations. Metals such as copper, silver and gold would each possess different values based on weight, yet all had one thing in common- they all where universally accepted. Bullion (gold or silver bars) was used initially in commerce though only in larger transactions and also used by those of wealth.

Historically, it is widely accepted that around 610 BC, the first “coins” appeared in circulation. These first coins were the creation of the Lydians of Asia Minor, and are referred to as the “The Lydian Lion” because of the fascinating image of a lion on the coins face. It was made of a naturally occurring gold & silver alloy called Electrum and each coin weighed approximately 4.7 grams.

Lydian Trite

There is an interesting debate among coin experts as to the actual percentage of gold and silver in each coin, based on metallurgical analysis. Naturally occurring Electrum has a gold content of 70 to 90 percent, while these coins have a gold content of 50 to 60 percent. This indicates that the Lydians added these metals to electrum. Silver was less expensive, as was copper, and it was likely that the small amount of copper that was added was done so to improve the coins’ color and hardness rather than devalue or debase their coinage’s value. Shortly afterward, the use of coinage spreads to China who in 600 BC issued their first coins cast in bronze in the shape of farm tools. Around 550 BC, the Greek minted coinage in the mainland, Athens and Corinth. Soon all of the developing world followed with minting their own coinage of varying value depending on the coins metal content and weight.

Those coins weigh allot!

Ok now, we fast forward to a new era and another form of money appears- paper currency.  Also known as “representative currencies” since they were actually hand written notes or slips of paper that proved (represented) the existence of actual precious metal. Gold and silver was being held on deposit by the local goldsmith acting as a money changer, or merchant bankers who would then issue a promissory note to the owner for the gold or silver on deposit. So, in a transaction these notes could easily be signed over to another party much as checks are today. The notes on demand could be redeemed for the actual gold or silver. This new paradigm shift came about through a similar process of convenience. It was far easier to pay or transact commerce with bank notes or “promissory notes” issued by a bank, verses carrying around the weight of many coins. The natural evolution of promissory or bank notes on much larger scale occurred in China around 806 AD which became the first country to employ government backed paper currency. An interesting fact is that China’s use of paper for currency rather than metal came about due to their temporary shortage of copper. It was not long until paper notes circulated along side coins.

This now take us to a more recent, modern example of representative currency in the 17th century. The British Pound Sterling. Again, the Pound was backed by the promise of King Henry III that a bearer could redeem notes for silver. At that time, a one pound note was redeemable for one pound in silver. Some time later, around 1717 the exchange standard became gold rather than silver; of course the amount of gold exchanged for the Pound was adjusted accordingly. It is here that we may have got the phrase: “it’s as good as gold”. The point to remember about representative currencies is: originally they were a promise by the government or issuing bank to exchange the note for a certain amount of silver or gold. This is important as we will see what happened next.

I thought Fiat was a car

Just kidding of course, we are discussing “fiat currencies”. In this part, to some the concept is almost unbelievable and to others funny in a different way. First, let’s define the word “fiat”. The source of the word is Latin, meaning: “let it be done” and defined as: a command or act of will that creates something without or as if without further effort; an authoritative or arbitrary order. Consider this- Fiat currency is one in which a government declares to be legal tender, and must by law, be accepted as such. For example in the US, it is illegal to refuse “legal tender” money to pay a debt and if refused, the debt is not required to paid in some other form of monetary payment. In other words, creating something out of nothing. Only in this case, creating money! There you have it. The newly created currency is backed by nothing and cannot be exchanged for gold or silver.

Fiat currency found its birth around the mid-twentieth century mostly caused by governments printing money (issuing currency) in quantities that could no longer be supported with the equivalent amount of gold or silver on reserve to back it up. Not surprising, the impetus historically to do such a thing was to fund warfare.  In 1971 the United States declared the dollar would no longer be backed by gold or silver because the dollars in circulation exceeded gold in reserves. Remember the phrase:  the gold standard? Hmm…I wonder now what is really inside Fort Knox. Again, the primary cause for doing this was the cost to fund the Vietnam War. One last point on fiat currencies- The US Dollar was and still is the world’s reserve currency and is how other nations value their own currency, this action to no longer back the Dollar with gold, in effect made all other currencies fiat-based.  Today, all currencies are fiat-based with one exception to a degree, only the Euro currency has a small percentage in circulation backed by gold.

Why is there a value in “paper money”?

This is a very important question to ask or at least, ponder. Money today in and of itself does not have any value. The value is in what it represents. For example, an automobile or water, each has value because of what they can do for you. The value of money all comes down to the supply of money and the demand for it. Like the song says: “If dirt were dollars we wouldn’t worry any more”. True, but of course, dirt is not going to replace money any time soon! Money is simply a “good” with a limited supply and because of that, there is a perpetual demand for it in the marketplace.

Since others want this money, I can exchange mine for various goods and services from others so they in turn can do likewise. Goods and services are what we refer to as the “real economy”. Real production, tangible items that benefit people. Keep in mind, individuals sell their time or labor (work) in exchange for this “money” because they believe it will be able to purchase goods or services in the future. The concept of money works because enough of us believe in the future value money will posses so the system continues. Money in reality is a form of a belief system. But what happens to the value of money when there is a greater supply of money?

It’s all about the monetary “system”

US Central Bank Remember, a fiat currency is essentially creating money out of thin air, and the quantity of which is controlled by the Central Banks of governments and placed into circulation by those same governments. And this new money creation happens all the time.  Take the recent US economic “stimulus” spending. What many people do not fully understand is that money is initially created out of debt. By way of example, take the recent case in the US, creating money through the Federal Reserve Bank. They sold or issued US Treasury bonds to generate the money to fund various bank “bail-outs” and other expenditures included in the “stimulus package”. There are other economic repercussions consider such as the additional taxpayer burden imposed from the interest due on the debt issued.

Not wanting to go further into detail now as to how this money creation process actually happens, we simply need to understand- when more money is placed into the monetary system, the existing money is valued lower. Liken this to when in times past, governments changed the amount of precious metal content that made up their coinage.  Their monetary value changed almost instantly.  Remember money itself is a “good”. So, again supply and demand rule the marketplace. More money chasing a perceived or limited quantity of goods or services creates what is called price inflation. Inflation becomes an unwanted by-product of printing too much money into circulation. Not a good thing for your money and its purchasing power!

The future of money

While I’m not necessarily a futurist, there is good reason to believe that just as money and currency has evolved over time, money’s evolutionary process is also not yet complete. Many economists and other qualified people believe we are now facing a time globally which demands great scrutiny and a re-designing of our monetary systems and how we use money. Whoever controls money easily gains access to the real economy (goods & services) and resources which are the keys to geopolitical and economic power.  I’m of the opinion, money should be a vehicle for prosperity creation not, subjugation.

The old paradigm of creating money through debt should be re-examined then modified or replaced. Some argue we must remove the private banking interests which actually own and control the Central Banks of the world. A closer look at the Federal Reserve reveals a banking cartel with its thin veil of government facade. They may have a valid point. As in the US, the Federal Reserve System although congressionally authorized by law, should have its charter removed on the basis for not successfully performing its objective- to stabilize the economy. History speaks loud enough in that regard. Chances are additional monetary policy changes or enhancements to effect economic change or even a more intelligent board of governors cannot ensure its success.

So what possibly could be next?  First, the most important obstacle to change is that governments and banks still retain a monopoly on the creation and supply of “real” money by law. I believe we must overcome this old way of thinking about money and create new forms of exchange. Of course we already see this happening in the digital realm of online gaming with virtual currencies used to buy real-world objects.  Here is an interesting fact from the BBC back in 2002: “Air Miles currently in circulation are said to be worth $500 billion – making them the second biggest “currency” after the dollar”. And that was the value seven years ago, wow!

The money of our future will be one with similar characteristics as today’s money- it must possess a value of exchange we all can agree upon. Another change we may soon see is dissolution of the private central banks monopolistic control over the creation of money. When this occurs, expect a monumental shift in our perception of money and how it can be used to improve our world.

In closing, it is imperative that each of us realize we play a critical role in shaping the future of money and monetary systems. A first step is awareness that an opportunity to change for the better is now upon us and the power to do so is within all of us. The second step would be gain more knowledge on the subject helping to remove any fear of the unknown and to share this information with others. Hopefully, this article provided some awareness for you and helped to demystifying the subject of money.

For an inside look into how money is actually created, read this articleMagic Money- Fractional Reserve Banking

As always- your comments are welcomed and encouraged. If you like what you see and read here at Shift of The Age, be apart of the awareness- share! Be sure to forward, subscribe via RSS feed or email direct to your inbox. Thanks!

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