Habit is a funny thing. On the one hand, it allows us to get through our day without having to waste brainpower on all kinds of mundane activities. Once you're accomplished at it, you don't think about how to drive your car, check your email, or even walk upstairs. These activities are etched into your neural synapses as an automatic program.
Everything in life though involves trade-offs. So, it shouldn't be surprising to learn that our propensity for habit also has its drawbacks. This propensity for habitual thinking inclines us toward a tendency to accept the given as natural. Popular attitudes toward the nature of money are a case in point.
Ask the average person what is money and they'll likely refer to pieces of colored paper or metal coins that they have in their pockets or purses. Perhaps they'll talk about the purchasing power coded into computer systems accessed by rectangular plastic cards, with information carrying magnetic strips on the back.
Such answers wouldn't be entirely wrong. The roots of the English word "money" harkens back to the minting of coins. Leaving the matter at that, though, obscures a rather vital distinction. Those original coins of our ancestors - unlike ours, and our paper currency, today - had a value that was determined by the market.
Those coins were literally composed of precious metals: e.g. silver or gold. The amount of rice or cotton or saffron a coin could purchase was determined by the value of the specific amount of precious metal in it, as priced by the valuation of the supply-and-demand process of the market. Thus, we can see that money was really just another exchange commodity. And like any exchange commodity it was valued for its benefits. Money was money though because it had a special quality.
Through history all manner of commodity has been used as money. Before the agricultural revolution, sea shells were commonly used, and after it a common currency was cattle. In different times and places, salt, peppercorns, grains, tobacco, and many other commodities, played this money role of exchange currency commodity.
These commodities were embraced as exchange commodities because they were widely sought out. If a carpenter built a table and wanted to trade it for chickens, he might have a hard time finding a chicken farmer who just so happened both to have chickens to sell and was in need of a table. However, given the much more common need of salt, not only for flavor, but as a preservative, it was much more likely to find a chicken farmer in need of salt.
Additionally, the popularity of salt increased the prospects of finding someone holding some salt in need of a new table. All considered, then, there would be good sense in the carpenter converting his table into salt, and likely increasing the number of chicken farmers with whom he could trade.
This quality of making trade between people with differing preferences simpler was how the exchange commodities, which came to be known as money, rose to prominence. Eventually, precious metals became the preferred form of money. They were widely and highly valued, subject to precise measurement, easily molded into convenient shapes and sizes, and able to be stamped with the information of their proportions. Hence coins. Hence money.
Alas, the fact that everything has trade-offs offers no exception in the case of precious metal based money. The trouble wasn't with their market uses, but their potential for administrative abuse by coercive authorities. Military strength has generally been the prime factor in determining who ruled society. Armies however are maintained by the money to pay the troops. A longstanding and sure-fire means to get the requisite money was to plunder the currency.
Coercive rulers claim control over the money supply (which is usually not too difficult to do when you have the majority of guns - or swords or spears, etc.). Once in control of the coins, they debased the currency. The most popular practices for such debasement have been either clipping the edges of the coins or recasting them with reduced proportions of the precious metal that ostensibly gave them their original market value. In any case, the coercive rulers kept the "excess" precious metal, generated by their currency debasement, to spend on their armies.
The ludicrous result of this debasement was the rulers pushing into the market coins whose actual value, measured in amount of precious metal, was less than the value claimed by the official stamp of the mint on the coin. The value was determined not by the market, but by the fiat, or legally binding assertion, of the ruler. Calamities and shenanigans of every sort have resulted wherever such corruption of the monetary system has been practiced. No less an epic historical event as the fall of the Roman Empire is largely attributable to fiat currency.
This story points to the origins of monetary inflation. Understanding fiat currency means understanding inflation. That's a story we've told elsewhere, Understanding Fiat Currency and the Inflation Beast . And it's a story you have to understand to appreciate the circumstances of our fiat currency, today.
Everything in life though involves trade-offs. So, it shouldn't be surprising to learn that our propensity for habit also has its drawbacks. This propensity for habitual thinking inclines us toward a tendency to accept the given as natural. Popular attitudes toward the nature of money are a case in point.
Ask the average person what is money and they'll likely refer to pieces of colored paper or metal coins that they have in their pockets or purses. Perhaps they'll talk about the purchasing power coded into computer systems accessed by rectangular plastic cards, with information carrying magnetic strips on the back.
Such answers wouldn't be entirely wrong. The roots of the English word "money" harkens back to the minting of coins. Leaving the matter at that, though, obscures a rather vital distinction. Those original coins of our ancestors - unlike ours, and our paper currency, today - had a value that was determined by the market.
Those coins were literally composed of precious metals: e.g. silver or gold. The amount of rice or cotton or saffron a coin could purchase was determined by the value of the specific amount of precious metal in it, as priced by the valuation of the supply-and-demand process of the market. Thus, we can see that money was really just another exchange commodity. And like any exchange commodity it was valued for its benefits. Money was money though because it had a special quality.
Through history all manner of commodity has been used as money. Before the agricultural revolution, sea shells were commonly used, and after it a common currency was cattle. In different times and places, salt, peppercorns, grains, tobacco, and many other commodities, played this money role of exchange currency commodity.
These commodities were embraced as exchange commodities because they were widely sought out. If a carpenter built a table and wanted to trade it for chickens, he might have a hard time finding a chicken farmer who just so happened both to have chickens to sell and was in need of a table. However, given the much more common need of salt, not only for flavor, but as a preservative, it was much more likely to find a chicken farmer in need of salt.
Additionally, the popularity of salt increased the prospects of finding someone holding some salt in need of a new table. All considered, then, there would be good sense in the carpenter converting his table into salt, and likely increasing the number of chicken farmers with whom he could trade.
This quality of making trade between people with differing preferences simpler was how the exchange commodities, which came to be known as money, rose to prominence. Eventually, precious metals became the preferred form of money. They were widely and highly valued, subject to precise measurement, easily molded into convenient shapes and sizes, and able to be stamped with the information of their proportions. Hence coins. Hence money.
Alas, the fact that everything has trade-offs offers no exception in the case of precious metal based money. The trouble wasn't with their market uses, but their potential for administrative abuse by coercive authorities. Military strength has generally been the prime factor in determining who ruled society. Armies however are maintained by the money to pay the troops. A longstanding and sure-fire means to get the requisite money was to plunder the currency.
Coercive rulers claim control over the money supply (which is usually not too difficult to do when you have the majority of guns - or swords or spears, etc.). Once in control of the coins, they debased the currency. The most popular practices for such debasement have been either clipping the edges of the coins or recasting them with reduced proportions of the precious metal that ostensibly gave them their original market value. In any case, the coercive rulers kept the "excess" precious metal, generated by their currency debasement, to spend on their armies.
The ludicrous result of this debasement was the rulers pushing into the market coins whose actual value, measured in amount of precious metal, was less than the value claimed by the official stamp of the mint on the coin. The value was determined not by the market, but by the fiat, or legally binding assertion, of the ruler. Calamities and shenanigans of every sort have resulted wherever such corruption of the monetary system has been practiced. No less an epic historical event as the fall of the Roman Empire is largely attributable to fiat currency.
This story points to the origins of monetary inflation. Understanding fiat currency means understanding inflation. That's a story we've told elsewhere, Understanding Fiat Currency and the Inflation Beast . And it's a story you have to understand to appreciate the circumstances of our fiat currency, today.
About the Author:
Fiat currency threatens to destroy your family's savings; follow the hottest scoops relevant to protecting yourself and your family at The Fiat Currency Review . Wallace Eddington's recent article on Bitcoin exchange trading funds has been taking the Internet by storm: don't miss it!
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