Humans are creatures of habit. And there's a lot good about that. It spares us the need of expending a whole bunch of brain power on life's banal endeavors. Once you've got the hang of it, you don't actually think about how to make a phone call, ride a bicycle or open a pickle jar. These activities are ingrained into your neural synapses as an automatic program.
The downside of such habit, though (everything has its trade-offs), is precisely this unthinking acceptance of the given as natural. Most people's attitude toward money illustrates the potential pitfalls.
If asked to define money, the majority of folks likely will point to rectangular sheets of colored paper or metal coins. A slightly more sophisticated approach could lead to citing the purchasing power encoded in the magnetic strips on the back of the plastic cards they carry in their wallets. Most people, though, when pushed, would regard the latter as accounting devices for the former, i.e. real money.
And, in one sense, they'd be right. The etymology of the English word money refers back to the minting of coins. There is an important distinction lost in this, though. Those ancient coins had a value determined on the market.
Our ancestors' coins were composed from precious metals. The most common used were silver and gold. The amount, then, of silk or barley or nutmeg that any given coin could buy was based on the value of the precious metal that composed it. And, this was a function of the price of the precious metal derived from the supply-and-demand market process. In this way, money was just another exchangeable commodity, valued for its benefits. Money, however, was money (a currency of exchange) as a result of a specific benefit.
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 used as exchange commodities due to their wide spread demand. If a carpenter constructed a table and wanted to exchange it for chickens, he could have difficulty finding a chicken farmer who fortuitously both had chickens to sell and wanted a new table. However, due to the widespread need of salt, not only for flavor, but as a preservative, there was greater likelihood of finding a chicken farmer needing salt.
Additionally, this same high preference for salt also increased the prospect of locating someone holding some salt that needed a new table. As a result, the carpenter increased his potential trading partners, and thus the ease and likelihood of meeting his needs, by converting his table into salt.
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.
Despite all these virtues, though, not all has been well in the world of precious metal money. The fact that everything has its trade-offs has provided no exception in its case. The downside hasn't been in market utility, but rather in the convenience they provide to those who would coercively exploit market processes. At the risk of stating the obvious, those who have ruled human societies since the agricultural revolution have generally done so at the end of a gun barrel (or sword, or spear, etc.) The armies required for such coercive rule are maintained by the money to pay the troops who do the weapon pointing. History reveals that a favorite method for procuring the requisite funds has been plundering the currency.
Such rulers claim control over the money supply (they, as a general rule, have the majority of guns - or swords or spears, etc.). Once in control of the coins, they commonly debase the currency. Sometimes this would be by clipping the edges or sometimes by recasting the coins with a smaller proportion of the alleged precious metal. In either case, they kept the "excess" precious metal 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.
To understand these historical events, though, requires understanding the process and impact of inflation. That's a discussion I've undertake elsewhere. I invite you to check it out: Understanding Fiat Currency and the Inflation Beast . And it's one you have to understand to appreciate the circumstances of our fiat currency, today.
The downside of such habit, though (everything has its trade-offs), is precisely this unthinking acceptance of the given as natural. Most people's attitude toward money illustrates the potential pitfalls.
If asked to define money, the majority of folks likely will point to rectangular sheets of colored paper or metal coins. A slightly more sophisticated approach could lead to citing the purchasing power encoded in the magnetic strips on the back of the plastic cards they carry in their wallets. Most people, though, when pushed, would regard the latter as accounting devices for the former, i.e. real money.
And, in one sense, they'd be right. The etymology of the English word money refers back to the minting of coins. There is an important distinction lost in this, though. Those ancient coins had a value determined on the market.
Our ancestors' coins were composed from precious metals. The most common used were silver and gold. The amount, then, of silk or barley or nutmeg that any given coin could buy was based on the value of the precious metal that composed it. And, this was a function of the price of the precious metal derived from the supply-and-demand market process. In this way, money was just another exchangeable commodity, valued for its benefits. Money, however, was money (a currency of exchange) as a result of a specific benefit.
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 used as exchange commodities due to their wide spread demand. If a carpenter constructed a table and wanted to exchange it for chickens, he could have difficulty finding a chicken farmer who fortuitously both had chickens to sell and wanted a new table. However, due to the widespread need of salt, not only for flavor, but as a preservative, there was greater likelihood of finding a chicken farmer needing salt.
Additionally, this same high preference for salt also increased the prospect of locating someone holding some salt that needed a new table. As a result, the carpenter increased his potential trading partners, and thus the ease and likelihood of meeting his needs, by converting his table into salt.
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.
Despite all these virtues, though, not all has been well in the world of precious metal money. The fact that everything has its trade-offs has provided no exception in its case. The downside hasn't been in market utility, but rather in the convenience they provide to those who would coercively exploit market processes. At the risk of stating the obvious, those who have ruled human societies since the agricultural revolution have generally done so at the end of a gun barrel (or sword, or spear, etc.) The armies required for such coercive rule are maintained by the money to pay the troops who do the weapon pointing. History reveals that a favorite method for procuring the requisite funds has been plundering the currency.
Such rulers claim control over the money supply (they, as a general rule, have the majority of guns - or swords or spears, etc.). Once in control of the coins, they commonly debase the currency. Sometimes this would be by clipping the edges or sometimes by recasting the coins with a smaller proportion of the alleged precious metal. In either case, they kept the "excess" precious metal 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.
To understand these historical events, though, requires understanding the process and impact of inflation. That's a discussion I've undertake elsewhere. I invite you to check it out: Understanding Fiat Currency and the Inflation Beast . And it's one 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; keep up on the hottest scoops pertinent to protecting yourself and your loved ones at The Fiat Currency Review . Wallace Eddington's recent piece on Bitcoin exchange trading funds has been taking the Internet by storm: don't miss it!
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