The Ghost of Money
As civilized societies around the world evolved, market forces moved people to specialize in what they did best and trade the fruits of their labor. The most skillful shoemaker in town would exchange shoes for tools with the most skillful blacksmith. The most skillful seamstress would produce clothing for the shoemaker and blacksmith in exchange for shoes and tools respectively. Specialization led to more efficient production, and more efficient production led to a more prosperous society. However, this direct exchange of goods and services was cumbersome. What happened when the blacksmith had all of the shoes he wanted when the shoemaker was in need of tools? The shoemaker might have had to involve a third party, who produced something the blacksmith wanted, and exchange shoes for the good produced by the third party, then exchange that good for tools. This was an inefficient process. As markets continued to evolve, exchange became more efficient with the utilization of money.
The earliest forms of money were certainly not rectangular pieces of paper. Merchants of the time would have thought it ridiculous to exchange consumer goods for paper that was good for little more than kindling. Commodities, like salt and cattle, were utilized. One reason is that these commodities had real, or intrinsic, value. Another reason was uniformity. For the most part, one pinch of salt was as good as another. Utilizing this type of commodity as money was more convenient than the direct exchange of goods and services, but the perishable nature of these commodities was an issue.
“Paper is poverty. It is only the ghost of money, and not money itself.”
Thousands of years after the first gold coin was struck, gold remained the dominant form of money. In 1964, people in the United States traded Federal Reserve notes, otherwise known as U.S. dollars. These notes were not money. Each one of these notes was a promise to pay money, in the form of gold, upon request. Dimes, quarters and half-dollars were made of 90% silver. These coins were not Federal Reserve notes. These coins were stand-alone money. In 1971, under President Richard Nixon, it was declared that the United States government would no longer make good on the promise to pay gold upon request for U.S dollars. The U.S. dollar would be a fiat currency. The word fiat is derived from Latin and means something to the effect of, “So it shall be.” In other words, the U.S. dollar would no longer have intrinsic value. It would have value only because the government had declared it to have value.
Why would a government want to take the intrinsic value from its currency? There is plenty of pseudoscience surrounding the topic, but the truth is that politicians want the power to levy hidden taxes and to monetize debt. To monetize debt is to increase the money supply, also known as inflation, so that debts are repaid with a devalued currency. The government makes good on its debts in nominal terms, but the currency creditors are repaid is worth less than the currency the government borrowed. Each increase in the money supply serves as a hidden tax, as it allows for an increase in the spending power of government due to a decrease in the purchasing power held by the people. The U.S. dollar serves as the reserve currency of the world. So, in the case of the U.S. dollar, fiat currency allows for the exportation of inflation, but that is a topic for another article. There is no honorable reason for utilizing fiat currency. Fiat currency is dishonest and unstable.
What is money? The basic definition of money is a medium of exchange. Gold had been established as the best medium of exchange throughout history. The value of gold is backed by thousands of years of tradition, history, culture and even religion. The Quran says that those who believe and work righteousness will be adorned with bracelets of gold. The Ark of the Covenant, considered sacred by both Jews and Christians, was overlaid with gold, both inside and out. Kings have adorned themselves with gold. Many have died in an effort to keep it or obtain it. It has been said that gold is just a shiny metal, and it holds no special value in modern society. Would you accompany a marriage proposal with a ring made of stainless steel? The libertarian view is that the best exchange is an honest exchange. The modern use of fiat currency is unfortunate, as it serves to corrupt the honesty of exchange through the constant manipulation of the money supply. Gold served as sound money for time immemorial, and when sound money died we were left only with the ghost of money.