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.
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.
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.
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.
History provides all kinds of examples of commodities employed as money. We have archaeological evidence that prior to the agricultural revolution sea shells were commonly used. Afterward, cattle was the most common currency for a very long time. In various periods and locations, salt, peppercorns, different grains, and tobacco, have served as money: a currency of exchange 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, 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.
Better enabling exchange between trader partners with initially incompatible values was the special benefit of exchange commodities as currency. (All the tradable goods in the above story, tables, chickens and salt, of course received their valuation from the market's supply-and-demand process.) Whenever they appeared, though, precious metals have emerged as the money of choice. Both widely and highly valued, small and highly valued amounts were easily transported. Further beneficial features were that they were subject to precise measurement, easily molded into convenient shapes and sizes, and could be stamped with a description of their content: e.g. one ounce of gold.
Again, though, everything has its trade-offs. While this metal money had benefits, it also had drawbacks. Those who have ruled societies have usually gained their power through military strength. An army though requires wealth and one way of accruing that wealth has been to plunder the money supply.
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.
As if by magic, the number of coins multiplied, but only as a function of the rulers imposing on the market coins whose actual value, measured in amount of precious metal, was less (sometimes vastly less) than what was claimed by the official stamp of the ruler's mint placed on the coins. Value for such coins was determined not by the market, but by fiat, or legally binding assertion, enforceable through violence, of the ruler. The result of such "magic" everywhere leads to calamities and shenanigans. The fall of the Roman Empire itself can be traced back to the impact of such fiat currency.
Herein lays the explanation for monetary inflation. To appreciate the relevance of fiat currency requires appreciating the significance of inflation. To better understand this development, see our Understanding Fiat Currency and the Inflation Beast article. You have to understand those developments 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.
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.
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.
History provides all kinds of examples of commodities employed as money. We have archaeological evidence that prior to the agricultural revolution sea shells were commonly used. Afterward, cattle was the most common currency for a very long time. In various periods and locations, salt, peppercorns, different grains, and tobacco, have served as money: a currency of exchange 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, 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.
Better enabling exchange between trader partners with initially incompatible values was the special benefit of exchange commodities as currency. (All the tradable goods in the above story, tables, chickens and salt, of course received their valuation from the market's supply-and-demand process.) Whenever they appeared, though, precious metals have emerged as the money of choice. Both widely and highly valued, small and highly valued amounts were easily transported. Further beneficial features were that they were subject to precise measurement, easily molded into convenient shapes and sizes, and could be stamped with a description of their content: e.g. one ounce of gold.
Again, though, everything has its trade-offs. While this metal money had benefits, it also had drawbacks. Those who have ruled societies have usually gained their power through military strength. An army though requires wealth and one way of accruing that wealth has been to plunder the money supply.
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.
As if by magic, the number of coins multiplied, but only as a function of the rulers imposing on the market coins whose actual value, measured in amount of precious metal, was less (sometimes vastly less) than what was claimed by the official stamp of the ruler's mint placed on the coins. Value for such coins was determined not by the market, but by fiat, or legally binding assertion, enforceable through violence, of the ruler. The result of such "magic" everywhere leads to calamities and shenanigans. The fall of the Roman Empire itself can be traced back to the impact of such fiat currency.
Herein lays the explanation for monetary inflation. To appreciate the relevance of fiat currency requires appreciating the significance of inflation. To better understand this development, see our Understanding Fiat Currency and the Inflation Beast article. You have to understand those developments to appreciate the circumstances of our fiat currency, today.
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Don't let fiat currency destroy your family's savings; follow the latest news pertinent to protecting yourself and your family at The Fiat Currency Review . Wallace Eddington's recent piece on Bitcoin exchange trading funds has been an online hit: don't miss it!
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