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.
An important lesson of life, though, is that all things entail trade-offs. There ought to be no surprise then that this facility for habit turns out to also present drawbacks. Habitual thinking predisposes most people to regard the given of life as natural or even inevitable. Attitudes toward money are illustrative.
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 it's not that those answers are exactly wrong. Etymologically, the English word "money" is traced back to the minting of coins. To let such an association pass at that would be though a significant categorical error. After all, the coins of our ancestors - unlike ours, and our paper currency, today - had a value that was derived from market supply-and-demand processes.
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.
Historically, in fact, all kinds of things have been used as money, in this deeper sense: from sea shells to cattle. At various times, in different places, the role has been played by salt, peppercorns, grains, tobacco and copper: a list which only scratches the surface.
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.
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.
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.
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 result was coins whose actual value in 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. All kinds of calamity and shenanigans have ensued. Indeed, nothing less than the fall of the Roman Empire can largely be attributed to such fiat currency abuses.
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.
An important lesson of life, though, is that all things entail trade-offs. There ought to be no surprise then that this facility for habit turns out to also present drawbacks. Habitual thinking predisposes most people to regard the given of life as natural or even inevitable. Attitudes toward money are illustrative.
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 it's not that those answers are exactly wrong. Etymologically, the English word "money" is traced back to the minting of coins. To let such an association pass at that would be though a significant categorical error. After all, the coins of our ancestors - unlike ours, and our paper currency, today - had a value that was derived from market supply-and-demand processes.
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.
Historically, in fact, all kinds of things have been used as money, in this deeper sense: from sea shells to cattle. At various times, in different places, the role has been played by salt, peppercorns, grains, tobacco and copper: a list which only scratches the surface.
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.
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.
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.
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 result was coins whose actual value in 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. All kinds of calamity and shenanigans have ensued. Indeed, nothing less than the fall of the Roman Empire can largely be attributed to such fiat currency abuses.
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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Fiat currency threatens to destroy your savings and wealth; follow the hottest scoops relevant 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!