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.
They were made from precious metals such as silver and gold. How much flour or lumber or cinnamon could be bought with such coins was determined by the market valuing of the quantity of the precious metal in the coin. In this way, at a deeper level, money had always been merely another exchange commodity - simply one that had a certain 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, 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.
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 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.
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.
They were made from precious metals such as silver and gold. How much flour or lumber or cinnamon could be bought with such coins was determined by the market valuing of the quantity of the precious metal in the coin. In this way, at a deeper level, money had always been merely another exchange commodity - simply one that had a certain 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, 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.
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 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.
About the Author:
Don't let fiat currency 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 article on Bitcoin exchange trading funds has been taking the Internet by storm: don't miss it!
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