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What is Money?
By John | April 14, 2009
What is “money”? Is a piece of paper – a dollar bill – money? How about precious metals? Gold? Silver? Copper? Platinum? How about gems? Diamonds? If I write you a check, have I given you money? Is the balance in my bank account money?
Where does money come from? Who decides what money is?
“Money” is frequently described in terms of its functions – in terms of what it does:
1) Money is a store of value.
2) Money is a medium of exchange.
3) Money is a unit of measure of value.
OK. That’s what money does. But, what is money?
Money is a promise. Money is a promise from the issuer of that money to the recipient or bearer of that money. A promise of what?
1) Money is a promise to return to the recipient of money the same value that was supplied, no matter how much time has elapsed. If money is backed by something specific of value, such as gold, the promise is that the money will be worth the same quantity of gold when it is redeemed as when it was issued. If money is not backed by something of value – if it is a fiat currency – the same principle applies. The relative value the money had at the time it was issued should still be there when it is redeemed, regardless of how much time has elapsed in the meantime. Otherwise, money has failed to perform its “store of value’ function.
2) Money is a promise that its integrity and acceptability will be maintained over time. Whatever that promise is, whether it is convertibility to gold or other precious metals or just its ability to maintain a constant purchasing power over time, money should retain a consistent reputation so that it will be readily acceptable among the community in which it serves. Otherwise, it has failed to perform its “medium of exchange” function.
3) Money is a promise to maintain the perception of constant value. A building built in 1800 should measure the same dimensions today as the day it was built, as long as we use the same unit of measure, such as the foot. Similarly, a dollar tucked away inside a crevice of that building in 1800 should have the same purchasing power today as it did when it was hidden. If it does not, the promise has been broken, and the “unit of measurement” function has failed.
It matters little whether money is represented by precious metal, a paper certificate, a token, a cord of wood or an electronically stored contract. If it adequately performs the above itemized functions, and fulfills its promises, it is money. It doesn’t matter if that money was originated by a national government, an international body, a bank, a private organization, or an individual. If it looks like a duck, walks like a duck and quacks like a duck, its a duck. At least until it is no longer a duck.
If Thomas Jefferson were to return to Monticello today, recover a dollar bill he had stuffed in the wall in 1800, and try to spend that dollar, do you think he would find that dollar acceptable “money”?
The U.S. dollar was backed by precious metals – gold or silver – throughout most of our history. Throughout most of that history, the dollar maintained a constant value. At times, such as in wartime, the U.S. government found it convenient to manipulate the value of the dollar, but it subsequently came back to its previous value. Then, in 1934, President Roosevelt devalued the dollar relative to gold, and made it illegal for U.S. citizens to own gold. This was “necessary” to support government programs.
Then, in 1971, President Nixon took the U.S. entirely off the gold standard – meaning the dollar was no longer convertible to gold, even in international transactions. This was “necessary” to support government programs.
Since 1971, the dollar has been backed only by the “full faith and credit” of the U.S. Government. That means that if you own a U.S. dollar you may take it to the Government and redeem it for – a U.S. dollar.
The basis for U.S. money today is credit. Through the actions of the Federal Reserve Bank and other banks, money is created by lending to others that which they do not have. Banks are only required to keep a fraction of what they have loaned out in reserve. And, of course, the U.S. Treasury can just print money, and does, at any time.
Is there anything wrong with that? No, in theory, there is not. As stated above, it doesn’t really matter what we call money. It doesn’t have to be backed by anything. It can be fiat money. As long as it fulfills its promises to the community it serves, it is money. The problem, of course, is that there is no longer even the pretense of keeping these promises.
The Government today enjoys a crisis. It is “necessary” to create dollars to support its programs.
The dollar is becoming worthless. It is only a question of how fast. Dollar investments are at risk.
Duck!
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