What is Money?

Money and Value are concepts that man has struggled with throughout history.  The need for money arose from the challenges with barter of goods. Aristotle, in Book 5 of Nicomachean Ethics (page 1788 of the Oxford Translation of The Complete Works of Aristotle if you’d like to read the context) discussed the role of money here:

...it is not two doctors who associate for exchange, but a doctor and a farmer, or in general people who are different and unequal; but these must be equated...It is for this end that money has been introduced, and it becomes in a sense an intermediate; for it measures all things, and therefore the excess and the defect -- how many shoes are equal to a house [or for a given amount of food] must must therefore correspond to the ratio of builder to shoemaker.

Aristotle

Aristotle went on to talk about divisibilibity and portability and what-not, but modern economics tells us Money must serve as:

  1. A store of value
  2. A medium of exchange
  3. A unit of account
 
History is full of examples of different experiments in money – from large rocks with holes in them the size of boulders, to tobacco leaves – but in most societies gold and silver were the preferred forms of money.  Grant Williams has a wonderful breakdown as to why this had to be so.

Store of Value

When we say “money is a store of value,” we mean you should be able to work all summer, save up enough money to buy a used car, and store that money in a coffee can to be used later.  At some later date – even decades later – the contents of that coffee can should be able to buy at least as much as it could when you earned it.

For most of the history of the United States we used gold and silver as money, which had this property of maintaining purchasing power over time.  In fact, our paper currency used to be nothing but a more convenient way to carry gold, and was exchangeable for gold at any time.  These were equivalent in terms of purchasing power:

10-dollar-coin-front

Over the Twentieth Century the United States (and eventually all countries) moved away from money backed by gold and silver.  Today our money is backed by the “Full Faith and Credit” of the US Government, which has done a fine job of destroying the value of the dollar and increasing wealth disparity in our country.  The dollar today has lost 96% of its value since the Federal Reserve was created.  A dollar today will buy less than what a nickel bought a bit over a century ago. The creation of the Federal Reserve in 1913, a central bank, is what allowed this to happen. 

As a result, that $10 bill above will now buy $10 of goods (ignoring its collectability), but the $10 gold piece contains .4838 troy ounces of gold, which today is worth $847.  These used to be equal in value.  Since the beginning of the 20th Century gold has retained its purchasing power, while the value of paper currency has been wrecked.

Sound Money is a Check on Government Spending

Once upon a time the United States Government could not go to war without the consent of the people, because the cost of the war had to be paid in gold and silver.  Great effort was made to convince the Citizens of the United States to support the war efforts.  You may have seen these before:

You no longer see posters like that, because the government no longer needs the consent of the citizens to raise money.  Dollars are simply created by the Federal Reserve, and spent as desired.  In the end we all pay for this profligate spending in the form of inflation and the reduced purchasing power of our money, but the decline is imperceptible.

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose

Sound Money protects us against inflation and government overreach