On Money: Part 1

Fort Knox
One of several vaults at Ft Knox. There’s more gold at the depository in New York, though.

(Will mention Hegel here once then stop – so don’t give up!) Hegel proposes that gaining worthy philosophical knowledge is in some sense a top down process: only by understanding how the Spirit has unfolded through History can any deep sense be made out of the more fleeting and mundane – less ‘concrete’ – features of reality.  Whatever Hegel may have meant to do, when applied by less exalted intellects this approach has been the curse of modern thinking.

Thus, we are afflicted with any number of ‘leaders’ who hold passionate positions about how taxes should be levied and the moneys thus collected spent who could not tell you what, exactly, money *is* to save their lives. This combination of passion and ignorance springs from two related causes: outrage over injustices that cry for vengeance, and belief in an overarching theory that obviates the need for any actual information or understanding.  Examples abound: any who ask how the Affordable Care Act is supposed to work out financially from a simple mathematical basis are not challenged on the basis of the math or the logic of money, but on the basis of holding Wrong Positions. Same goes for questioning attempts to raise the minimum wage – if you point out the logical repercussions of such an increase based, again, on math and the logic of money, you’re not being practical and realistic, you just hate poor people.  And on and sadly on.

So here is a simple, basic explanation of money and value, in several parts. These basic facts remain true regardless of whether you are Midas or St. Francis himself. All the good intentions in the world will not change them. Ignoring them leads to inevitable undesirable consequences.  There is no overarching theory that magically changes the basic nature of money and value.

  1. Money

There is no mystical concept more widely accepted and simultaneously misunderstood.  I’ve never met or even heard of a person from any civilization who does not accept without question that he should be able to present money to a seller and walk away with the thing sold. Sure, sometimes you might barter, but rather than being seen as the more primitive and fundamental transaction, it is viewed as something you do when money is unavailable or otherwise inconvenient. It rarely occurs to anyone, it seems, that money is a sophisticated surrogate for barter, but the basic idea stays the same: You have something I want, I have something you want, we trade.

Thus, if asked, the educated will tell you that money is the medium of exchange. I can carry around a pocketful of gold coins and exchange them for most anything I want, because everybody recognizes the value of the gold. If cows or barrels of wine or amphora of olive oil were likewise easy to carry about, they could be the medium – the concept is the same. Gold simply has more ‘bang for the buck’ as it were, as it has more ‘value’ (we’ll get to that later) per unit, however measured, and doesn’t die or spoil.

But nobody carries around gold coins anymore. Instead, we carry around paper currency or, increasingly, credit and debit cards. How does that work?

In the olden days, places where lots of large scale trade took place – Venice, or London, or Antwerp, for example – invented modern banking. The idea was that since it was not practical or safe to carry around the amount of gold you’d need to buy whole shiploads of goods, certain trustworthy people would hold the gold in a safe place and write you a note saying: On my honor, John Doe here has a nice pile of gold held by me under guard at my place. If he signs this note over to you, I will deliver the gold upon presentation of the signed note.

You can see how a whole bunch of things had to happen for this to work: notes had to be hard to forge, for large amounts of money, the bank would need to ‘clear’ the transaction with the depositor, and that the person claiming the gold would probably want just another note, because he doesn’t want to risk carrying around all that gold either.

In short order, standardized bank notes were created, which had stated values guaranteed by the bank. In theory, I could present one to the bank and get my gold; in practice, it was just much more convenient to trade the notes.

As commerce got bigger and more sophisticated, people wondered if individual banks were the way to go. For one thing, sometimes a bank failed, and the notes became worthless. After all, the notes were only worth something because everybody agreed that, if push came to shove, you could go get your gold from the bank. Remove that piece, and the notes were not worth the paper they were written on. For another, having lots of banks each issue their own notes could be confusing. The users of a bank note had to be confident it was not a counterfeit, which is harder to be confident of when there are lots of different banks issuing lots of distinct notes

So national banks tended to be established, which supplied one consistent family of easy to identify and hard-to-counterfeit bank notes, and put the ‘full faith and credit’ of the nation behind the notes. What this means is that it’s not Giovanni di Bicci de’ Medici who is on the hook to deliver the gold to you, it’s the US government or whatever government’s bank issued the bank notes. People feel pretty good about this, up until some Wiemar Republic  or other is put in charge. Every nation in the world does something like this today.

One last thing happened: After years of holding a small mountain of gold that almost nobody ever wanted, the US government and other governments as well decided to see what would happen if they did away with this whole ‘hand over the gold on demand’ nature of the bank note concept. Here in the US, this happened in 1933 when FDR made private ownership of gold bullion and coins illegal. He didn’t say that our money was no longer backed by gold, just that you were not legally permitted to have the gold. In 1971, they got around to mentioning that, by the way, we’re not honoring any of the old gold certificates (federal bank notes backed by gold), a bit of a truism since private citizens could hold the gold anyway. But now it was official, so we could do away with the pretext: so now private citizens can own gold again. Clear?

Money is the medium of exchange that we’ve all agreed (no, really – any time you buy or sell something, you’re agreeing) to use for all our buying and selling, even though it lacks any intrinsic value.  When William Gibson wrote about the ‘consensual hallucination’ of the Matrix, perhaps he was thinking of not so cold, not at all hard cash.

But don’t despair! It actually works! Well, at least until the next Wiemar Republic.The tricky part is: how does money represent value? That’s for part 2.

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Author: Joseph Moore

Enough with the smarty-pants Dante quote. Just some opinionated blogger dude.

2 thoughts on “On Money: Part 1”

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