We humans are notorious creatures of habit. In many ways, that's a good thing. Try to imagine all the brain power you'd have to expend if you really had to think about everything to be able to do it. Instead, once we've got it down pat, we don't actually ever think about how to drive an automobile, use our cell phone, or open a mayonnaise jar. The precise physics of these activities are embedded in our neural pathways as an automatic response.
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.
Ask the average person what is money and they'll likely refer to pieces of colored paper or metal coins that they have in their pockets or purses. Perhaps they'll talk about the purchasing power coded into computer systems accessed by rectangular plastic cards, with information carrying magnetic strips on the back.
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.
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.
Through history all manner of commodity has been used as money. Before the agricultural revolution, sea shells were commonly used, and after it a common currency was cattle. In different times and places, salt, peppercorns, grains, tobacco, and many other commodities, played this money role of exchange currency commodity.
These commodities were embraced as exchange commodities because they were widely sought out. If a carpenter built a table and wanted to trade it for chickens, he might have a hard time finding a chicken farmer who just so happened both to have chickens to sell and was in need of a table. However, given the much more common need of salt, not only for flavor, but as a preservative, it was much more likely to find a chicken farmer in need of 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.
Since these coercive rulers, with their surplus of weapons at their disposal, have little difficulty claiming control over the money supply, this is a safe and profitable option for them. Taking control of the coins enabled them to debase the money supply. Preferred historical practices for doing so have been clipping the edges of the coins or recasting them with reduced amounts of the precious metal. That is to say, they reduced the very material that the market valued. These coercive rulers kept the "excess" precious metal resulting from such debasement activities and magically created new coins to pay their armies.
The ludicrous result of this debasement was the rulers pushing into the market coins whose actual value, measured in amount of 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. Calamities and shenanigans of every sort have resulted wherever such corruption of the monetary system has been practiced. No less an epic historical event as the fall of the Roman Empire is largely attributable to fiat currency.
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.
Ask the average person what is money and they'll likely refer to pieces of colored paper or metal coins that they have in their pockets or purses. Perhaps they'll talk about the purchasing power coded into computer systems accessed by rectangular plastic cards, with information carrying magnetic strips on the back.
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.
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.
Through history all manner of commodity has been used as money. Before the agricultural revolution, sea shells were commonly used, and after it a common currency was cattle. In different times and places, salt, peppercorns, grains, tobacco, and many other commodities, played this money role of exchange currency commodity.
These commodities were embraced as exchange commodities because they were widely sought out. If a carpenter built a table and wanted to trade it for chickens, he might have a hard time finding a chicken farmer who just so happened both to have chickens to sell and was in need of a table. However, given the much more common need of salt, not only for flavor, but as a preservative, it was much more likely to find a chicken farmer in need of 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.
Since these coercive rulers, with their surplus of weapons at their disposal, have little difficulty claiming control over the money supply, this is a safe and profitable option for them. Taking control of the coins enabled them to debase the money supply. Preferred historical practices for doing so have been clipping the edges of the coins or recasting them with reduced amounts of the precious metal. That is to say, they reduced the very material that the market valued. These coercive rulers kept the "excess" precious metal resulting from such debasement activities and magically created new coins to pay their armies.
The ludicrous result of this debasement was the rulers pushing into the market coins whose actual value, measured in amount of 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. Calamities and shenanigans of every sort have resulted wherever such corruption of the monetary system has been practiced. No less an epic historical event as the fall of the Roman Empire is largely attributable to fiat currency.
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; follow the latest news pertinent to protecting yourself and your loved ones at The Fiat Currency Review . Wallace Eddington's recent piece on Bitcoin exchange trading funds has been an online hit: don't miss it!
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