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.
If queried for an explanation of money, most people would refer to pieces of colored paper or metal coins. Some might be a little more sophisticated and mention the purchasing power encoded in the magnetic strips on the back of rectangular plastic cards they have in their wallets. Though, the latter is basically just an accounting device for the former.
Such answers wouldn’t be entirely wrong. The roots of the English word “money” harkens back to the minting of coins. Leaving the matter at that, though, obscures a rather vital distinction. Those original coins of our ancestors – unlike ours, and our paper currency, today – had a value that was determined by 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.
History provides all kinds of examples of commodities employed as money. We have archaeological evidence that prior to the agricultural revolution sea shells were commonly used. Afterward, cattle was the most common currency for a very long time. In various periods and locations, salt, peppercorns, different grains, and tobacco, have served as money: a currency of exchange commodity.
The high levels of demand for such commodities were partially a result of precisely their high level of demand. A carpenter who fashioned a new table and desired to exchange it for chickens had no guarantee of finding easily (or at all) a chicken farmer with precisely the reverse preferences: chickens to spare and need of a table. Salt though provided a solution. Since it was so much more widely demanded, not merely due to its flavor, but also for its preservative benefits, the prospects of locating a chicken farmer needing salt was far greater.
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.
Facilitating exchange between traders with incompatible preferences was the virtue of exchange commodities as currency. (Take note, though, all the items involved – tables, chickens and salt – were valued by market supply-and-demand.) Over time, pretty much everywhere, once they were available, precious metals became the money of choice. They were both widely and highly valued, which allowed for small amounts, with high value, to be easily transported. Additionally, they were subject to precise measurement, easily molded into convenient shapes and sizes, and able to be stamped with the information of their proportions.
Alas, the fact that everything has trade-offs offers no exception in the case of precious metal based money. The trouble wasn’t with their market uses, but their potential for administrative abuse by coercive authorities. Military strength has generally been the prime factor in determining who ruled society. Armies however are maintained by the money to pay the troops. A longstanding and sure-fire means to get the requisite money was to plunder the currency.
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.
As if by magic, the number of coins multiplied, but only as a function of the rulers imposing on the market coins whose actual value, measured in amount of precious metal, was less (sometimes vastly less) than what was claimed by the official stamp of the ruler’s mint placed on the coins. Value for such coins was determined not by the market, but by fiat, or legally binding assertion, enforceable through violence, of the ruler. The result of such “magic” everywhere leads to calamities and shenanigans. The fall of the Roman Empire itself can be traced back to the impact of such fiat currency.
To understand these historical events, though, requires understanding the process and impact of inflation. That’s a discussion I’ve undertake elsewhere. I invite you to check it out: Understanding Fiat Currency and the Inflation Beast . And it’s one you have to understand to appreciate the circumstances of our fiat currency, today.
Fiat currency threatens to destroy your family’s savings; follow the hottest scoops pertinent to protecting yourself and your family at The Fiat Currency Review . Wallace Eddington’s recent piece on Bitcoin exchange trading funds has been an online hit: don’t miss it!