Humans are creatures of habit. And there's a lot good about that. It spares us the need of expending a whole bunch of brain power on life's banal endeavors. Once you've got the hang of it, you don't actually think about how to make a phone call, ride a bicycle or open a pickle jar. These activities are ingrained into your neural synapses as an automatic program.
The downside of such habit, though (everything has its trade-offs), is precisely this unthinking acceptance of the given as natural. Most people's attitude toward money illustrates the potential pitfalls.
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.
And, in one sense, they'd be right. The etymology of the English word money refers back to the minting of coins. There is an important distinction lost in this, though. Those ancient coins had a value determined on 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.
Historically, in fact, all kinds of things have been used as money, in this deeper sense: from sea shells to cattle. At various times, in different places, the role has been played by salt, peppercorns, grains, tobacco and copper: a list which only scratches the surface.
These commodities were used as exchange commodities due to their wide spread demand. If a carpenter constructed a table and wanted to exchange it for chickens, he could have difficulty finding a chicken farmer who fortuitously both had chickens to sell and wanted a new table. However, due to the widespread need of salt, not only for flavor, but as a preservative, there was greater likelihood of finding a chicken farmer needing salt.
Likewise, given this popularity of salt, the likelihood of finding someone holding some salt that was in need of a table was also pretty high. Consequently, it made good sense for the carpenter to turn his table into salt, likely increasing the number of chicken farmers with whom he could exchange.
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.
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.
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.
The result was coins whose actual value in 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. All kinds of calamity and shenanigans have ensued. Indeed, nothing less than the fall of the Roman Empire can largely be attributed to such fiat currency abuses.
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.
The downside of such habit, though (everything has its trade-offs), is precisely this unthinking acceptance of the given as natural. Most people's attitude toward money illustrates the potential pitfalls.
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.
And, in one sense, they'd be right. The etymology of the English word money refers back to the minting of coins. There is an important distinction lost in this, though. Those ancient coins had a value determined on 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.
Historically, in fact, all kinds of things have been used as money, in this deeper sense: from sea shells to cattle. At various times, in different places, the role has been played by salt, peppercorns, grains, tobacco and copper: a list which only scratches the surface.
These commodities were used as exchange commodities due to their wide spread demand. If a carpenter constructed a table and wanted to exchange it for chickens, he could have difficulty finding a chicken farmer who fortuitously both had chickens to sell and wanted a new table. However, due to the widespread need of salt, not only for flavor, but as a preservative, there was greater likelihood of finding a chicken farmer needing salt.
Likewise, given this popularity of salt, the likelihood of finding someone holding some salt that was in need of a table was also pretty high. Consequently, it made good sense for the carpenter to turn his table into salt, likely increasing the number of chicken farmers with whom he could exchange.
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.
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.
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.
The result was coins whose actual value in 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. All kinds of calamity and shenanigans have ensued. Indeed, nothing less than the fall of the Roman Empire can largely be attributed to such fiat currency abuses.
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 hottest scoops relevant to protecting yourself and your loved ones at The Fiat Currency Review . Wallace Eddington's recent article on Bitcoin exchange trading funds has been taking the Internet by storm: don't miss it!