PREFERRED COMMODITY-MONEY
Over time and throughout history, many commodities have been used as money. This is to be expected since in different circumstances different commodities may be more convenient to be used as money than others. If salt has the necessary properties to become money, it probably will. However, if there is a surplus of salt, maybe tea will become a commodity (as a matter of fact, it did). There really is no difference between commodities that may serve as money other than marketability, which is to say, desirability.
It is the human desire for a specific commodity that makes a commodity a winner or a looser of the real money race (commodity-money). Over very long periods of time, there have been one or two commodities that have shown outstanding desirability levels: gold and silver.
Again, we can’t know exactly why gold and silver were almost universally preferred as money, because we can’t measure their “desirability”, at least not directly. All we can do is speculate that these two metals were chosen over everything else because they were better at serving as money. Some of the reasons probably were:
- They were desired for their beauty and malleability and being rust-proof
- They had a limited supply that is “just right”, not too much (to become too common) and not too little (to become too scarce).
- They were easily divided into smaller pieces and not lose their value.
- They were easy to purify and to homogenize; they did not wear out easily.
- Their life was endless, they were not perishables.
These were some of their properties that made them winners.
MODERN CURRENCIES
Precious-metals based money (or currencies) were originally traded by weigh. This only made sense since it was possible to purify the metals to a high degree and it was also possible to test their purity (for example by the use of a touchstone). In other words, gold and silver were difficult to counterfeit. They also had a fairly high density, which meant that although small, they were fairly heavy. This meant that a small amount could have a high value because it had a high weight. This made them highly portable.
Gold and silver were so popular that at some point in history people started to re-package them in small, portable quantities. Those small packages were called coins. Coins were an instant success for two reasons:
- They were made by reputable companies or royalty. They were all made of a known weight, with a known purity and had their sides stamped for easy recognition and difficult counterfeit. They were trustworthy.
- They were easily divisible with accuracy. Some coins even had markings on them which made them easy to split in smaller parts.
Coins were so successful that governments went into the “coinage” game in a big way. They did so to maintain a coinage monopoly and so charge higher prices to producers for transforming their raw gold and silver into coins.
So successful were governments in doing this, that many of our modern currencies still carry their original name derived from gold and silver! A classic example is the UK “Pound Sterling” which originally had one pound weight of sterling silver in it.
The second reason why governments went into the coinage act was to debase the money. Governments have always run out of money since the beginning of time. The term “debasing” simply means removing base metals (gold or silver) from the coin. This can be achieved in two ways. One way was to dilute coins with lower value metals, for example copper. Another way was to manufacture thinner or smaller coins. Many monarchs had foundries specializing in debasing. They received a certain amount of high grade coins, and produced a larger amount of coins containing a smaller weight of gold or silver. However, by then, people were forced to accept those counterfeited coins at “face value” under threat of death.
The term “face value” also comes from this practice. It simply means to be forced to accept what the stamp on the coins says (usually a face of a sovereign) as opposed to the weight of precious metal the coin contains.
Governments dating back to the Roman Empire and even before were the first massive money counterfeiters. This continues to this day, although much more sophisticated methods are used. We will talk about them in our next lesson dealing with fiat money.
THE REGRESSION THEOREM
Ludwig won Mises developed what he called his regression theorem 1912. This theorem is unique among economic theories. It is important to understand that what we have explained in simple words up to this point, has a very complex, solid and developed theory behind it.
Mises asked himself why would people accept money? The answer was simple, because everybody knew that tomorrow other people will accept that very same money. We could have asked the same question yesterday and the answer would be that people would know that other people would have accepted that very same money today. We can go back to the day before yesterday and the day before that and so forth. Unfortunately, this answer is not satisfactory because we could go back in time, and for every day we could get the very same answer. However, at some point in time, we would reach the day in the past when money was not considered money but simply a commodity. How did this transition happen? The answer was that this transition happened because people already valued the commodity for its other uses before it became money. In that very first moment when the first person began to use this commodity as money, this commodity acquired one new value: as money. However, it continued to maintain its old value as commodity. It became a dual-valued commodity.
And so every commodity-based money needs to be a commodity first and money second. This is the reason why real money cannot be legislated into existence because it needs to have a commodity value before it can have a money value. Such a commodity value can only be created by the free market, not by any government imposition.
A REAL ECONOMY
Debasing money is counterfeiting plain and simple. People receive less value in return for their goods and services. It distorts the markets and cheats its members. Counterfeiting is theft.
It is precisely because governments are so adept to debase money that economies suffer. Governments are stealing value from us, every one of us, every day. Therefore, if we want to have a real economy and not a make-believe one, there is only one solution: real money. Unfortunately, real money can only be had if governments do not interfere with it. This is a historical impossibility. Every single government in recorded human history, without exception, has debased currency in one way or another. There really is no other solution. Governments must go.
CONCLUSION
This is our little history of money, although it is only half of it. We will review the other half in the next lesson. Meanwhile you can ponder these facts and review under a new light what your government is doing in your name. You did vote right? So the next time you have a chance to vote or to discuss this topic with your friends, you will have a big decision to make. Make it or not. As always, your choice.
Note: please see the Glossary if you are unfamiliar with certain words.
