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Today, we're accustomed to thinking of
small greenish paper rectangles as the definition of money, and we think of
the US government as the only source of money. To honestly discuss sound
money, we need to realize where our current money customs came from.
At first, it was every man for himself. You ate or wore what you could pick or catch.
Barter was the first advance. If you had
some extra meat, and your neighbor had an extra fur, you might make a direct
exchange. If food, water, clothing, and simple tools are the only goods on
the market, barter is fine - you can always find someone who has what you
want and wants what you have.
But as soon as there's basic
manufacturing and prosperity begins increasing, barter becomes inadequate.
Say you're a hunter and you want a bed, but the only bedmaker
in town is a vegetarian. What do you do then? You would have to figure out
what the bedmaker wanted (maybe tofu), and then
find someone who had tofu and wanted meat. If you couldn't find that person,
you would have to find a fourth person (someone who wanted meat, and had the
hats that the tofu maker wanted), or try to convince the vegetarian bedmaker to take the meat and trade it for something
else.
Meat, however, spoils, and so the bedmaker would have to unload it pretty quickly. So,
unable to get your hands on anything the bedmaker
wants to consume, you trade your meat for some salt and approach the bedmaker.
"Look, I know you don't want salt,
but think of all the people who do. They use it to preserve their meat and
flavor their soup. And this stuff is nonperishable, so you can hold it as
long as you want. And if, when the tofu dealer comes through town, he doesn't
want salt, you can explain to him what I've explained to you - he can use it
to buy something he wants."
If you and the bedmaker
agree, you've just created money. Organically, more people in your community
begin taking salt for payment, even if they have no intention to use it,
because they know others will accept it.
But - and this is important - the value of salt money is not entirely
dependent on other people accepting it as payment. If, for some reason, folks
stopped taking salt as payment, you could use it as, well, salt.
Salt was a pretty good currency, especially before refrigeration, because it
was widely demanded, divisible down to the grain, very portable, easy to
weigh, and could easily be tested for counterfeit by tasting it. Romans used
salt for money.
But just because salt served as money
didn't mean there would be no other form of money in circulation. Tobacco
leaves might be widely accepted as payment. So might gold or silver.
The Greatest Invention Ever?
The point is that money arises naturally
in society, as a way of aiding in voluntary economic transactions. It was one
of the greatest inventions ever. Money not only made it easier for people to
buy what they wanted, it also made saving much more possible - you could
accumulate excess money to spend at a later point.
While saving is frowned upon by the
elites today, it's an essential element in economic progress. By making it
easier for people to save, money did two crucial things. First, it inspired
more industriousness: there was now incentive to work harder to earn more in
a day than you could spend in a day. Second, savings enabled ambitious
entrepreneurs to make big capital investments: labor-saving machines,
warehouses, transportation.
If the saver didn't have any big plans
in mind for his money, he could still make it productive by lending it out.
Finance was nearly impossible without money. Sure, you could give your
neighbor a pig this year in exchange for a pig and a chicken next year, but
there would be a lot more opportunity for squabbling ("this pig isn't
as healthy as the pig I gave you last year").
With a commodity
money, where there is little or no deviation in quality, and using universal,
objective measures, like weight, you can lend with the confidence that what
you get back will be of the same quality as what you loaned out.
Money also made specialization more
practical. If you were really good at one thing - manufacturing nails (to
borrow Adam Smith's famous example) - you could make a living just by making
nails. Without money, someone who spent his whole day making nails would have
to find (a) someone with excess food who wanted nails, (b) someone with
excess shelter who wanted nails, (c) someone with clothes to spare who also
wanted nails at that moment, and so on.
Once money is introduced, the nail
seller only needs to find (a) people with money who want
nails, and (b) different people with everything the nail seller needs
who want money. Facilitating specialization creates efficiencies, as folks
get to divide up labor according to skill and interest.
In countless ways, money improves
society.
Competing Currencies
In the past, different types of
commodity money competed. Salt had its advantages, but also disadvantages -
you had to keep it dry, it was easy to spill. In Rome, rising sea levels made
it much harder to get salt over the years.
Meanwhile, gold had a lot going for it.
It's fairly easy to store. Like salt, it's easy to divide, but also easy to
combine: you can make blocks, or coins of different weights or denominations,
which can be standardized. It doesn't rust. It doesn't tarnish or undergo
other unpleasant reactions with chemicals.
Like any money, gold has underlying
value. Mostly, we think of its decorative value - across nearly every
culture, gold is considered beautiful. Women love it, and pleasing women's
fancies is universally considered a good thing. It has industrial uses due to
its resistance to corrosion and how thin it can be hammered.
Gold is also rare enough to be valuable,
but plentiful enough that it can be widely circulated. Its supply grows, but
never very quickly.
No authority had to declare gold to be
money. It arose as a good medium of exchange, and in many cases it won out in
competition against other moneys. It didn't always win out to the exclusion
of other types of money, but it was probably the most successful money ever,
thanks not to some order from above, but thanks to gold's own attributes.
This is very important: money doesn't
come from government; it comes from civil society.
Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and
silver dealer selling reputable, well-known bullion coins and bars at
competitive prices. To learn more, please visit www.europacmetals.com or call (888) GOLD-160.
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