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What is Money?

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Published : June 12th, 2012
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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 or call (888) GOLD-160.

For the latest gold market news and analysis, sign up for Peter Schiff's Gold Report, a monthly newsletter featuring original contributions from Peter Schiff, Casey Research, and other leading experts in the gold market. Click here to learn more.



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Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for nineteen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services. Mr. Schiff holds NASD Series 4,7,24,27,53,55, & 63 licenses.
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Yay! Hooray for money. It's perfect. Money only leads to good.

Schiff never questions his free market capitalism dogma. Every system has problems, capitalism included. Every human construct has failings, including the 'free market.' It is not perfect.
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M, something quite close to perfection can in fact be achieved. We have never even been close. The key imperfection in our "free" markets is that they aren't and never have been free. Not even close.

M, you might be unfamiliar with the more recent sciences of complexity and chaos theory, and what they have to say about reality, money, economics, etc. M, it is simply true that man will never "invent" an economic system superior to capitalism operating in a sound-money regime, and we should all just get over it.

We all must decide on which side of Bastiat's dichotomy we lie, by deciding whether we agree or disagree with his statement "All legitimate interests are in harmony." If you agree, you must seek social solutions in freedom and non-interference. If you disagree, you must employ coercion as your tool of trade. If you agree, you are good. If you disagree, you are evil. It is quite simple, really. We have just never yet put the rules into play.

After the myriad failed social and economic experiments to which elites have subjected the people of the world, I think it is time we tried freedom. Please read "I, Pencil", written way back in 1958 by Leonard Read.
It can be found at:,%20Pencil

The "free market" has failings because it isn't free.
Rate :   7  2Rating :   5
Excellent comment and a rousing " hear,hear" to the last sentence.
It's an article of faith that the 'free market' is the best system possible. It's completely unprovable. You should read 23 things about capitalism you never heard (or some title like that). Anything called a 'free market' is an illusion. It's merely a market where those who receive the favors do not perceive the rules.
How could you have a global system of exchange without some controls about flow and creation of currency and thousands of other things? It has to have some order. But look at the word - controls. How can you have a free market with ANY controls. Even a single control limits the 'free' in free markets. At what level does it go from a free to a not-free market?

Free market ideologues have a very dogmatic approach. To be honest, I agree that gov't interference is the worst answer.

Now - why don't we have a free market in gold, for example? The Comex offers a place to buy and sell futures, etc. You can buy in the local shop. Those with the most money can set the price - oh, wait - that's 'manipulation.' Not a free market. We have to restrict them from doing that just because they have the most money. We have to set 'position limits' to ensure a 'free market.' But then the big powers aren't free.

I don't think most libertarians can see the contradiction. But it's easy to spot.
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I feel compelled to point out one more thing. Not only is money not the product of government, rather the product of civil society as you conclude, Peter, I am quite certain that sound money (ie species-backed currency that is a true and stable measure of value) is essential for civil society to develop and to persist.

The decline of civility and society always follows the corruption of the money-system. Note we had two world wars, one cold one, and endless skirmishes since Jekyll Island.

The money-system is always one of the first areas of society attacked when a coercive authority seeks to co-opt society for some purpose.

History is riddled with these examples. Is it that we do not learn, or that, as Bertrand Russell would say, we are intentionally educated from ignorance into stupidity? I submit the latter. Keep teaching truth, Peter.
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How interesting to see this article arrive in my email box, as I had just published some thoughts on exactly the same topic at Gold is money.

Peter, while you point out correctly barter's problem of simultaneous need, there is something just as important, maybe even moreso in today's complex economies, namely the triangular rate of growth of the number of exchange rates in a barter-exchange system. When we have a market of N goods, we only need N "prices" if we have money. Without money, we need N*(N-1)/2 different exchange rates.

In "Debt, the First 5000 Years", David Graeber points out that the canonical barter economy we all use to explain "what existed before money" never in fact existed. We developed debt as a way to think about money before we bartered. Currency, on the other hand, was indeed our invention, but came after debt and bookkeeping.

On my blog, I argue that we did not "invent" money any more than Newton invented "position" or "velocity". The concepts existed in our brains long before Newton gave us a language to understand it all. We did not suddenly develop an ability to throw and catch objects once Newton's rules were published, our minds were already doing the math based on mass, position, velocity, and acceleration. Newton just gave us language to express what we were already doing.

The same is true of money and currency. The concept of money was in our minds before we invented currency to represent it. For our governments to both force us to use a specific currency, and further, one of widely varying and rapidly declining value, and, worst of all, further forcing us to pay interest to private bankers, just for the "privilege" of using it, well, it is like forcing us to pay bankers to use their proprietary elastic bands to measure position, when we have perfectly good, solid yardsticks instead, that are rent-free.

Is it any wonder, with measures of value so distorted, that society is confused?

Thank you for helping to get the message out, Peter.
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A very concise but easily understandable presentation about the origins of money, probably the best I have ever read in a long time -- congratulations!

Unless one starts in such a way, it is very difficult to confront the general assumption/belief that the issuance and regulation of money must intrinsically be a governmental monopoly.
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It's an article of faith that the 'free market' is the best system possible. It's completely unprovable. You should read 23 things about capitalism you never heard (or some title like that). Anything called a 'free market' is an illusion. It's merely a m  Read more
M. - 6/15/2012 at 9:37 AM GMT
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