This essay got out of hand and way too long, so it will appear in two installments.
Wealth and Money I
When America adopted the US Constitution, the forefathers, who had read Adam Smith’s “Wealth of Nations,” and who had had bitter experience with fiat money during the Revolutionary War knew full well the meaning of “not worth a Continental.” The paper money that was circulated during the war became so totally worthless that no one would accept a “Continental” bill, printed under the auspices of the Continental Congress, tendered in payment of debt. The simple fact is that if you wanted to hold your investments together, you accepted British, Spanish or French money … for the most part coins made of gold, silver, copper or brass … or failing coinage, you bartered. You could trust Spanish doubloons, for instance, as each separate coin bore the stamp of the man who had assayed its weight and purity. This begs the question, “why did the people of revolutionary America reject the paper Continental bills of their country and opt instead to barter or trade their goods for foreign coinage?” The answer to this question lies in the difference between money and wealth. Let us explore the difference between the two.
Long ago, in the pre-dawn of history, a mountain man, possibly named “Og,” eked out a living by hunting, fishing, skinning, tanning, gathering and generally accumulating things that Mother Nature provided in the wilds. Og had a cousin, possibly named “Smed,” whose branch of the family had tired of being dirty, smelly, bee and mosquito stung … and hungry. So they, some years before, had wandered out of the mountains into the valleys below where they met some people who put seeds into the ground, watched them grow to maturity, and then put them into storage so that they could have regular meals. Og had often visited Smed and knew about the clay pots full of seeds and the tasty root crops. He may have even tried the lifestyle and rejected it. He admired their clothes made of linen from the flax plant and their cotton shirts, but he too had things of value … Smed was always after him for his leather shoes, belts, gloves and other accessories which he said were much superior to anything that the community where he lived had. It is a sure cinch that Og and Smed traded each other’s goods. Barter was born!
We can easily see some of the problems that might have arisen. Og being a consummate leather worker, a man who took a lot of pride in his work, soon had saturated his market because his quality stuff didn’t wear out. However, the stuff that he traded for, asparagus, liverwort, rhubarb, turnips, parsnips and such, not to mention the barley cakes and burnt un-leavened flour disks, all of which he loved to mix into his diet of meat, blood pudding, animal lard, liver and head cheese, was very quickly consumed. Smed soon quit trading, because he had no use for the surplus leather goods. Og, however, had acquired a taste for Smed’s goods and craved them mightily. Og thought about swooping down out of the mountains, thumping Smed on the head with his animal conker and taking his stash, but he, being a pretty bright guy, thought it through. If he knocked Smed in the head and took his stuff, it would soon be gone, and since he didn’t know how to grow the crops and with Smed dead, he reasoned that he would have killed the “goose that laid the golden egg.” Og was beside himself … then he had an epiphany … “the golden goose.” Gold!
Og, being the powerful mountain man, remembered a place far away up a stream where his friend “Goldermaniaca” had shown him a stream bed that was covered with a shiny metal. Og had decided to name the shiny stuff “gold” in memory of his friend who had fallen off a steep ledge the very next day. The rest is history … Smed was dazzled by the metal and willingly traded his goods for the gold. After he had gathered quite a bit of it, he crossed over into the next valley to see “Argmak,” the dairyman, who similarly dazzled, traded a milk cow for what Smed had. It wasn’t long before everyone was in on the deal. Argmak couldn’t help but see the beautiful leather goods that Smed was wearing and asked him where he had gotten them. He knew Og and on his annual vacation in the mountains he bought his own leather trousseau from Og with the gold that he had gotten from Smed. We can imagine that the descendants of Og also mined copper, silver and tin. Since these commodities were easier to extract and refine, it took a heavier measure of them to fetch Smed or Argmak’s products. Soon Og’s kin would have made all these metals into small, easily carried tokens which they tendered for smaller things like chickens and clay pots. Og’s grandson, Ack, named these base metal tokens after his introverted daughter, Coyne; he called them “coins.”
What do we see from the above example? Real wealth and the beginnings of money. Nothing would have happened if our friends had not used their minds and muscles. Each, starting from nothing, fashioned a livelihood from their surroundings. Their strivings resulted in useful commodities … property … wealth. All the husbanded items above, all useless in nature, became wealth when man’s efforts reduced them to commodities. Each of these primitive men had acquired property. We can see that each man, using the resources of the Earth combined with the sweat of his brow, had acquired tangible, fungible assets … property. So, we see how that man, early on in the rise of civilization, had taken his greatest assets, his mind and his labor, combined that with the largess of nature and created wealth by making a commodity. We see that any commodity, leather, vegetables, livestock or metals like gold, silver or copper could be bartered for another, and that any of these could be money. It is also apparent that of the things above, that the metals lend themselves best to being money. Og found that leather goods were much desired, but of limited demand. Smed’s commodities were of great value as money, but soon disappeared because of their dual purpose nature; they were soon eaten. Argmak’s commodity, the cow, was not easily replaced and its by-products were too perishable; his stuff was probably too valuable or cumbersome to be a convenient medium of exchange, to be used as money. The only commodities that lent themselves by value and bulk to be money were the metals. It turns out, because of relative supply, that gold is about twenty times as valuable as silver and silver is about 100 times as valuable as copper. Our forefathers recognized this when the monetary system of the US was instituted. They valued an ounce of gold at $20.00, an ounce of silver at $1.00 and, initially, an ounce of copper at 1 cent.
The history of money is long and convoluted, so once we define it we will trace its history in the US.
Trading metal coins for other commodities is almost certainly as old as human agriculture. We know that, among other things, coins were used in the Mesopotamia in antiquity and were certainly in vogue in the Roman Empire and Hellenic Greece … Jesus Christ chastised the “money changers” in King Solomon’s Temple. But throughout antiquity well into the Dark Ages money was a metallic commodity. Of course there were many types of coins and some people, the money changers (the first bankers), made a good living converting one kind of coin into another (keeping a substantial portion of the value for their trouble) in order to allow their customers to have the money of what ever realm they happen to be in. All of this would have worked out very well except for a clinker … the local government.
As we have discussed at length elsewhere in this blog, government should be instituted to enforce God’s Law, but, man being man, there has always been a group who for one reason or another eschewed making commodities. These are the minions of government and/or the “Church.” The first way that the “minions” got money for their needs was by taxation. Of course “government” never has enough revenue, so throughout history governments have resorted to that method which the primitive Og, in his musings rejected. They stole it, usually not from the local populace, because they needed someone to feed them, but generally by knocking some foreigner in the head and taking his stash. Down through history, this has been the general “modus operandi.” It worked great for the Romans and Spanish until they had stolen all that was available from their conquests. After the well dried up, if you study ancient coins, you can see that other methods were attempted. One of the best examples is the study of imperial Roman coins. A typical coin, when first minted was magnificently opulent, of good diameter and quite thick. After a while it lost about half its thickness, then slowly, inexorably, it lost diameter until it was finally a tiny wafer … but always professed to be the same denomination of coin with the original value. Another trick that was used was to debase the alloy, for instance mixing silver or other metals with the gold. (hence the difference between 24 carat and 10 carat gold) The crenations on the edge of noble metal coins were put there because some people (including the government) made a living shaving the rims of smooth edged coins. As you can imagine, any trick to steal value that could be thought of was tried. Of course, two different types of thieves were involved; the free lance entrepreneur, who was often jailed for his efforts and the government who would jail you if you would not accept their debased money. Once again, though, the word got out and your debased dinar, ducat, real or other coin continuously lost purchasing power. The government, then as now, blamed the resulting “inflation” of prices to buy goods on the “rich”, the Jewish bankers, the evil merchants, the hoarders … anybody but themselves. And then as now, the value of the metal commodities remained and remains relatively quite stable in relation to other commodities. The only thing that happened is that the government in some manner or another debased the money.
In Italy about the time that the Americas were discovered a new phenomenon appeared – modern banking … The promissory note. As world trade exploded and industry began to appear, not to mention the advent of modern (expensive) warfare it became apparent that there simply was not enough gold to finance the projects being anticipated. The bankers generally had some reserves to lend – at high interest, to be sure – to those proposing some expensive enterprise. But bankers were frugal men that accumulated cash and they didn’t have enough … they had to do something. They began accepting deposits from the populace for safe keeping, giving the customer a note of credit for the deposit. But, by far their greatest source of funds came from issuing interest bearing bonds. With the purchase of a bond, a private person could not only protect his money by entrusting it to the bank, with the additional benefit that the bank would also guarantee a fixed rate of return (interest) on his deposit. The bank had the use of the person’s money for a fixed period (usually ten years) and the purchaser could realize an annual return on his investment by cashing in the annual coupon. A side benefit was that the purchaser could sell the bond to a third person if for some reason cash was needed … the bonds were negotiable instruments.
The beauty of this arrangement was that it allowed the banker to lend the deposited money to borrowers at a higher rate of interest than the bond yielded with no fear or current obligation to repay the principal to the bond holder … his only short term obligation was to the annual interest. It did not take long for the bankers to figure out that they could lend out more money than they had on deposit. In the beginning a typical bank would lend three dollars for every one on deposit; the ratio has steadily enlarged over the years until now banks lend (legally) nine dollars for each one on deposit. Of course, they did not lend coin, but issued paper bills that stated that the bearer was entitled to a certain amount of gold or silver or some certain coin … imagine — nine times as much paper as metal on deposit. Initially, banks did this but, — this was too good a deal to be left to “evil” bankers — very soon governments got into the act. They soon had usurped the paper money market, making it illegal for banks or individuals to print money, reserving the right to themselves exclusively. Nice, but few could see the evil that the government could or would do with this power.
More in a week or so …