Just about a year ago, I started a group of essays about money and wealth in order to try to understand what is happening to the American monetary system and why we are sinking into monetary oblivion. I, at least, when I began these essays, had only a vague understanding of what money is and the difference between money and wealth. My search for understanding is long and torturous. It begins with the essays submitted in July last year, Money and Wealth I and Money and Wealth II and now concludes with (because of their length) three essays (Gold or Fed 1 through 3) on the relationship between hard currency and Federal Reserve notes. I hope you will revue the essays on Money and Wealth that are preserved in the July 2011 section of the blog and add your comments and insights to the following essays on Gold and the Fed … Lee
Gold or Fed I
In our essays about “Wealth and Money” we investigated what money is. We showed that wealth is made up of tangible commodities that man obtains by using his mind and the sweat of his brow in conjunction with the resources of the Earth. We showed that money is some tangible token of value or is some tangible commodity gained from the Earth by man’s use of his mind or body that is used as a medium of exchange. We reviewed the long torturous path of man learning to trade … tendering the fruits of his abilities and endeavors in acquiring a commodity or commodities for those he did not have but desired that were possessed by another of his fellow man. We saw that he learned that he could trade his hard won wealth for commodities that others, in turn, wished to trade to him.
It is apparent that the road to modern society began when man began to barter his goods for the goods of others. Reflection will inform us that trade is still barter … essentially my worth for your worth. Our earlier essays pointed out that money arises when people making honest trades begin to numerate or quantify the relative worth of their particular commodities to those of others. Two cows for a horse; five sheep for a cow; twenty chickens for a sheep; or ten bushels of wheat for a cow and so on. Man’s early barterubg worked well in closed communities, but soon his trade went beyond the borders of his local sphere. Early man very quickly realized that metals like gold, silver and copper were very rare and exceedingly difficult to obtain and therefore of high value. It did not take our ancestors long to equate a small amount of these metals to an equitable portion of any other commodity. And the utility and compactness of these commodities were found very early in the history of man to be preferred medium of exchange … better than barter … they were money!
The history of noble metals as money was traced by our inquiry. It was seen that the purity and weight of coins were of great concern. For coins to be relied upon to be a fair medium of exchange, the person that accepted them had to have reasonable confidence that the coin he accepted for his commodity was made of a guaranteed purity and weight so that he was not being cheated. Being paid a yellow lead slug would be equivalent to being sold a knowingly diseased animal … being defrauded! Fraud is theft and theft breaks God’s Commandment … “Thou shalt not steal.” We certainly all remember the movie scene where the old one eyed merchant is given a coin which he evaluates for weight by tossing it in his hand and then bites to see how soft it is. He probably could identify the yellow lead slug himself. The successful thief had to be more subtle.
We have seen that money can be any commodity and has in fact been about anything that man could imagine. A couple of my favorite examples are the buying of Manhattan Island for $24 worth of beads or Pacific islanders using stones weighing several hundred pounds for trade. Although any commodity could be used, civilized people soon settled upon precious metals, mostly gold, silver and copper as the most convenient and reliable commodities to be used as the media of exchange for trade. This arrangement was settled upon at least 5000 years ago and continued until the use of them was essentially outlawed by President Nixon in 1972.
The biggest problem with precious metals (it is useful to refer to them collectively as gold for the rest of this essay) is and has always been fraud. In ancient times when a new dynasty would become ascendant, as the new country flourished, large, pure coins were often times put into circulation by miners or from plundered booty. The typical method to defraud this money for the common thief was to shave a thin amount of gold from the rim of the coin. To stop this, the edge of the coin was crenulated and the transgressor jailed (or worse.) If the coin was struck by a private party, as was often done, the minter had to guarantee the purity and weight, deviation from which was cause for severe penalty or punishment. Interestingly, the renowned Spanish doubloon was initially struck by individuals who were required to put a unique stamp on each coin as their personal guarantee of its value. With the advent of paper money, the paper being redeemable for a fixed amount of gold, the problems multiplied. Counterfeiting became an industry and the problem of enforcements and punishments became a booming governmental business. Counterfeiting paper money, however, while always present, has never been much of a growth industry because of the extreme talent required to make the money and also because of the draconian punishments for getting caught.
Punishment for counterfeiting begs the question … why is it crime? Since the paper can be tendered for gold, and since each bogus bill has the effect, if tendered, of diluting the supply of gold available for the true bill, the theft is obvious. Tender of a counterfeit bill has exactly the same effect as a loaded pistol in front of a bank teller.
We can easily see that any individual entrepreneurs who businesses were metal debunking, bogus coin striking, counterfeit printing or other more subtle villainy were all thieves. But is the individual entrepreneur the greatest threat to the integrity of the money supply? To answer this we must look at what governments through the ages have done to money.