What is Money? – Part I
10/21/2010 Portland, Oregon – Pop in your mints…
We were reading today what a wonderful success TARP has been for you and I, fellow taxpayer! According to Bloomberg, the government has “earned” $25.2 billion which translates into an 8.2% return on our investment over two years . Thank goodness! I was afraid the government was just throwing our money away. Apparently the only better investment over the past two years would have been the S&P 500 and real money, Gold.
Does this mean that you and I, fellow taxpayers, should expect a dividend check in the mail in the near future? Alas, that is not how the government operates. According to Bloomberg this windfall is
“enough money to fund the Securities and Exchange Commission for the next two decades.”
Do you see how things operate, fellow taxpayer? If the government cannot use the gains to do something productive, which by virtue of being the government it cannot, a rational logic would suggest that the returns on investment be distributed in the form of dividends to the “investors” (or in this case the reluctant taxpayer). But the government takes the absurdity of TARP and it’s aftermath a step further and, as the article suggests, it takes its good fortune and continues to fund an inept agency (the SEC) which has essentially failed to protect the interests of the average taxpayer throughout this financial crisis. It would assure two more decades of clumsy games and busy work that pass as “market oversight.”
Ah, the wonder of it all! Meanwhile they are still rioting in France to retain their right to retire at age 60. I pity the French government for directly fighting the masses on this issue when there is an easier way out, at least for the current government officials. The truth is that this is the end game of all government entitlement programs when there is nothing left to pay them with. Neither the masses nor the government should be in this sad situation to begin with.
But we must carry on. Today we are going to begin to ponder the eternally important question that few people bother to ask and even fewer arrive at a satisfying answer. What is money? Today, most persons in would answer that money is a nation’s local currency. In our case, the US Dollar which today is a Federal Reserve Note backed only by people’s faith that it will be accepted in exchange for goods and services and to cancel debts.
But is that a satisfactory answer? On the surface, it is. What is troubling is that there is a circular reasoning involved that goes like this. “Why is this piece of paper money? Because everybody says it is.” But what happens when everyone decides that it is NOT money? More tomorrow…
What is Money? – Part II
10/22/2010 Portland, Oregon – Pop in your mints…
click here to see previous episodes in this series:
What is Money? – Part I
We left off yesterday leaving the comfortable place of thinking that we knew what money was to having to define something that we took for granted. I do not blame you, dear reader, if you are content with the answer that you had slept comfortably at night knowing all of your life. To grapple with this question is to question many things that we take for granted. It can be an unsettling experience.
I was first unsettled by this same question in a class on Monetary Policy at the Universitat de Barcelona in the Spring of 2004. The professor held up a small jar full of shredded green paper and asked us if we knew what it was? The answer, it turns out, is that the jar was full of $50,000 worth of US Dollars that had been removed from circulation and destroyed. Simple enough, right? Dollar bills wear out, you have to replace them. However, her (the professor’s) point was that what we use as money does not exist in a real, tangible sense. It is an invention created to meet the policy demands of the fiscal and monetary authorities. It is an invention that can be created and destroyed at whim.
I was taken aback, trying to catch my breath! She went on to explain that Corporations, businesses, etc. are simply “money machines” which strive to minimize money inputs and maximize money outputs. The difference between the inputs and outputs is what we call profit. This is obvious enough and it was logical that she would share this insight with our MBA class which was being trained to manage said Corporations.
Something in my mind short circuited in trying to reconcile the logic of a Corporations’ reason for existence being to create money and then seeing that same money end up shredded and destroyed in rather large quantities. The motor of my mind was so seized up that I managed to miss nearly every question that day on a pop quiz that tested our knowledge on “What is the proper reaction, in terms of monetary policy, to various economic data points? Should you move to increase or decrease the money supply?” The questions I did answer correctly were likely due to my misunderstanding the question (I was still learning Spanish and Catalan) rather than any grasp of accepted policy remedies.
In retrospect this day was the day that completely changed the way in which I viewed US Dollars, Euros, and all other paper currencies of the world. You see, I was answering all of the questions about monetary policy using the assumption that the monetary authorities wanted to maintain the value of the currency that they were managing. I was dead wrong. So if they are not trying to maintain the value of these currencies, what are they trying to do? What does it all mean? Why do I have to wait until next week to know what money is? I can’t believe you are leaving us hanging like this!
Relax and enjoy the weekend. This is a long journey!
What is Money? – Part III
10/26/2010 Portland, Oregon – Pop in your mints…
Before continuing our exploration of what is money, a quick look at the news. For the second day in a row the news and related commentary receives and “Oh my” from your author. From TIME’s Curious Capitalist post we get the thoughts on a recent speculation:
Fellow taxpayer, do you believe that a meeting of the FED could ignite a civil war? Your author has his doubts. For one, in such a conflict, who would side with the FED? Second, a waging a war, on any scale, is not an action powerful enough to solve a problem on the scale that the FED and other world central banks have caused. There is but one way rid society of this cancer which is delightfully and completely peaceful: A return to the use of sound money and its corollary, free banking.
With that said, we must move on with our pondering of what is money, or as we may now rightly ask, what is “sound” money (here is a hint, it is money that cannot be created at whim!)
As you can see, our quest to define money has taken us farther and perhaps troubled us further than many would have imagined. Should this come as a surprise? The subject of money is generally taken lightly because to ponder it deeply is, well, troubling. However in pondering it, we find we are in good company.
Jesus, during his ministry, talked about money more than any other subject EXCEPT for the Kingdom of God.
Robert H. Hemphill, formerly of the, Federal Reserve Bank of Atlanta, said this about money:
“Money is the most important subject intellectual persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and its defects remedied very soon.”
The famous economist John Maynard Keynes made a dramatic statement about the consequences of debasing a currency (i.e. printing money) which he eloquently calls “debauching:”
“Lenin is certainly right. There is no subtler or more severe means of overturning the existing basis of society (destroy capitalism) than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.”
A great collection of famous money quotes (of which these are just two) can be found here - http://silverstockreport.com/quotes.htm -. For those of you who haven’t read anything by him before, Jason Hommel is perhaps the biggest Silver bull on the planet. He has written volumes on the Silver Market, Bible Prophecy, Capitalism, Freedom, and Money. His writings can be found at his website, which I highly encourage you to visit, is here – http://silverstockreport.com/ -. Thank you Jason!
After having my faith in paper currency shaken in Barcelona, we moved to Portland and I landed a job. For the first time I could remember, I actually had a surplus to save on a regular basis. But this was 2006 and somehow I was uncomfortable about the stock market and home ownership as wise investments at the time. I was also skeptical at the prospect of simply keeping our savings in a bank account as the image of shredded dollar bills in the jar haunted me. What to do? This dilemma, which is common to man, drove me to search for what is now the obvious answer. Stay tuned.
What is Money? – Part IV
10/27/2010 Portland, Oregon – Pop in your mints…
So we are back to the question, what is money? Money, dear reader, is a concept that must first be defined. It is a set of attributes. Once these attributes are defined, we can begin searching for something that possesses these attributes and then call that “Money.”
|For money, does this fit the bill?|
What are the attributes that something must possess to be used as money? To answer this question we will paraphrase a list compiled by Jason Hommel which includes the following attributes that something must possess to meet most people’s criteria of money. Mr. Hommel expands upon these themes extensively in his writings, which again, I highly encourage you to read at http://silverstockreport.com. For our purposes, we will content ourselves with a simple question which should make each attribute clearly understandable:
First, it should operate as a medium of exchange. Will other people accept this item in trade for something else? Second, it should operate as a unit of account. Can the item be easily divided without destroying its value? Third, it should be a reliable store of value. Will the item purchase the same amount of goods in ten, twenty, or three thousand years from now as it will today? And fourth, it should be anonymous. Can the item be freely transferred amongst parties?
Part of our present financial mess is that money has such an obvious role in society that we assume that what is currently used as money actually IS money. However, a review of the above attributes and a peek at the quotes related yesterday from Robert H. Hemphill and John Maynard Keynes starkly illustrate that this may not be the case. Alas, since 1971 in the United States this has not been so.
So what is money? After reviewing the attributes above and reviewing all of known human history, we can conclude that, in an overwhelming majority of cases, precious metals, namely Gold and Silver, are best suited to serve mankind in the role of money. As a medium of exchange, they are universally recognized. As a unit of account, they are divisible with destroying their content. As a store of value, Gold and Silver are not easily pulled from the ground and coined for use (they cannot be “debauched”). And as for providing anonymity, they can be freely transferred.
Bear in mind that there is no perfect item or element that can be used as money, nor is there a specific command from God to use Gold and Silver as money, rather Gold and Silver, in all of God’s creation, have been found to be best suited to physically embody this concept of money. The US Dollar, Euro, and all other paper currencies are merely inventions of men and, in 100% of live experiments with their use as money, they have failed catastrophically. We are currently nearly 40 years into the largest experiment with paper money that the world has ever known. The disaster that awaits as this experiment ends the way all the other experiments have, dating back to alchemy, simply boggles the mind.
Fortunately, we can return to using Gold and Silver as money, which, apart from merely “fitting the bill” for humanity to use as money, their use by humanity as money has numerous positive side effects for the overall well-being of every single person on the planet. The most notable and perhaps the basis for all of the other healthy side effects is the incentive to create and conserve capital. This phenomenon, called Capital Formation, allows mankind to prosper in ways we both currently enjoy and cannot yet imagine.