Money
Money
Money requires specific understanding. A trap lies waiting by assuming that a common sense understanding of money represents reality.
“There is no evidence of a society or economy that relied primarily on barter.” Marcel Mauss in ‘The Gift: The Form and Reason for Exchange in Archaic Societies’
Instead, non-monetary societies operated largely along the principles of gift economics.
“When barter did occur, it was usually between either complete strangers or potential enemies.” David Graeber in ‘Toward an Anthropological Theory of Value’
Commodities were likely used as the first form of money, such as gold, silver, copper, rice, salt, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis and candy. It seems that money emerged to facilitate exchanges between “complete strangers or potential enemies.”
Commodity Money
is similar to barter in use and commodity money provides a simple and automatic unit of account for the commodity being used as money. A unit of account is a standardized measurement of market value.
A unit of account is a necessary prerequisite for agreements that involve commercial debt. To function as a unit of account, whatever is being used as money must be:
- Divisible into smaller units without loss of value, for example, precious metals can be coined from bars, or melted down into bars again.
- Fungible: one unit or piece must be perceived as equivalent to any other, which is why diamonds, works of art and real estate do not work as money.
- Verifiable as to specific amounts. For example, coins are often made with ridges around the edges, so that any removal of material from the coin (lowering its commodity value) will be easy to detect.
Representative Money
stands in direct and fixed relation to a backing commodity, while not being composed of that commodity itself. Representative money consists of token coins or certificates that can be reliably exchanged for a fixed quantity of a commodity.
Paper representative money or banknotes were first used in China during the Song Dynasty. Banknotes were first issued in Europe by Stockholms Banco in 1661.
Under the gold standard, the value of money derived from gold in bank vaults, not government credit. If, for example, the United States of America government defaulted on its debt under the gold standard, the value of the dollar and much of the financial system would remain intact.
The United States Department of the Treasury seized physical control of the nation’s gold reserves in 1934, with the Gold Reserve Act. All of the United States’ monetary wealth was secretly transferred to vaults under the control of the United States Department of the Treasury.
United States Department of the Treasury is the nation’s largest debtor. The 1934 Gold Reserve Act put the United States Department of the Treasury in control of money.
That is like putting a pedophile in control of childcare when we are the children.
The government benefits three ways from using money debasement to create inflation:
- Inflation erodes the real value of government debt. The government repays with dollars worth less than the dollars they borrowed, which immediately transfers wealth from investors in government debt directly to the government.
- Inflation swells federal tax receipts due to “tax bracket creep” as incomes are pushed into higher tax brackets with no increase in purchasing power. Inflationary appreciation of business inventories is taxed as profit.
- Most importantly, money debasement itself levies a hidden “tax” on holders of money, such as people who keep savings accounts.
The 1934 Gold Reserve Act revalued gold (= debased the dollar) from $20.67 to $35.00 per ounce and accomplished all of the above along with much, much more. The United States Department of the Treasury took the control of the nation’s gold and spent it, leaving nothing but United States Department of the Treasury IOU’s backing the dollar.
“To act as a store of value, a money must be able to be reliably saved, stored, and retrieved – and be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time. In that sense, inflation by reducing the value of money, diminishes the ability of the money to function as a store of value.” N. Gregory Mankiw (2007) in “2″ Macroeconomics (6th ed.)
The role of money as a store of value that requires holding it without spending conflicts with its role as a medium of exchange that requires it to circulate. Apparently, the United States government encourages money circulation by continuously practicing money debasement.
The pain of taxes – increases - even as Congress declares tax cuts. As long as politicians maintain central control of the money supply, we are all impoverished.
In this environment one must either make investments that return a higher yield than the rate of government money debasement or immediately purchase hard goods known to be valued widely by other people. Any other strategy will, over time, devalue what you were paid for your work to make you, for any practical accounting purposes, a slave.
An example of making a high yield investment would be investing in your own on line business that generates an on going cash flow. Examples of widely valued hard goods include quality tools and firearms.
Fiat Money
or fiat currency is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a commodity. It has no value except by government order or fiat.
The government declares the fiat currency (contemporary notes from the Federal Reserve System) to be legal tender, making it unlawful to not accept the fiat currency as a means of repayment for all debts, public and private.
Commercial Bank Money
is created through fractional-reserve banking, the banking practice where banks keep only a fraction of their deposits in reserve and invest the remainder. Commercial bank money differs from commodity money and fiat money in two ways
- it is non-physical, its existence is only reflected in the account ledgers of banks and other financial institutions
- risk that the deposit cannot be reclaimed upon demand if, for example, the financial institution becomes insolvent because demands upon deposits exceeds both the reserve and the value of the investments
The worthless home mortgages now held at fictional values make all the major banks, along with most of the smaller banks, technically insolvent and the FDIC does not have enough to cover the difference. This was all perpetrated with government oversight, aided and abetted by legislating away regulations.
A few insiders (at Goldman Sachs it seems) well understood the inevitable consequences, transferred their risk to unregulated financial instruments and then sold them to mutual funds and sovereign governments around the world including Portugal, Ireland, Italy, Greece, Spain and the United States of America. This was all perpetrated with government oversight, aided and abetted by refusing to legislate regulations.
Banksters will be blamed but make no mistake, this was a government operation from illicit beginning to the revolting end. The banks, by themselves, never could have pulled this off while governments have proved capable of debasing money without banks throughout history.
from the
United States Department of Labor
Bureau of Labor Statistics
Productivity and Costs, First Quarter 2010, Revised
“Nonfarm business sector labor productivity increased at a 2.8 percent annual rate during the first quarter of 2010, the U.S. Bureau of Labor Statistics reported today, with output rising 4.0 percent and hours rising 1.1 percent.”
Good for corporations and what about workers?
“Unit labor costs in nonfarm businesses fell 1.3 percent in the first quarter of 2010, as the 2.8 percent increase in productivity outpaced a 1.5 percent gain in hourly compensation. Unit labor costs fell 4.2 percent over the last four quarters, as the 6.1 percent increase in output per hour over that period outpaced a 1.6 percent rise in hourly compensation.”
Work harder, get paid less.
The pay you receive is what you spend, that is the economy. If you are paid less, then you are able to buy less with your wages, that is fundamental.
This makes short term corporate profits look good, but with less income you cannot buy what others produce and in the long term this results in corporations either having to
- cut prices (deflation) which damages profitability or
- end up with unsold inventory (priced above the cost of production) or
- fail.
The government monetary policy is not sustainable. In fact, the government monetary policy appears to have hit its limits.
The only thing now keeping the government monetary policy going is the still (apparently) wide spread belief that other people will continue to accept the United States dollar in trade for goods and services. In reality, the last person to accept it, loses.
Get your money working or get it into durable hard goods. A thoughtful balance between the two would appear a wise decision.
