~~~ Original version written in March of 2010 ~~~
Before I go into a discussion of money let me first talk about the abstract concept of value. Many things can be valuable to people including food, clothing, housing, entertainment, etc. The concept of value encompasses all of these things and anything else that humans believe is necessary for life or which enhances of the act of living. If people want or need it then by definition it has value.
Before I go into a discussion of money let me first talk about the abstract concept of value. Many things can be valuable to people including food, clothing, housing, entertainment, etc. The concept of value encompasses all of these things and anything else that humans believe is necessary for life or which enhances of the act of living. If people want or need it then by definition it has value.
New value can only be created into the economy through labor of people. It can be labor of the body or labor of the mind, and the amount of value created by the labor can be multiplied by the use of animals, tools and energy but it is impossible to create new value without some human somewhere doing work. Even fully automated tools need to be built by humans and repaired by humans.
Note that I did not state that it is impossible to acquire value without doing work because that happens all the time and it has happened since the beginning of history. We call it “gambling”. Gambling winnings do not necessarily represent the creation of new value for the economy because the value involved in the wager was actually created by someone doing work at some earlier point. The act of winning a gambling bet simply transfers preexisting value from the loser to the winner. It is absolutely key for people to remember this fact: if you gained something without working for it then it was acquired by some form of gambling (or theft).
There is nothing wrong with gambling but every form of it contains risk. Sometimes the risk is very low and sometimes the risk is simply obscured so that it appears to be low but all gambling incurs some level of risk. Most people in the world are gambling like crazy and they have absolutely no idea whatsoever that this is the case. The reason they are not aware of the fact is because society hides the gambling from people with euphemisms like “investing”, the basic concept of which is that your money will “work for you”. Whenever you are getting something for nothing, whenever your money is supposedly working for you, whenever your money is self multiplying without you adding any work you can rest 100% assured that you are engaged in some form of gambling even if you don’t understand how it all works.
Building upon the above, Wealth is defined as stored value. Wealth is different from value in that it is tangible and physical. Wealth can be stored in many ways: clothing in your closets, cars in your garage, grain in your grain elevator and in myriad other forms.
Money is, among other things, a fungible form of wealth. Real money is a commodity which serves as a physical token or marker which represents wealth. Since wealth is stored value and value comes from labor, money can be thought of as a fungible form of stored labor. It can be exchanged for goods or it can be exchanged for the labor of others. In the past we used gold and silver coins for money as mandated by the constitution. Today we simply ignore the constitution and use unbacked colored paper as if it were money.
One of the best examples of real money (commodity money) in the world today is that which is used by the people of Yap Island
From this you can see that the commodity used for money can be anything at all as long as it has perceived value by the people of the economy. Stones in Yap Island Yap stone money has significant advantages over gold and silver as money. Nobody wants to carry gold and silver coins around to buy things with and of course nobody is able to carry a 12’ Yap stone money wheel with them. In both cases people have taken to using paper based markers/representations of the underlying commodities. In the case of Yap stones, no vault is needed because the stones are too big to move easily. Storage is thus free. They are also easily recognized by the locals and are always on display so no new stones can show up unnoticed and they can be casually audited on a daily basis if desired.
On the other hand, paper representations of gold have always been gamed by governments. This is known as a gold standard in which governments promise that a certain number of their paper markers (dollars) can be exchanged for physical gold on demand. But the gold has to be stored in a vault which costs money and that vault keeps the gold out of sight of the public so audits cannot be done. This lack of transparency tempts governments to print more paper markers than can be covered by the amount of physical gold held in reserve. As primitive as it may seem, such deceit is impossible with Yap stone money.
In a properly working economy, money can be converted into any other form of wealth or any form of labor. Markets are the mechanism by which wealth is converted from one form of commodity into another. Markets also set the exchange rates between these commodities. Money is nothing more than a special form of commodity. It is special because commodities are meant for consumption but money is not meant for consumption. Most of the gold ever mined still exists in the world today in the form of bars, coins or jewelry because gold is an ancient form of money and money is not meant for consumption into nothingness.
The historical purposes of money are threefold:
- A store of fungible wealth. Something that has known value and that others will accept in trade for their goods and services.
- A means of exchange. When you go to a market looking to acquire some needed commodity, you need to bring something with you to trade for it, preferably something small, lightweight and portable which can be exchanged for anything else available in the economy.
- A unit of account. A mechanism for measuring wealth, debt, and the price of things.
Note that there is not a 4th item entitled “As a means of value multiplication without the addition of work”. It is not a function of money to self multiply and if that is what money is being used for then it should set off alarm bells in the minds of thinking people.
But what about investing? It was mentioned above but people make money all the time investing. While this is true, you have to look at where that money came from. Was it new value that magically appeared into the economy or was it simply value transferred from the loser of a deal to the winner of a deal? When you buy or sell stocks you are really just speculating on price. It is the practice of greater fool theory. No new value is injected into the economy due to stock trading. For every winner there is a loser.
Now, how about when you loan a company money (buy their bonds) with the intention of making money via regular interest payments? In this case, yes, new value can be injected into the economy because the money will be used in conjunction with the labor of other people to create new value. For example, the money will buy buildings and equipment used to manufacture something. But still the money is not making new value all by itself, people are doing that. Furthermore, you are gambling on the people being successful at it so that they can pay you not only the interest payments they promised but also so they can return your principal. Bottom line is that investing is gambling.
Some people buy gold or silver coins and they call it investing but what they are really doing is saving. Saving is not investing. With saving you simply wish to retain what you earned; you are not seeking a profit. Saving implies lack of speculation whereas investing implies complete speculation. When you convert your paper money into gold and silver and then store it in your vault it does not self multiply no matter how long you leave it in there. That is an act of saving, not speculating/investing. If you put 10 gold coins each of 1 Troy Oz and 99.9% pure into storage you will still have the same exact amount of gold when you come back 10 years later. The dollar price of it might have changed during that time but it will not be because the gold got bigger or smaller. It will rather be due to changes in the value of the dollar itself. If the dollar price of gold goes up while it is in your vault, chances are that the price of oil and food also went up so that you really don’t net a gain in purchasing power on average over time. Yes, some people jump in and out of gold on a daily or weekly basis and that is gambling but it is not gambling on gold. It is gambling on movements in the value of the dollar because the gold itself never changes, only the dollar changes.
This is a completely different concept than, for example storing wealth in art or antique cars instead of in the dollar. Gold is money whereas collectible items are not money. The value of those things do change independently of the money supply. For example, it is common to see significant price increases occur in his existing art pieces when a popular artist dies. This is because value derives from scarcity and a dead artist is unlikely to add to his existing body of work. The lack of future supply imparts additional value on the existing supply. But gold can be pulled out of the ground whenever the people believe it is necessary and thus it is always possible to add to the existing supply of above ground, refined gold.
What keeps gold from becoming worthless due to over mining/over production of it is that it cannot be pulled out of the ground and refined for free. When the market price of gold in dollars exceeds the mining and refinement costs of it by enough of a margin that it becomes worth people's time and labor and injury risk to mine it then people scramble into the mining business to go produce more. When the market price of gold in dollars falls due to additional supply from the the additional production to the point where its no longer good business to mine, people stop mining it. Mining gold is hard and dangerous work. People will not do it without there being some significant reward in it for them. The dollar cost of mining gold depends on labor prices, energy prices, equipment prices, government regulations/permits/environmental impact studies/taxes and a variety of other factors. When the dollar is debased because of government running the printing presses or because of banks loaning out ridiculous amounts of credit, the prices of labor and energy go up right along with gold. Thus, what triggers more gold production is NOT the rising spot price of gold but rather the delta between the spot price and the cost of production.
One wild card factor to consider in the price of gold is that paper money actually has no intrinsic value. This is because it takes very little work, personal risk and energy to print it up from thin air. In fact, it mainly exists as digital numbers in computer accounts. Its only value is what people perceive it to be and these perceptions are directly tied to confidence in the government since the money has no other basis of valuation. If the government loses the confidence of people holding its currency, the people will express their concern by trading the paper money for something else of value. They will take anything they can as long as it's not the paper currency. This is why, for example, it is common to see the currency of a country weaken based on some political event such as the assassination of its top leaders even though the event is not accompanied by a change in the money supply. People often treat gold as a safe haven when they lose confidence in governments which can lead to a panic into gold and then an exodus back out once the panic clears. Again, the value of the gold didn't change in this case. Instead, lack of confidence in the paper money occurred which reduced its value thus making it so that more of it was required to buy that ounce of gold.
This is a completely different concept than, for example storing wealth in art or antique cars instead of in the dollar. Gold is money whereas collectible items are not money. The value of those things do change independently of the money supply. For example, it is common to see significant price increases occur in his existing art pieces when a popular artist dies. This is because value derives from scarcity and a dead artist is unlikely to add to his existing body of work. The lack of future supply imparts additional value on the existing supply. But gold can be pulled out of the ground whenever the people believe it is necessary and thus it is always possible to add to the existing supply of above ground, refined gold.
What keeps gold from becoming worthless due to over mining/over production of it is that it cannot be pulled out of the ground and refined for free. When the market price of gold in dollars exceeds the mining and refinement costs of it by enough of a margin that it becomes worth people's time and labor and injury risk to mine it then people scramble into the mining business to go produce more. When the market price of gold in dollars falls due to additional supply from the the additional production to the point where its no longer good business to mine, people stop mining it. Mining gold is hard and dangerous work. People will not do it without there being some significant reward in it for them. The dollar cost of mining gold depends on labor prices, energy prices, equipment prices, government regulations/permits/environmental impact studies/taxes and a variety of other factors. When the dollar is debased because of government running the printing presses or because of banks loaning out ridiculous amounts of credit, the prices of labor and energy go up right along with gold. Thus, what triggers more gold production is NOT the rising spot price of gold but rather the delta between the spot price and the cost of production.
One wild card factor to consider in the price of gold is that paper money actually has no intrinsic value. This is because it takes very little work, personal risk and energy to print it up from thin air. In fact, it mainly exists as digital numbers in computer accounts. Its only value is what people perceive it to be and these perceptions are directly tied to confidence in the government since the money has no other basis of valuation. If the government loses the confidence of people holding its currency, the people will express their concern by trading the paper money for something else of value. They will take anything they can as long as it's not the paper currency. This is why, for example, it is common to see the currency of a country weaken based on some political event such as the assassination of its top leaders even though the event is not accompanied by a change in the money supply. People often treat gold as a safe haven when they lose confidence in governments which can lead to a panic into gold and then an exodus back out once the panic clears. Again, the value of the gold didn't change in this case. Instead, lack of confidence in the paper money occurred which reduced its value thus making it so that more of it was required to buy that ounce of gold.
The fact that the dollar price of gold and silver tend to increase over the long term simply means that the paper currency is losing its value somehow. The Federal Reserve Note was born in 1913 and since its birth it has lost 95% of its value simply because the government continues to print more and more of them from thin air. Again, value derives from scarcity. When the government prints more money, be it physical dollar bills or additional figures in a computer account, the money is less scarce and thus less valuable.
For this reason many people prefer to refer to Federal Reserve Notes not as “money” but rather as “fiat currency”. Money is supposed to be a store of value but when something loses 95% of its value over the course of 100 years then it cannot possibly be said to fit the definition of money. “Fiat” means “by decree”. So fiat currency is something that has value by decree of government, not because it has any tie to a physical commodity token. Because there is no link to anything physical, there is no way to measure how much of the stuff governments have been printing. With real money, if people ever get suspicious that there is not enough of the underlying commodity (gold for example) to back the amount of paper markers circulating in the economy then they can simply demand that whoever issued the paper trade it for the underlying commodity. When Federal Reserve Notes were created they could be exchanged, by law, at the rate of 1 Troy Oz of 24kt gold per $25. After the gold confiscation scam of 1933 the official exchange rate became $35 per oz.
Federal Reserve Notes (FRN) are called “money” by many people but over time they have morphed into a strange form of IOU. A “Note” is a legal term for a debt. Your house note, for example, is a debt instrument. It says you owe someone something (i.e. the dollars of outstanding principal). A FRN started off being a debt note whereby the government would store 1 Troy Oz of your gold in its reserve vaults. In return, you proved your ownership of that gold by holding 25 US dollars. You were in effect loaning your gold to the government and the loan was supposed to be callable at any time on demand. That legal right to convert from paper into gold upon demand gave people the confidence to trade in the economy using colored paper instead of physical gold coins.
The government did the same thing with silver for awhile as well using something called Silver Certificates. Silver was also used in coins. Over time, government began cheating on (AKA “debasing”) the money supply. It started most visibly with the coinage. First the coins were 90% silver and then they suddenly became 40% silver and then finally in the mid 60s all the silver was removed and the only thing that was left was silver colored pot metal. They eventually even took the copper out of the pennies and made them out of copper plated steel instead.
While all this was happening, the government was also printing up many more dollars than there was gold to back them. During the 1960s it became obvious to the world that we could not afford the space program and Vietnam
Because of this, the world began to suspect that the money to fund all these things was being printed from thin air and that there was insufficient gold on reserve to back the paper. In the late 1960s other governments started turning in dollars and demanding the underlying gold at the official exchange rate of $35/oz. The pace continued to pick up until in November of 1971, President Nixon had no choice but to admit there was not enough gold in our reserves to cover all the paper FRNs we had been printing. The mechanism for doing this was to stop the convertibility of dollars into gold. Anyone who wasn’t smart enough or quick enough to do the exchange was stuck holding an empty paper promise.
Because of this, the world began to suspect that the money to fund all these things was being printed from thin air and that there was insufficient gold on reserve to back the paper. In the late 1960s other governments started turning in dollars and demanding the underlying gold at the official exchange rate of $35/oz. The pace continued to pick up until in November of 1971, President Nixon had no choice but to admit there was not enough gold in our reserves to cover all the paper FRNs we had been printing. The mechanism for doing this was to stop the convertibility of dollars into gold. Anyone who wasn’t smart enough or quick enough to do the exchange was stuck holding an empty paper promise.
The closing of the so called “gold window” was the largest financial default in the history of man. Since that time, dollars became fiat currency because they were completely unlinked to anything of value. While they are still called Federal Reserve Notes they are no longer a real debt note because they do not indicate what the debt is for. They are essentially promises to pay nothing. They only have value because people got used to them having value a long time ago and haven’t gotten the idea through their heads that the value was lost when Nixon defaulted on convertibility in 1971. It is similar to a company which has declared bankruptcy but whose shares still trade on the stock market between people as if they have value. The hope is that the shareholders will get something in bankruptcy (BK) court even though they rarely if ever get anything in event of BK. Note that I did not say this was intelligent or sustainable, only that people have been known to do it.
Eventually people wise up and the worthless paper trades at its actual value of zero. This will happen to the dollar, the Euro, the Yen and all other global fiat currencies in the course of time and in fact all historical fiat currencies have gone bust at some point. That’s because they aren’t money. On the other hand, gold has never gone bust because it is real commodity money. Silver is more volatile than gold because it is both money and an industrial metal. Because of this, silver is consumed into nothingness by industrial activity which does change the above ground supply, and sometimes rather dramatically. Still, silver is a monetary commodity and thus it has never gone bust before either. In other words, nobody ever looked at a gold or silver coin and said “it has no value”. But all paper money will eventually go to worthlessness because that is its actual value.
If this sounds incredible to you then it's time to broaden your horizons and learn some history. What is the current money of Taiwan? It's the so called NT which is short for "New Taiwan Dollar". What do you think happened to the old one? In Israel they have the NIS. Yep, New Israeli Shekel. Go look up what happened to the old one. Hint: it was not pretty. The majority of small European countries have had hyperinflation in the past 50 years and of course Latin America is famous for it (and it is happening in Argentina and Venezuela right now). It happened in Wiemar Germany. It always happens at some point in time because paper money is a confidence game and no con ever ran forever.
Most people don't know it but the US currency has already hyperinflated before. We used to have something known as the Continental dollar. They eventually became worthless due to war spending using money printed from thin air.
Eventually people wise up and the worthless paper trades at its actual value of zero. This will happen to the dollar, the Euro, the Yen and all other global fiat currencies in the course of time and in fact all historical fiat currencies have gone bust at some point. That’s because they aren’t money. On the other hand, gold has never gone bust because it is real commodity money. Silver is more volatile than gold because it is both money and an industrial metal. Because of this, silver is consumed into nothingness by industrial activity which does change the above ground supply, and sometimes rather dramatically. Still, silver is a monetary commodity and thus it has never gone bust before either. In other words, nobody ever looked at a gold or silver coin and said “it has no value”. But all paper money will eventually go to worthlessness because that is its actual value.
If this sounds incredible to you then it's time to broaden your horizons and learn some history. What is the current money of Taiwan? It's the so called NT which is short for "New Taiwan Dollar". What do you think happened to the old one? In Israel they have the NIS. Yep, New Israeli Shekel. Go look up what happened to the old one. Hint: it was not pretty. The majority of small European countries have had hyperinflation in the past 50 years and of course Latin America is famous for it (and it is happening in Argentina and Venezuela right now). It happened in Wiemar Germany. It always happens at some point in time because paper money is a confidence game and no con ever ran forever.
Most people don't know it but the US currency has already hyperinflated before. We used to have something known as the Continental dollar. They eventually became worthless due to war spending using money printed from thin air.
