Along with “What is Love?”, “What is Money” is one of the hardest questions for even the brightest and most well-educated people to answer. G. Edward Griffin has done arguably the best job providing a working, formal definition of money. As he explains, money is fundamentally anything that can be accepted as a medium of exchange1. If you possess something that can be exchanged for another item, then you possess money. If this definition sounds very broad and vague, that is indeed the essence of money, as the specific manifestations of money, such as the U.S. Dollar, Euro, Japanese Yen, gold, and even bitcoin, are all TYPES of money. These types of money can be classified into the following forms:
1. Commodity Money
2. Receipt Money
3. Fiat Money
4. Fractional Money
5. Digital Money
That order was presented on purpose, as money originally started out as physical commodities that people would exchange. Preceding even ancient history, if you had potatoes and wanted firewood, in order to purchase the firewood, you had to find someone who both owned firewood and wanted your potatoes. Effectively, your potatoes and the other person’s firewood were money, and still can be even today, so long as there are two distinct entities willing to exchange such commodities. This primitive arrangement of voluntary exchange of physical commodities, considered consumer goods in today’s times, was known as barter. This barter system was a good starting point, but the problem became; what if you lacked the specific commodities that others were willing to receive as money? The modern-day equivalent would be lacking sufficient dollars to buy something. It therefore became necessary to develop a commodity that could intrinsically be exchangeable for all other commodities. Furthermore, the general public had to agree to accept these commodities as common media of exchange. Over time, humanity came to accept gold and silver as the best commodities as media of exchange, and therefore, as money. No law, government edict, or central bank mandate made gold and silver triumphant as money – people naturally and voluntarily agreed to accept them as money. Circling back to the prior example, if you only have potatoes and gold, you want firewood, but those selling firewood don’t want potatoes, you could instead exchange your gold for the firewood, as the firewood seller would accept the gold because it could be exchanged for a commodity that he/she actually wants or will want in the future, let’s say boots instead of potatoes. The key question to ask and answer now becomes, why did gold and silver, out of all possible commodities, emerge triumphant as the early forms of money and common media of exchange?
This question is especially important as this post is also advocating the return to the gold standard and silver dollar, as will be elaborated on later. Gold and silver, in addition to serving as exchange media, could also store value, and thereby function as savings, which could later be exchanged for future purchases and investments. Additionally, these metals can be used for purposes other than exchange and can be melted down into small coins that are convenient enough to carry, unlike diamonds. Furthermore, gold and silver coins don’t rot, unlike cows that were previously used as money, and they can also be precisely measured in weight and quantity. If you throw gold and/or silver gold(s) into the bottom of the ocean, those gold and silver coins will be exactly the same even if they get dug up 1,000 years into the future. Would this be possible with any modern day paper currencies, credit cards, or even cryptocurrencies? No. In effect, gold and silver became the reference by which all other commodities in the economy could be compared. This is why it is critical for the monetary unit to be both stable and constant, which gold and silver are. While there were, and arguably still may be, different commodities that have the same benefits of gold and silver, civilizations in history generally agreed upon gold and silver. The point is, like with every other commodity, the people i.e. the free-market, should decide what commodity prevails as money through the mechanism of natural and voluntary choice and exchange. This is not the case in 2020, and hasn’t been for too many decades, as money, meaning modern-day national currencies, in nearly every country is wrongly created and controlled by an unelected, uncaring, and unaccountable central bank, such as the Federal Reserve in the U.S.
On a relevant and interesting side note, the Byzantine Empire practiced sound money throughout its long, 800 year history. The Byzantine Empire is an excellent case study of how sound money, such as a pure gold standard, actually sustains civilization and allows it to flourish. This runs contrary to modern mainstream belief that the gold standard inhibits wealth growth and traps civilization in poverty. Learning on the sound money tradition of the Greeks, Emperor Constantine ordered the creation of the new gold piece which was called the solidus and a silver piece called the miliarense. The solidus was so dependable that it later became known as the bezant, from China to Brittany, from the Baltic Sea to Ethiopia. Furthermore, Byzantine laws practiced very strict laws regarding money and banking. In order to become a banker, the candidate required sponsorship by those who’d vouch for his character. Additionally, the candidate needed to pledge to refrain from filing or chipping either the solidus or miliarensia and also from issuing false coin. Violation of these rules called for cutting off a hand2. Although such a punishment violates the Eighth Amendment of the Bill of Rights, it sure would be worth considering whether we should reimplement similar banker pledges. Definitely, bankers should be punished for inflating, and thereby devaluing, the money in circulation: how they should be punished is through the abolition of both the Federal Reserve banking cartel and the federal income tax that enables the banking sector to unfairly steal from the public, including the poorest taxpayers, to cover their reckless and failed investments and speculations – euphemistically called bailouts and Troubled Asset Relief Program(TARP). After all, if the gold standard and sound money worked so well for the Byzantime Empire all the way back then to the point where it lasted over twice as long as the Roman Empire, why couldn’t it work in today’s more sophisticated and technologically advanced civilization?
As civilization became more sophisticated, as the division of labor in the economy became more specialized, and as people became wealthier, the number of people owning more gold and silver coins than was convenient to carry grew immensely too. This lead to the first coming of Receipt Money. Interestingly, some of the earliest innovators of receipt money were goldsmiths, primarily during the Medieval Era. At the time, lots of people held too much gold than was convenient to carry. Goldsmiths, by virtue of owning large and secure vaults, offered to store people’s gold for a small fee. This is the medieval equivalent to banking deposit fees, although those don’t really exist anymore. The goldsmiths would then give a paper receipt to the gold owners, who could return to the goldsmith and take the gold out of the vault upon presentation of the receipt. The original receipt owner could also give the receipt away and sign his/her approval of the transfer of ownership of the receipt and consequently, the gold. This was the first version of modern bank checks. Receipt money came about out of a need for convenience; instead of carrying heavy amounts of gold or silver, you simply had to carry around light-weight paper receipts. These paper receipts became the first version of currency.
Let us now define Fiat Money, as that is, at the time of this writing, the predominant form of money in both the U.S. and the vast majority of the world. The American Heritage Dictionary describes Fiat Money as “paper money decreed legal tender, not backed by gold or silver”. Essentially, this is the antithesis of commodity money. The legal tender feature is critical, as this is the primary reason why people would accept or use baseless money – because the law forces them to do so for the payment of debts, and it is the only form of money that can be used to pay the federal income tax, for which again, this author calls for the absolute abolition. Of course, in every country that practices fiat money, which sadly is pretty much every country, only one central authority is allowed to issue the fiat money, which in the U.S., is the Federal Reserve. If a non-banker citizen prints any notes and tries to exchange it as if it were a U.S. Dollar, he/she would be a counterfeiter and would then be thrown in jail, rightfully so. However, when the Federal Reserve, and all other central banks of the world do it, they get away with the counterfeiting scot-free. This unjust balance of power is wrong, contrary to the Rule of Law, and the end of it is what this author is advocating. Inevitably, fiat money is created by inflation, either through physical printing of paper fiat money or in more recent times, through digital ledgers on computers. This inflation, in turn, unjustly destroys the purchasing power of people’s earnings, savings, and investments, resulting in widespread poverty. History provides too many examples of this, ranging from the Roman Empire, colonial America, the Continental Army during the Revolutionary War, both armies of the U.S. Civil War, to more modern examples like Weimar Republic Germany, Zimbabwe, Argentina, South Africa, and Venezuela. Fiat money, because it is created by inflation, actually imposes a subtle tax which is actually far more sever than any income, property, sales, or excise tax. As Thomas Jefferson explained it, “Every one, through whose hands a bill passed, lost on that bill what it lost in value during the time it was in his hands. This was a real tax on him; and in this way the people of the United States actually contributed those… millions of dollars during the war, and by a mode of taxation the most oppressive of all because the most unequal of all”.3 As G. Edward Griffin explains, the Law of Fiat Money is “A nation that resorts to the use of fiat money has doomed itself to economic hardship and political disunity.”4 There are no exceptions to this law.
Number 4 on the categories of money is Fractional Money. Here again, the goldsmiths were some of the earliest innovators of Fractional Money. Fractional Money simply means that a bank only has to keep a fraction of deposits in its possession and can lend out a certain amount, a fraction, of the deposits. Say a bank has $100 in total deposits, and then decides to lend out some of those deposits, say $85, only keeping a fraction, $15, in the vault. The problem, however is that not only is the bank committing fraud and violating its contract by lending out money that is supposed to be available at all times for the deposit owner to redeem, but if the borrower does not pay back, then the depositor unjustly suffers the loss that he/she never consented to by depositing his/her gold with the goldsmith. The reason goldsmiths felt safe doing this was because at the time, depositors usually didn’t withdraw more than 15% of their deposits. In effect, the original receipts that depositors accepted after placing their gold in the vaults became fiat money as the money backing the receipts wasn’t physically in the vault, and so the receipt owners were now forced to rely on faith, fiat in Italian, that the vault owner would have the gold at any given time to redeem the receipt. Obviously, this did not happen in history, causing bank runs and all kinds of other avoidable and severe banking and economic problems. As Griffin states, the Law of fractional money is that “Fractional money will always degenerate into fiat money. It is but fiat money in transition.”9 The only time bank deposits should be lent out is if the depositor provides informed consent to the banks that the deposit will not be available for withdrawal until a future time agreed upon by both the depositor and the bank. This is usually compensated with an interest rate payment to the depositor, with the risk of potential loss, of which the banker is obligated to properly inform the depositor.
Let us now discuss Digital Money, the final above-listed form of money. Before 2009, digital money didn’t exist. Unlike conventional money like the USD or Euro, BitCoin is decentralized and controlled by no central bank. BitCoin has a finite supply of 21 million. While this seems to be a good thing and in line with the scarcity of gold and silver, the problem is, as Peter Schiff has pointed out, BitCoin isn’t back by anything physical, making it more like fiat money. The BitCoin price gets driven higher simply by the availability of others willing to buy it for higher prices, and the reverse is how it gets driven lower. Even at its peak price of $20,000, what is it about the intrinsic nature of BitCoin that makes it worth $20,000, or even $5? Even as a hedge against the dollar, BitCoin hasn’t always performed well. In some of the most recent corrections in the S&P500, Nasdaq, and Dow Jones indices, BitCoin hasn’t skyrocketed when those indices have declined. Take March 17, 2020, for example, right around when the U.S. started irrationally shutting down commerce and most of the economy in a vain attempt to combat the exaggerated COVID-19 scare; BitCoin also declined with the major stock market indices. Even in late July 2020, when gold is knocking on the door of its all time spot price record, BitCoin is hardly half of its all-time record close of nearly $19,447. Most importantly, that record high price came right as the year 2017 was ending, which was a year in which the DJIA and other major stock indexes were breaking new records, although of course those records were artificial as they were illegitimately boosted by Federal Reserve injection of monetary liquidity, otherwise known as Quantitative Easing. In essence, the stock market indices weren’t appreciating in value; the dollars used to buy them were depreciating because of Quantitative Easing. This produced the illusion of appreciated values of the stock market indices. It therefore cannot be said that BitCoin is significantly different in speculative nature than the major stock markets or fiat currencies. In fact, BitCoin is only valuable by virtue of people having the willingness to accept it as a form of payment that’s it. It is almost essentially another Ponzi Scheme, whereby the original value of the asset is dependent on a buyer willing to purchase for a higher price than the original one. Furthermore, BitCoin doesn’t have the monopoly on digital currency – so many other similar digital currencies can easily be created to compete and thereby reduce the value of BitCoin. Unlike gold and silver, BitCoin is really not that unique compared to its competitors. It isn’t really possible to discover or replicate a metal that can compete on the same level of gold. Furthermore, many merchants are uncertain about BitCoin’s, or any cryptocurrency’s, future value. Those merchants who do accept BitCoin or other cryptocurrencies as payment usually don’t keep the BitCoin stored; instead they usually immediately exchange it for dollars, further showing how BitCoin is not a better alternative to gold for the fiat US Dollar, or any other fiat currency in circulation as of the time of this writing. This author, along with other reputable commentators on economics, advocates for the return of the gold standard and the silver dollar.
Why return to gold and silver? Think about this; 1971, Richard Nixon “temporarily” took the U.S. off the Bretton Woods Agreement whereby the U.S. Dollar could be redeemable for $35 per ounce of gold. So, let’s say your wage was $1.60 per hour back then, the minimum wage of 1971. That means you had to work nearly 22 hours to be able to buy an ounce of gold(excluding taxes, deductions and those sorts if variables). in 2020, nearly 50 years later, the price of gold is a little above $1,800 per ounce. With the federal minimum wage at $7.25 per hour, the poorest employees in our country have to work over 248 hours for that same ounce of gold, representing a decline in purchasing power by over 11-fold! How’s that for nearly 50 years of withdrawing from the crazy, arcane, obsolete gold standard? Remember this when people give even the tiniest possible flak to those advocating for the return of the gold standard.
While some may ask in objection to the gold standard – What about the finite supply of gold and silver? They will argue that there isn’t enough gold and silver to go around in circulation. To that, the answer is: the supply of money doesn’t matter. Regardless of the supply of gold and silver, the prices of gold and silver will adjust relative to the supply of other commodities. The greatest evidence of this is the adjustment of gold’s per ounce price form $35 in 1971 to over $1,800 since then. As famous economist Murray Rothbard, former professor at the University of Las Vegas in Nevada explains: “We come to the startling truth that it doesn’t matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness, of its gold-unit. More money does not supply more capital, is not more productive, does not permit “economic growth”.5
Sources
1) G. Edward Griffin, Creature From Jekyll Island, pg. 138
2) Le Livre du prefet ou l’empereur Leon le Sage sur les corporations de Constantinople, French translation from the Geneva test by Jules Nicole, pg. 38. Cited by Groseclose, Money and Man pg. 52.
3) Thomas Jefferson, Observations of the Article Etats-Unis Prepared for the Encyclopedia, June 22, 1786
4) G. Edward Griffin, Creature From Jekyll Island, pg. 165
5) G. Edward Griffin, Creature From Jekyll Island, pg. 142