State of Mankind

A New Way Of Thinking

What Is Money?

This may seem to be a dumb question at first thought, but what is money?  To answer this question we’ll look at perhaps the first form of money, the IOU.  We’ll then fit this into a modern context to give my theory of what money really is and what really backs our dollar.

Many years ago, when money wasn’t as common as it now is, people often worked together with simply their word as a bond to return the favor.  Building a log cabin is much easier with a few hands, so a few people would get together and build one house with the promise that they would help build all of their houses.  If we write this promise on paper, we have a basic form of money–a piece of paper that can be traded for work from another person.  It essentially says you added this much to our economy, and are therefore entitled to receive the same amount.  You built 1/4 of my house, so I’ll build 1/4 of your house.

The move up to gold coins or gold backed paper money isn’t a big stretch from here.  Instead of measuring the input or output directly (house for house), we find a commodity that pretty much has universal value.  Any input or output from the economy is then measured by the standard of the value of this commodity.  1/4 of the house may then be said to be equal to 10 gold pieces for example.  The 10 gold pieces could then purchase 1/4 of a house or 5 wagons or 10 wheelbarrows, depending on the needs of the person who earned the gold.  The basis for the money has not changed.  It is still the trust that by working for someone today, the worker can receive an economic marker and trade it for the value of the work he did.  He can do this immediately or in the future.

Now we fast-forward (this was an old practice used when cassette tapes were the technology that carried our music) to todays money.  What is the foundation for its use?  I propose that it is still the same.  It is the idea that I can work, receive a marker for the value I have given to the economy, and use that marker to take that value out, in whatever form I may desire.  I trust that this is the case or I would have no reason to go to work.  If my input was making cars, but I couldn’t exchange that input for the farmer’s input of growing food, then I couldn’t feed my family.  I work on the assembly line in the trust that my labor can be converted to food and shelter by the economic marker we call money.

Now for the curve ball.  This is the thing we call inflation or its twin brother of money printing.  When the government seeks to have “modest inflation” or they print money out of thin air, what are they doing?  They are making promises that have no economic justification.  10% inflation says, “I didn’t build 10% of your house, but I’m taking that amount from those who did.” 

Rather than get mathematical about this, I would question what this does to the foundation or the reason we use money.  It undermines the trust that I will be able to receive the same service I gave.  If this trust is undermined to the point of being broken, what happens next?  In the end, money is nothing more than a promise, and trust in that promise by the recipient.  I believe good monetary policy should focus on maintaining the integrity of the promise that a person can get from the economy the full value of his earnings from what he put in.  On a little higher note, if everyone were fully honest, would there really be any need of money?

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