Birdman posted an article by some other author about “What is Money”?
That author is a fine example about how utterly confused most people are about monetary theory.
The confusion always starts around the definition of money (or the dollar). For many people, money is some mysterious economic ‘thingy’ that exits to help transactions occur.
This incomplete thinking causes problems – if it exists to just facilitate transactions and trade, why is money still valuable when it is not traded?
This leads into the attempt of trying to assign an alternative value to money. “See, this piece of paper, called money – used for transactions – isn’t valuable in of itself – it holds value because it represents a piece of gold/silver/claim on taxes, etc.”
But, when they investigate money even more – they find that in the past it was a measure of some sort of metal – it isn’t any more. So, suddenly they find themselves a drift again – because it doesn’t represent anything other than itself, it is still money!
Then they really become confused.
Mises defined money very easily and completely. His definition completely answered all the questions, quirks and existence of all money in the whole world over all times.
Money is whatever is the most desired commodity in an economy.
So as I crack apart this incomprehensible mess of an article, keep that definition forefront in your mind. It will give great clarity to the questions that author is asking.
“What exactly is a dollar?”
You throw the query out to your friends, and you receive various responses based on the same vague premises. A dollar measures value, but value is subjective, so the measure is itself subjective (try convincing the IRS of that) . . . . A dollar is money, and money is just some arbitrary substance that is based on the faith placed in that selected monetary unit . . . . Money is an abstraction . . . .
So the confusion starts.
A dollar is a unit of currency, as the author later learned.
But he automatically assumed that a dollar is money!
We can figure that out quite easily through an experiment. A Bolivar is a unit of currency of Venezuela. It is also money in Venezuela.
But try using the Bolivar in Smalltown, USA. Though it maybe a currency, and maybe money somewhere else, it is not money in Smalltown, USA.
In our journey, we now know that money and currency are not the same thing. One does not beget the other.
We touch Mises’ definition – ‘most desired in an economy’. Well, the Bolivar is not desired at all in Smalltown. Thus, it cannot be money – and as we’ve seen in our experiment, it isn’t.
So we have 1) refuted that dollars are automatically money and 2) Mises’ definition continues to give us the best information regarding money.
The fuzzy answers all seem reasonable enough, but not quite satisfying. And so upon your return home, you consult your Black’s Law Dictionary, (6th Edition), that revered, definitive legal resource, which informs you thusly:
Dollar The money unit of the United States of the value of 100 cents, or any combination of coins totaling 100 cents.
“But what’s a cent?” you ask yourself aloud, paging back through the C’s. And you find:
Cent A coin of the United States, the least in value of those now minted. It is the hundredth part of a dollar.
Ah-hah. The trail has apparently ended but you don’t feel especially enlightened. What gives?
Some people maybe surprised that the Law according to Black directly and with no confusion fits precisely into Mises definition of money. How?
By not defining the dollar to be money! This author was seeking exactly that – that the law will define what money is so he looks up defining a dollar – believing that the dollar and money are somehow intrinsically linked. But they are not.
But he did find the definition of a dollar.
You decide that more formal research is required. Luckily, the library is not far away, and so you make the short trip on over to see what you can find out.
You discover that there actually does exist an original, official definition of the dollar—the Coinage Act of 1792 formally defined the dollar as 371.25 grains of pure silver.
Therefore the dollar, by its original legal definition, was a unit of mass describing a fixed quantity of pure silver. Those old-timers didn’t seem to think a dollar was some fuzzy idea subject to interpretation—it had a precise definition without any circular references or vagaries involved.
Further research discovers that the last legal definition of the dollar exists in an amendment to the Par Value Modification Act from 1973, which defines the dollar as precisely 9/380 of a fine troy ounce of gold.
Interesting. Every paper dollar is legally equivalent to gold, and yet the government only accepts paper dollars, and not gold, as money. Theory does not seem to translate into practice here for some reason.
At this point, he furthers his confusion – that the dollar he has in his pocket is the same dollar that is being discussed here.
He can be forgiven for this confusion – because these two different items, the one in his pocket and the item referenced in Act’s use the same name, but are not at all the same thing.
This is a dollar bill from 1928. It is called a dollar. This dollar represents an amount of silver.
This is a dollar bill from 1929. It is called a dollar. This represents 100 pennies or 20 nickels or 4 Quarters.
The author then falls victim to more confusion. The government only accepts ‘paper’ dollars instead of gold for payments.
That is because gold is not money. It is an ore. It was once money, but it is not money in the United States today.
This, below, is money
A Federal Reserve Note (FRN) called a dollar. If you take this bill to a bank and ask for it to be redeemed, they will give you Ten (10) $5 Federal Reserve Notes (or some other FRN that will make up $50).
But this one has something the others do not have, which is why the author is confused about why suddenly the FRN became money.
Look at the writing of the $50, on the left side of the picture: it says
“This note is legal tender for all debts public and private”.
In the United States, if you owe someone a debt, you can use this FRN to pay them, and they must accept payment. They cannot refuse you. If they refuse you, you can leave this FRN at their feet and leave. You are no longer in debt.
By an act of law, the government declared that this piece of paper was a whole and complete way to legally discharge debts. But this law did not make it money. The people made it money by using it as money.
So, while the author is confused about dollars, money, silver and Federal Reserve Notes, the government is not!
Returning home, you sit at your dining room table contemplating a scrap of greenish paper that everyone refers to as a dollar.
He is trying to infer that the dollar, as a name, is exclusive. But it isn’t. Canadians call their currency a ‘dollar’. Does that confuse anyone?
So there is no need to confuse the three different types of currency above while they all share the same name.
PS: The use of the name of dollar for all three (well, actually six different currencies of the United States) was to confuse the people into thinking that they were all the same thing.
The look the same, are the same size, use the same color, share the same Presidents as pictures. But they are not the same!
This slight of hand was purposeful to create the desire to use the FRN instead of the silver and gold dollar bills. This unhitched the “dollar” from representing the “dollar” gold. This tactic accomplished that goal very quietly.
But now we are smarter. We understand that there are many different things all using the same name – dollar – as a name. But only one of them today is money – the FRN.
So how can a piece of paper be money?
Let’s ask Mises (again): because it is the most desired commodity in the economy.
Mises does not judge the choice for money – so what if it is a piece of paper, or a rock such as the Rai stones in the island of Yap, Micronesia.
All that counts is the desire. In the situation of the USA, the government created that desire by making it a law that this paper paid debts – including your tax debt.
This same method was used in England. The “Tally Stick” was used back by English tax payers (starting in 15th century) to pay their taxes.
The King would take the peasants grain and animals and pay them with Tally Sticks – sticks with a notch in them representing the ‘value’. The stick would be broken in half, and the ‘short end of the stick’ would be given to the peasant (this is where that phrase began).
At tax time, the peasant would pay his taxes by giving back tally sticks. The stick ends would be matched up (the anti-counterfeiting component!), and taxes would be declared paid.
These tally sticks would be bought and sold between the peasants depending on their tax debts. Soon, they become money – traded for all goods and services.
Tally sticks were still in use up to 1870, and legal to use in England until 1970.
It is very common tactic for government to create money by simply making that money required to pay one’s taxes, and accepting nothing else.
This is how FRN became money in the USA.
But because most people do not understand the definition of money, paper currency, stones or tally sticks becoming money seems bizarre.
But it should no longer appear bizarre to us. Money is simply another commodity, whose feature of being the most desired turns it into money.
Supposedly this cottony pulp is money. Black’s Law Dictionary says that the term “money” refers to coins and paper currency used as circulating medium of exchange, and does not embrace notes, bonds, evidences of debt, or other personal or real estate.
This is what happens when a lawyer attempts to be an economist, he gets the wrong answer.
Coins, paper, notes, bonds, evidences of debt, real estate, rocks, shells, salt, or anything else can most certainly be money.
But the reason they are not is because it is not the most desired. A lot of commodities are difficult to transport, or divide or use. Thus, there is a discount in using them for payments, because the debtor would have to somehow dispose of these non-money commodities in a manner unsuitable for his own purposes.
If you paid me your debt to me in wheat, what am I going to do with a bag of wheat? I would have to trade to someone else for something I can use. Thus, I would charge you – the debtor – a fee for the annoyance of having to do another additional trade before I could get my needs or desire filled.
If you paid me with a debt note from another person? What am I going to do with that? I have to collect the debt for me to have something useful. It is these things that dissuade the people from using these other forms of commerce as money.
So, we know that a certian commodity is money when there is no discount in using it for a payment. If you paid your debt in dollars, I accept them straight away. Why? Because I can use that money directly to buy what I want for my needs without a discount either!
So money is the most desired commodity, and we know something is money because there is no discount necessary when it is used to pay for something.
You notice that the words at the top of the scrap of paper you are contemplating read FEDERAL RESERVE NOTE. Since it is a note, it cannot be money.
And because the author holds a terrible definition of money, he runs smack head first into a wall of understanding.
The FRN is money in the United States (and almost everywhere else in the world). Money is not money because it is an ore, or jewels.
Money is ‘money’ because other people want it. Other people today want FRN. They will accept FRN without requiring a discount. Therefore, it is money.
After this, the author goes into circus flips to prove that money (as in FRN) are not money, but something else.
And what does Black’s have to say about Federal Reserve Notes (FRNs)? It says they are a form of currency issued by Federal Reserve Banks in the likeness of noninterest bearing promissory note payable to bearer on demand. The federal reserve note (e.g. one, five, ten, etc. dollar bill) is the most widely used paper currency. Such have replaced silver and gold certificates which were backed by silver and gold. Such reserve notes are direct obligations of the Unites States.
So they are only a likeness of a noninterest bearing promissory note payable to bearer on demand. Sure enough, in order to be a real promissory note, it has to be redeemable for something to someone, and the FRN certainly doesn’t promise anything to anyone in that it has no redemption clause. So although it says it is a note, perhaps it isn’t.
But then you recall from your library research that current law as stated in the United States Code, Title 12, Chapter 3, Subchapter XII, Section 411 declares that Federal Reserve notes are redeemable in lawful money at any Federal Reserve bank. So perhaps they are indeed promissory notes. But it turns out that in the real world, Federal Reserve notes are only redeemable in more Federal Reserve notes, contrary to the printed law. If they are in fact “redeemable” only in more Federal Reserve notes, then they are by definition non-redeemable.
Imagine having saved hundreds of cereal box tops in the hopes of redeeming them for a microwave oven or some other product the cereal company promises. If that company later declares that they would only “redeem” your collected box tops with an equal amount of the same type of box tops, how redeemable would you consider those little pieces of cardboard?
So FRNs cannot be notes after all, because they are not redeemable in anything other than more FRNs. So perhaps they are money after all?
He so confused himself that he undefined “notes” to be nothing. Since it is nothing, now it becomes money!
Well, if they are said to be redeemable in lawful money, this implies that they are not lawful money themselves. Are they then unlawful money? Is there such a thing? Or are FRNs simply not money at all?
Loop-da-loop! I think he is getting dizzy!
Referring back to the Black’s definition of money, we see that FRNs are stated to be direct obligations of the United States. Since an obligation is a debt, and money cannot embrace evidences of debt, we can state quite definitively that FRNs are not money. They in fact represent United States debt. They can be referred to as currency, or legal tender, but not money.
He is correct. Just like a Tally stick, FRN does represent an obligation held by the USA. A Tally stick was an obligation (or debt) of the King. He took a cow and gave you a stick. The inferred promise was he’d give you back a cow for that stick.
But the King ate the cow. Hard to give back. The USA government ate your ‘food’, too. Hard for the USA government to give it back, too.
So both entities used taxes. Taxation creates an instance of obligation of you, the citizen, to the government or crown. “Poof” – you owe the government money ‘right out of thin air’. The government demands that you use its currency – tally sticks or FRN depending on where you live – to pay of your debt!
The tally stick is returned to the King. All debts are square.
Yes, your debt to the government or King came out of thin air and you get stuck with the short end of the stick (bad deal) – you lost your cow. But that is a discussion about government, and not a concern right now in our economic discussion of money.
But the point here – whether it is a Tally Stick or FRN – and whether it represents an obligation of the government – the stick or the FRN is still money. Hold onto Mises definition, and you’ll be able to wade easily through this authors muddled thinking.
You remember that the dollar was originally defined as a weight of gold. Are gold coins money according to Black’s? They certainly do seem to qualify by the given definition.
Yes, a piece of paper that represented some gold was called a dollar. My neighbors dog is called “Dollar” too. Does that mean that dog has some gold value? Probably not.
Don’t get thrown off by labels. The word “dollar” is a label. Yes, its use was purposeful to confuse the People. But it is still just a label. You can relabel all of these things if it helps to un-confuse you, such as “silver-dollar”, “gold-dollar”, “FRN-dollar”, “dog-dollar”.
But gold, today, is not money – regardless of what Black and that author may think. It is a valuable ore – but it fails, today, as money. If you took a gold coin to the grocer and attempted to use it to pay for your food, he probably would ask you to go to a gold dealer, sell your gold, and then come back with FRN to then pay for your food.
That means gold is not money. The grocer did not desire at the same degree as he did FRN . FRN is money, gold is not.
So let’s sort all this out: Gold is money, and a dollar is, by definition, gold, and the FRN claims to be a dollar, and thus also money, but we saw that FRNs cannot be money. Every FRN also claims to be a note, but it isn’t since it is non-redeemable. How can there be so many conflicting statements and ideas swirling around what should be a simple, straightforward concept? Why all the contradiction and confusion?
Now, you can understand how this poor fellow got confused. And it is a lesson I have and will repeat all the time.
Watch your definitions!
Because he started with faulty definitions about money, and then applied other definitions to labels called ‘dollar’ inappropriately, he ends up here contradicting himself and in confusion.
Well, as your day of philosophical thinking winds on down, you decide to pursue one final logical thread: People began exchanging goods and services long ago. If a person gave up a good or service, he certainly expected something in return. Who would want to give up something for nothing—one would justifiably feel cheated in such a transaction.
Money developed as a way to get around a direct barter economy, and money simply was a commodity that was so universally accepted that one could be sure that if he accepted it in exchange for goods and services, then he could later exchange it for other goods and services of equal value.
And away he goes, again, with more faulty definitions.
Money was not developed!
This makes it sound like some ancient Einstein sat down and said “Hey, I’ll invent money to solve the problem of trade!”
Well, go and find out who invented money. You won’t find anyone, because no one did.
Money has always existed since the day men traded goods. It was spices, then silk, or salt, or whatever at that time was the greatest desired commodity. Gold has always been at the top of the list, but not because gold is money, but because gold has always been very desired.
The money commodity had to be—besides universally desired
By accident, he got one right answer. Universally is not a requirement – not everyone accepts the US dollar FRN. But we still call it money.
—durable (not easily destroyed and stores value over long periods of time),
Durable helps a commodity become desired, but it doesn’t make it money.
fungible (does not lose its value when divided into small pieces),portable (high value in relation to weight),
Again, each of these improve the desirability of a commodity, but it doesn’t make it money. I’ve already shown the Rai stones – not very darn fungible or portable – but they are money!
and relatively stable in supply.
Salt was money in ancient Rome. The supply was very unstable – but salt was very desired. The root of the word “solider” comes from Latin for salt – it was a man who fought for Rome and was paid in salt.
or If the money commodity was so composed, then one could be sure that goods and services exchanged for money would eventually bring in goods and services of equal value when the money was later exchanged with another person.
Do not get into the trap of trying to evaluate commodities based on ‘value’. Value is subjective. You may value water right now because you are dying of thirst, whereas I see no value in water as I am drowning in it.
Value is measured by the individual, not by money. Money gives us a way to price commodities for us to exchange them in a coherent way.
Salt, tobacco, cattle, shells, and rocks have all served as money. But the free markets of the planet Earth have selected—over a span of thousands of years—the precious metals gold and silver as the most widely accepted and enduring monetary commodity.
That may be true, but because it was true in the past does not make true now or in the future.
Today, gold is not money. FRN are money. This author does not know why.
But hopefully, by now, you do.
When our nation was young, the government didn’t invent the dollar and then declare it to be the national monetary unit. The dollar was the coin that was circulating in the market at the time, and so the government was simply defining the exact amount of silver that should always be present in the coin. Beyond that, their only other role in the matter was to create dollar coins of uniform silver content. This was a service for the people so they would not have to weigh and chemically test coins whenever a transaction took place.
Now he is evaluating the ability of currency and its properties. But so what?
So you can’t counterfeit my platinum ring easily – doesn’t make my ring money.
But over time, people began to associate the word dollar with the coin itself, or with the paper surrogate that served as a warehouse receipt for actual silver or gold coin on deposit at the United States Treasury. When the word “dollar” became synonymous with any base metal token or scrap of paper that had government-endorsed words and pictures on it, when the people forgot that a dollar was a fixed amount of silver or gold in the same way that a gallon is a fixed volume of liquid, then the point was reached where the government could debase and eventually take away the money from the people and substitute it with fiat (imposed by decree) coin and currency.
Yes, this was the process that turned FRN into money – but that does not mean they are not money now.
And the people would have no idea that anything at all had happened. Amazing.
And so here we find ourselves, embarrassingly, without any money.
I wonder what he thinks all those numbers in a bank account or bills in his wallet are?
But if not money, then just what do we have? Unfortunately, the answer to that question is debt. Our system “monetizes” its debt into pieces of paper, which include those fancy little green exchange tickets that we pass around. Every FRN in circulation is in reality a tiny little portion of the mounting $10-plus trillion national debt floating from wallet to wallet. We give our goods and services to others in exchange for scraps of paper that represent debt owed by our government. We are thus cheated in that we give value but do not receive value in return. We accept an irredeemable IOU instead of actual payment. Why do we tolerate such a state of affairs?
All money, in any form, is some form of IOU. It doesn’t matter if it is paper or ore.
As many have often said, you can’t eat gold. And they are right. You can’t eat paper (easily, anyway) either. No matter what is money, it is used to trade for the things that we do need or desire.
Any commodity that becomes money does so because it is so easy to trade for things that a person really wants or needs.
We don’t look at money as ‘the thing that I eat’. We look at money as ‘the thing that I can trade to get things I can eat’.
Perhaps only because we know that we can cheat the next guy in line when we give him those same scraps of paper for the goods or services he gives to us in exchange. Nice.
You further realize that debts therefore are not paid when FRNs exchange hands—they are discharged. There is a difference. When you give someone an FRN you are discharging a small piece of the national debt that you were holding to the person who receives it. Nothing has been paid. No debt has been extinguished. It has been discharged—transferred from you to someone else.
If each and every American sent in all his FRNs to the Federal Reserve in an attempt to pay off the national debt, the entire supply of FRNs in the United States would disappear and there would still be debt remaining. Of course, at that point, there would be no “money” left to circulate and so the entire economy would immediately collapse.
Without money in a complex economy, it would collapse.
But another form of money would appear (if the law allowed it).
Again, consider a prison. There are no FRN running around there to facilitate trade.
But what is the most desired commodity available in prison? Cigarettes. Cigarettes becomes money. And now, knowing Mises, you can see that is perfectly understandable!
But so what? Congratulations, Einstein, you discovered that the United States has no monetary system, just a debt system. As long as it works, what’s the difference? Quit worrying already.
Well alright, you think to yourself, let me count the ways it makes a difference.
It makes a difference in that the current debt system cannot last indefinitely. Any economic system dependent upon perpetually-increasing debt is unsustainable. When people try this at home, the end of the line is when they can no longer acquire more credit, and things usually do not end well. Why should the process end differently if we consider the case of nations behaving in such an irresponsible manner instead of individuals?
It makes a difference in that the current debt system deceptively substitutes fiat currency for real money.
What is real money vs unreal money?
His dialogue of debt doesn’t prove or disprove any theory of money.
This is not the first time that government has imposed fiat currency on its citizens, and if history is any guide, it won’t be the last. History also teaches us that each and every time that a government has debased its currency and followed that inevitable slippery slope on down to pure fiat currency, the end result has always, invariably been exactly, precisely the same—the fiat currency becomes worthless.
Yes, government action can destroy money. But that doesn’t disprove that it wasn’t money in the first place.
We stopped using salt as money because we discovered lots of salt instead having to make it out of salt water. Salt became inflated and eventually lost its money status.
Yes, FRN will become worthless one day, and yes that will cause huge economic problems, but that is due to actions. Whether this commodity or that commodity is or is not money really isn’t the point.
It makes a difference in that the current debt system, based on credit expansion, has a “money supply” based on that debt that expands faster than the economy grows. This is called inflation. FRNs put aside as “savings” devalue over time due to inflation, and so people are unable to use savings to reliably provide for their futures. Work done 30 years ago that was put aside as savings has lost over 70% of its value due to this hidden tax. People are not free to provide for themselves with savings accrued from their own labor.
It makes a difference in that the current debt system is based directly on the fifth plank of the Communist Manifesto, which demands centralization of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly. Why is our entire Capitalist economy based entirely upon one of the basic tenets of Communism? The State must control the capital, not the people? Guess you must have missed that particular day at school.
It makes a difference in that the current debt system encourages war. Wars are expensive, and without unlimited credit, a government must tax its citizenry to raise funds for war. Unless the situation is extremely dire for the nation, the people usually are not supportive of such funding. When funds can be raised by government simply asking for more credit, then entering into wars that are less than direct self-defense becomes much easier. Our country is currently involved in wars that will cost trillions. Were taxes increased to fund this war? Where did the money come from? Just add it to the tab, please.
It makes a difference in that the current debt system is morally repugnant. When a person realizes that he has been deceived in order to participate in an unethical system that is bound to fail—a system wherein he believes he has money but actually has none—a system that demands that he be cheated and only by cheating others can he be recompensed—what is that person to do if he would rather not participate in such a dishonorable system?
And so now you’ve finally come to the heart of the matter. You have defined and analyzed the problem at length. You have griped and complained. Now, what can you do about it?
Debt is a problem. Inflating the money supply is a problem But that doesn’t dismiss FRN being money.
You notice that though the author thinks he as proven that FRN are not money, he can’t help but continue use the term money to describe the situation.
Can you single-handedly change the system? No. Can you convince a large number of people to become involved in changing the system? Probably not. Can you write a letter to your representative in Washington so he can get the ball rolling on fixing the system? (insert sarcastic remark here)
You decide that the best course of action is to take care of yourself and don’t assume that someone else is going to fix things for you. Now that you understand what money is and what it is not, you see a fairly simple and obvious first step to take.
So, now that you understand what money is – you can reread this article with a new eye.
Understanding what is money is the first step in protecting yourself from those that pervert it.