Reserve Currency, II: What is Currency?

In the previous posting in this series, we looked at the definition of money.  We discovered that a sound legal, scientific, even financial definition of money is not all that hard to develop once we jettison all the baggage that people have loaded on the concept and demythologize the subject.

Money is how people exchange what they produce.

To recap, money is anything that can be accepted in settlement of a debt; “all things transferred in commerce.”  Money is the means by which people carry out exchanges and trade what they produce for what others produce.

Given that, we now can understand that all money is (or should be) a contract, just as in a sense all contracts are money.  That means that money — to be legitimate (that is, not counterfeit or “fictional”) — must conform to the three essential elements of a contract, viz., offer, acceptance, and consideration:

·      Offer: “To bring to or before; to present for acceptance or rejection; to hold out or proffer; to make a proposal to; to exhibit something that may be taken or received or not.” (“Offer,” Black’s Law Dictionary.)  More simply than strict legal language, to make an offer means to ask someone if he or she would like to have something or would like you to do something.

·      Acceptance: “The taking and receiving anything in good part, and as it were a tacit agreement to a preceding act [an ‘offer’ — ed.], which might have been defeated or avoided if such acceptance had not been made.” (“Acceptance,” ibid.)  In other words, “acceptance” is exactly what it sounds like: accepting or agreeing to what was offered.

·      Consideration: “The inducement to a contract.  The cause, motive, price, or impelling influence which induces a contracting party to enter into a contract.  The reason or material cause of a contract.” (“Consideration,” ibid.)  Consideration is thus the things of value being exchanged.  If nothing of value is being exchanged, then there is no contract.

“But” — people reasonably ask — “you say that all money is a contract, and all contracts are money.  I don’t get it.  ‘Money’ is that dollar bill in my wallet, that coin in my purse.  It doesn’t look at all like a contract to me.  How do you explain that?”

Currency is money, but money isn't necessarily currency.

These are good points.  True, a dollar bill, a pound note, or a penny don’t look at all like the image many people have of a contract, which is a piece of paper with a lot of whereases, heretofores, and so on, with a lawyer standing by to take a huge fee for drawing it up in such a way that it takes another lawyer who also gets a huge fee to understand it, and two more lawyers to argue that the first two lawyers are both completely wrong about everything since the creation of the world.

Just because some contracts get complicated, however, does not mean that all contracts are complicated.  Most people, in fact, enter into dozens of contracts every day, maybe even hundreds or thousands.  A contract, after all, is just a promise to do or give something of value.  Most people make and keep promises all the time without thinking twice about it, or even at all in many cases.  Contracts — promises — only get complicated (and lawyers only earn huge fees) when the contract isn’t fulfilled according to the agreed upon terms, which only means that someone didn’t keep his promise, or kept it in a way that was not agreed upon.

Yes, this tetradrachm of Alexander the Great is a contract.

The fact is that a contract can take an almost infinite number of forms, from a verbal promise, to a handshake, to a complex legal document with sealing wax and ribbons dripping everywhere.  The form of a contract only becomes important when people try to change the terms of the agreement or attempt to avoid keeping their promises.

That’s when having the agreement in writing comes in useful, although lawyers can argue about even plain language and the proper placement of a comma for decades without ever being satisfied or coming to an agreement.  Nevertheless, most contracts — statistically speaking, practically all of them — are kept without anyone making a fuss one way or another.

And that leads into a discussion of “currency,” or “current money.”  According to Black’s Law Dictionary, currency is “[c]oined money and such banknotes or other paper money as are authorized by law and do in fact circulate from hand to hand as the medium of exchange.”  (“Currency,” ibid.)

They sing, dance, and lay eggs. What are they worth?

Now, that definition is good enough for most legal purposes, but is not good enough for our purposes, which is to understand money and its proper creation, not merely its function.  As we saw in the previous posting in this series, what we call money is simply the way people exchange what they produce.  That is certainly simple enough, at least in theory.

It gets a little difficult in practice, however.  What if I have three chickens and you have a bag of apples?  How do we equate chickens and applies?  Or how about chickens?  Is a scrawny, elderly hen long past its egg-laying prime the same as a young fat cockerel?

When Aristotle pondered this problem in The Politics, he decided that money had been invented as a way of using a third thing as a standard with which two or more things could be valued.  In this way people don’t have to come up with a new standard and a new price for everything exchanged in an economy, e.g., three chickens might be worth a bag of applies, but also a quarter of a pig, or a tenth of a cow, an ounce of copper, one and a half knives, or a cartload of manure.

Aristotle: Why not value everything by one standard?

Also, maybe only one person wants your chickens, but you don’t want the two bags of charcoal he is offering for your chickens.  You want a quarter of a pig, but the owner of the pig doesn’t want chickens, and isn’t ready to slaughter his pig just yet, anyway.

The answer?  Find something a lot of people want, and all are willing to accept that allows people to value all contracts in the same terms and save to be able to delay exchange or consumption to a later time.

For most purposes metal served admirably as a standard once economies began to rely on specialization and exchange to meet people’s needs.  Draft animals were the original standard used in most economies in very ancient times, but each individual animal is different, and a difference can mean a disagreement or even a killing if the matter is sufficiently serious.

The question was, which metal?  To a lot of ancient people, the answer was obvious: bronze, the material out of which the best tools and weapons were made.  Not that new stuff iron, it rusted, and was really hard to learn to work, too, plus the fact that it was a bit too plentiful to be really valuable.  The Romans even considered bronze money sacred, and continued to value things in terms of bronze long after silver and gold coins became common.

When we say the Egyptians wrote down everything, we mean it.

Gold was nice, but much too scarce, except in ancient Egypt but which never adopted currency until the Greeks took over.  The Egyptians wrote everything down and had scribes and accountants to record all important transactions.  Most documents from the ancient world in fact are not great works of literature, but all the different forms of money people invented to facilitate commerce.  Bills of exchange, mortgages, promissory notes, bank drafts (or the equivalent before true banking was invented), letters of credit — you name it, it was invented first in ancient times.

Rome financed part of the war against Hannibal by issuing debt.

Even the bill of credit, a type of bill of exchange issued by a government to be redeemed out of future tax collections, was used . . . although it was a dangerous expedient.  During the Second Punic War between Rome and Carthage the public revenue had deteriorated to such a point that the Roman Senate (the "S" in "SPQR") authorized leather bills of credit to purchase supplies for the army that circulated in the economy until the government collected enough in taxes to buy them back.  That worked, but a similar experiment in China some centuries later resulted in riots and the murder of the bureaucrats who had suggested it as a way to get easy money.

The west eventually settled on silver after a few experiments with gold and electrum, electrum being a naturally occurring alloy of gold and silver . . . which had wildly varying values for the same weight of metal, depending on the proportion of gold and silver.  Getting into Asia gold was more common, but even there, silver was the most common standard, with everything else measured in terms of a weight of silver.

Silver was, in fact, ideal for most purposes.  It is easily refined with primitive technology and there is a relatively simple way to achieve a standard fineness.  Silver was consequently the monetary metal of the world until the nineteenth century, when discoveries of massive gold and silver deposits made silver too cheap for a standard and gold sufficiently plentiful to be able to replace it.

Troyes, one of the Champagne trade fairs of the Middle Ages.

There is another problem, however.  Yes, a lump of silver of a specific fineness and weight might be the agreed-upon standard of value for a transaction . . . but who sets the standard?  And who enforces the contract if somebody tries to break his promise?  After all, what you mean by a foot or a pound might not be what I mean by those same terms.  Even today, a Troy ounce is not the same as an Avoirdupois ounce.

To keep things simple, most people agreed that the government should set standards and enforce contracts, although — of course — there was nothing to stop people from specifying different standards in their contracts.  For example, the organizers of the great annual trade fair at Troyes during the Middle Ages decided on the weights and measures to be used for all contracts entered into during the fair.  The fair of Troyes was so important that “Troy weight” became common in contracts everywhere.  It was so common that it’s still used today in contracts dealing with precious metals.

Currency — money of legally recognized and enforceable value — was a great boon to economic growth and progress of all kinds.  If you worked for a penny a day (a penny being defined as 1/240^th of a Roman pound of silver or 24 grains of pure silver, a “pennyweight”) you got a penny or something worth a penny, that you could spend next month, and it would still be worth exactly one penny!

That was the theory, anyway.  The problem was that governments figured out a way almost from the very beginning to manipulate the value of a currency to their own advantage — which is what we will discuss in the next posting in this series.

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