Tuesday, August 1, 2017

A (Very Short) Primer on Money



Aureus of the First Citizen
It somehow seems appropriate on the first day of August to have a posting about money.  August is named after Caesar Augustus.  In addition to stealing a day from February because 1) Julius Caesar added a day from February to his month, July, 2) a month named after a living god needs thirty-one days instead of a boring thirty, and 3) February got stuck because it was the last full month of the Roman calendar year — all really good reasons for messing things up — he also instituted a new coin, the “Aureus,” or “Gold Coin” that has maintained its weight and purity down to the present day, although not the same name.

Small size United States Note, 1928-1963
What brought this up was a comment we saw recently on FaceBook that the last “real” money the United States had was in 1963 because it was backed by silver.  Unfortunately for the point being made, the photograph was not of a silver certificate that was backed by silver until 1963, but a United States Note (“Greenback”) that was always backed by government debt.  It was convertible into gold on demand from 1878 to 1933, but not backed by gold.
Until 1933, the only money backed by gold was “gold certificates.”  The only money backed by silver was “silver certificates.”  From 1861 until 1913, everything else was backed by government debt.  That included United States Notes, National Bank Notes, and the Treasury Notes of 1890.
Small size silver certificate, 1928-1963
In 1913 with the passage of the Federal Reserve Act, the plan was to retire all the notes backed by government debt, and replace them with notes, called “Federal Reserve Notes,” in the interim, during the changeover, using debt-backed Federal Reserve Bank Notes indistinguishable from the asset-backed Federal Reserve Notes (to prevent speculation and having to issue new notes once they shifted from debt to asset backing).
Unfortunately, Keynes got involved.  He believed government debt is the only legitimate backing for a currency, and so today what people think are Federal Reserve Notes are actually Federal Reserve Bank Notes.
And, believe it or not, that’s the simple explanation. . . .
Large size ("Horse Blanket") Federal Reserve Note, 1914-1927
The fact is, very few things are as misunderstood these days as money.  Paradoxically, nothing is easier to understand, once you realize that money is not some mystical thing created by God or the State (or, if you’re Thomas Hobbes, the God-State . . . no, really.  Look it up.  It’s in Part II, Chapter 17 of Leviathan).
But if money is not created by God or by the State, what is it?
“Money” is “anything that can be used to settle a debt.”  Another way of putting it, money is “all things transferred in commerce.”
Thus, money is anything people trade back and forth.  It’s a promise, a contract.
That’s all.  Now you Know All About Money.
Except How To Get It.
So, how do you get money?  Besides stealing or just having it handed to you, that is?
Treasury Note of 1890
You produce.  It doesn’t matter whether you produce by means of labor, land, or technology, as long as you produce.  Since money is only the medium by means of which one person exchanges what he or she produces, for what others produce, if you can produce a marketable good or service — meaning something that somebody else wants — you can “make money.”
Money doesn’t have to take any specific form.  It can take any form that parties to a transaction find acceptable.  In fact, even today, most “money” is not something that many people even think of as “money.”  It’s commodities transferred in trade.  It’s bills of exchange, mortgages, promissory notes, letters of credit, contracts — anything by means of which people exchange what they produce with each other.
So, if you want to solve The Money Question, start asking the right thing: How do we make as many people as possible productive?
#30#