Wednesday, April 13, 2005


I'm going to be talking about money several times - international debts, taxes, deficits and investments just to name some topics that'll happen real soon now. I thought I'd take a moment to reprise something I've said one or two times before on other folks lists.

What is money? Well...

Once upon a time we worked by barter. (Ignoring for the moment that sometimes we worked by force and threat of force - that's important but it's irrelevant to this topic.) We traded the wheel we carved for some mastadon meat. A spear head for some skin ties for our spear. The negotiations might vary and take time, but in the end it was so many of this for so many of those. (You can see this happen if you are near more than one child at the end of a Halloween evening in the US. "I'll trade you three of these candies for three of those." "Nah, but I'll give you two these others for your three." "...")

Gradually, this expanded to three- (or more) way trades. I trade him some apples so he'll give you some milk so you'll give me some bread. This gets awkward, especially if I think four apples are worth a quart of milk AND worth a loaf of bread, but the guy with the bread thinks his bread's worth two quarts of milk. Sure, a three-way negotiation works but the more people the harder it is to get everyone together, much less get them to agree. This situation gets resolved in several ways. There are coops, where one person trades on behalf of several others. There are bazaars, where everyone meets and trades (I trade my apples for the milk, then I take the milk to the baker and trade for the bread I really want). There are habitual arrangements (where we finally worked out a mass trade system and just stick to it as long as we can rather than go through THAT again.) And then there are tokens.

Tokens take the bazaar principle a slight step further. I make a set of tokens for apples - MY apples, and the same for the milk and the bread and so forth. I give you some apples and you give me a quart's worth of milk tokens, which I then take to the baker and exchange for bread. The tokens have several advantages over the bazaar. For one, I don't have to worry about what I've got spoiling before I get to the next person. For another and huge benefit, I can trade in futures. I get apples for a couple of months during the year, but I need bread and milk all year long. I can trade tokens for 10 months and redeem them all after harvest.

But it's still a pain carrying milk and bread (and egg and honey and cloth and ...) tokens about, keeping track of them. What if we make a sort of uber-token? Hello, money. A 'token' of money represents a nominal fixed value of my time and talents in services or goods.

A critical issue of money is that it needs to be of relatively fixed quantity. If there are only 1,000 'tokens' in existance in my county, I might feel comfortable giving a bushel of apples for a token. If someone suddenly brings in 9,000 tokens without me being aware of it, I can get really and truly burned by having to give up a thousand tokens worth of apples - a thousand bushels - while others modify on what's available. Now coincidentally, the need of the token to be relatively restricted makes it tend to have some value in and of itself, and that leads to the confusion.

The token's inherent worth is not its tradeable worth. As money, the most important issue is the trust we have that the token is worth roughly the same quantity and quality of labor for all of us.

That's worth restating, in te process restating the thrust of this whole message.

"Money" is a representative token of the fruits of our labor that we TRUST to be at least nominally equal for us all In the process, and to simplify the multipart negotiatsion above, we work with the assumption that the token has a reasonably constant level of representation - it's not worth one apple today, ten apples next week, and half an apple a week after that. If the trust breaks down - if I cannot trust the value of the token to be at least nominally equal over time and distance - the almost inevitable result is to change tokens for something else. Something else may be other tokens, or it may result in a shift back to multi-level barter.

As I said there are many articles I'll be spinning off this point or for which this assumption is a ground, but I'm going to go immediately to one in particular. That's the inevitable refutation to the above point which argues that the best token is not one that is (as close to possible) irreplicable, but rather which has a solid intrinsic worth in and of itself. I'm speaking, of course, of the folk who'll say the best money is Gold and/or Silver.

I used to have a longwinded response. Instead I'll stick to two data points to show its inconsistency.

Point one. Getting paid your weight in gold used to allow you to live in luxury for the rest of your life. I presently weigh in the vicinity of 200 US pounds (av). That's 2,916 2/3 Troy ounces. Give me my weight in gold and at the current ~US$425 per ounce you've given me ~US$1,239,583 and change. That's a lot for a low income like me, but luxury for the rest of my life? Ha. I can reasonably expect to live another 30 years. Without the aid of interest that's US$41,319 and change per year. With interest and careful investing I might be able to push it to half again that amount, but more likely it'd be best to round it to $50,000 per year. That's certainly comfortable income, above the poverty line (not quite by half), but assuming inflation doesn't get me it's NOT going to be a luxurious wealth. Heck, if I'm trying to buy a residence in California it's going to suck off more than half just for that - assuming I don't want a palace but merely a nicer house than 'average'.

Point two. In 1905 a 5 year veteran policeman in Wichita, KS, was paid the princely sum of $60 per month, with which he provided a very good roof overhead and food on the table and a few odds and ends for himself, his wife, and two children. (datapoint - this is my wife's great grandfather and some info we stumbled upon while doing genealogy. He's solidly middle class with this income - buying a house on a plot of land within city limits.) Had he received his pay in silver bullion, he'd have been receiving approximately 92 (91.6 at $0.655 per) ounces each month. Today, Silver is selling at $7 to $7.25 per ounce, or about 11 times what it did then. The 5 year veteran policeman would be expected to make ends meet - using silver - on $660 per month. There are nations in which that's more than enough money. Those nations would most likely not have been paying $60 per month a century ago, though. For USians, the amount is less than a third of the "poverty level". Heck, renting a two bedroom apartment in the seedy part of town of Wichita would eat up 2/3 (at least) of the wage, even before such luxuries as heat, water, and electricity were provided.

Now to be fair, if he'd taken it in gold instead he'd have been receiving 3 ounces of gold. (The price was fixed at that time at $20.67 per ounce and wouldn't make the WWI jump to $35 per ounce for another 29 years.) He could not buy a house on ~$1275 a month, but since he had two children he could get enough welfare and poverty assistance to pay rent and utilities and put some food on the table. He'd only be earning about 2/3 what we consider today's poverty line to be. Gold's done better than silver, but it still won't buy as much as it used to buy.

When a libertarian insists that gold is a solid standard, I like to ask if they'd consider two ounces of gold a month an above average wage. It was, less than a century ago. Heck, at the nominal 16 silver to one gold of two centuries ago (later reduced) that means they'd be getting 32 ounces of silver if they'd prefer. Every month - oh what luxury.


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