McPhersonSentinel - McPherson, KS
  • The Money Story: Part II

  • A long time ago, in a culture far, far away… there was barter.
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    — John Adams, second president of the United States
    Men traded what they had in surplus for what they lacked. The cobbler would trade his extra shoes for a pot, the potter would trade his extra pots for a horse, and the used-horse salesman would trade his extra horses for a wife.
    As populations grew and trade increased, items of universal value became accepted as currency in order to ease the process of exchange. If skins and furs were in constant demand, then skins and furs could become “money” for those economies. Depending on place and time, just about everything has been used in this way as currency: seeds, leaves, beads, shells, horses, sheep, and unfortunately people. This could be called a “goods-as-money” system, since it uses actual goods as money.
    This old version of money was very different from our current notion of dollars and cents. The modern dollar is an abstract “representation” of value, but it is useless in itself (it is just a piece of paper). In ancient history, however, the item chosen for money was not an item which merely represented value, but was instead an item that was actually valuable in itself. This means that, like beads and bread, it was possible that the item chosen as money could be used in its own right if necessary. Inflation was therefore not yet in the monetary DNA, as it is now.
    For example, if I deposit a paper dollar into my bank account today, its value may decrease over time.
    My dollar might buy two loaves of bread today and then only one slice at this time next year. But it is impossible for inflation to make the price of bread artificially skyrocket beyond affordability if the “currency” is actually a measure of grain.
    Metal eventually came to replace other items for various reasons. Since there was only so much gold available, the money supply was controlled by its scarcity; it also was easily divided, making standardized coinage possible; and, lastly, it is always more convenient to carry a handful of gold pieces to the market than it is to carry a handful of camels.
    Now we have seen three stages in the evolution of money: first, there was pure barter of goods; then we moved to “goods-as-money”; and finally to standardized metal coins as money.
    Page 2 of 2 - At this point, the primitive system has weaknesses, but it is at least comprehensible. This simplicity is its greatest virtue. Because it was intelligible to the common man, it was within the control of the common man. Any method that reaches such a level of complexity that it cannot be grasped except by experts, has from that moment on become the property of the expert; it becomes removed from popular control, and is instantly susceptible to exploitation by the few specialists, to the detriment of the masses. The common man cannot stage an economic revolt if he doesn’t understand what he is revolting against. He will see that something is amiss, and will throw up his hands in frustration, but he will not be able to organize, much less formulate solutions. This was the failure of Occupy Wall Street, which represented a valid revolt against a very real crime, but which was able to get no further than anger and demonstration.
    Therefore, although the primitive system had limited potential, and is inadequate for our modern needs, we can appreciate the wisdom of its simplicity as we move forward.
    We are soon to reach a key stage in the Money Story: the point where money changes from a thing valuable in itself (such as fish-hooks or cocoa seeds) to something that is only an abstract representation of value, such as the paper dollar, which is useless by itself. This systemic transition was necessary, and could have worked out just fine. It did not have to become anything sinister, but it is now an unmanageable beast. In order to become that beast, it first had to combine with something else that would change its character entirely. That “something else” was called fractional-reserve banking, and we will examine that institution next week.