What Is Money?
by Peter Schiff: Economic
Today, we're accustomed to thinking of small greenish paper rectangles
as the definition of money, and we think of the US government as
the only source of money. To honestly discuss sound money, we need
to realize where our current money customs came from.
it was every man for himself. You ate or wore what you could pick
the first advance. If you had some extra meat, and your neighbor
had an extra fur, you might make a direct exchange. If food, water,
clothing, and simple tools are the only goods on the market, barter
is fine you can always find someone who has what you want
and wants what you have.
But as soon
as there's basic manufacturing and prosperity begins increasing,
barter becomes inadequate. Say you're a hunter and you want a bed,
but the only bedmaker in town is a vegetarian. What do you do then?
You would have to figure out what the bedmaker wanted (maybe tofu),
and then find someone who had tofu and wanted meat. If you couldn't
find that person, you would have to find a fourth person (someone
who wanted meat, and had the hats that the tofu maker wanted), or
try to convince the vegetarian bedmaker to take the meat and trade
it for something else.
spoils, and so the bedmaker would have to unload it pretty quickly.
So, unable to get your hands on anything the bedmaker wants to consume,
you trade your meat for some salt and approach the bedmaker.
I know you don't want salt, but think of all the people who do.
They use it to preserve their meat and flavor their soup. And this
stuff is nonperishable, so you can hold it as long as you want.
And if, when the tofu dealer comes through town, he doesn't want
salt, you can explain to him what I've explained to you he
can use it to buy something he wants."
If you and
the bedmaker agree, you've just created money. Organically, more
people in your community begin taking salt for payment, even if
they have no intention to use it, because they know others will
and this is important the value of salt money is not entirely
dependent on other people accepting it as payment. If, for some
reason, folks stopped taking salt as payment, you could use it as,
Salt was a
pretty good currency, especially before refrigeration, because it
was widely demanded, divisible down to the grain, very portable,
easy to weigh, and could easily be tested for counterfeit by tasting
it. Romans used salt for money.
But just because
salt served as money didn't mean there would be no other form of
money in circulation. Tobacco leaves might be widely accepted as
payment. So might gold or silver.
The point is
that money arises naturally in society, as a way of aiding in voluntary
economic transactions. It was one of the greatest inventions ever.
Money not only made it easier for people to buy what they wanted,
it also made saving much more possible you could accumulate
excess money to spend at a later point.
is frowned upon by the elites today, it's an essential element in
economic progress. By making it easier for people to save, money
did two crucial things. First, it inspired more industriousness:
there was now incentive to work harder to earn more in a day than
you could spend in a day. Second, savings enabled ambitious entrepreneurs
to make big capital investments: labor-saving machines, warehouses,
If the saver
didn't have any big plans in mind for his money, he could still
make it productive by lending it out. Finance was nearly impossible
without money. Sure, you could give your neighbor a pig this year
in exchange for a pig and a chicken next year, but there would be
a lot more opportunity for squabbling ("this pig isn't as
healthy as the pig I gave you last year").
With a commodity
money, where there is little or no deviation in quality, and using
universal, objective measures, like weight, you can lend with the
confidence that what you get back will be of the same quality as
what you loaned out.
made specialization more practical. If you were really good at one
thing manufacturing nails (to borrow Adam Smith's famous
example) you could make a living just by making nails. Without
money, someone who spent his whole day making nails would have to
find (a) someone with excess food who wanted nails, (b) someone
with excess shelter who wanted nails, (c) someone with clothes to
spare who also wanted nails at that moment, and so on.
is introduced, the nail seller only needs to find (a) people with
money who want nails, and (b) different people with everything the
nail seller needs who want money. Facilitating specialization creates
efficiencies, as folks get to divide up labor according to skill
and interest. In countless ways, money improves society.
In the past,
different types of commodity money competed. Salt had its advantages,
but also disadvantages you had to keep it dry, it was easy
to spill. In Rome, rising sea levels made it much harder to get
salt over the years.
gold had a lot going for it. It's fairly easy to store. Like salt,
it's easy to divide, but also easy to combine: you can make blocks,
or coins of different weights or denominations, which can be standardized.
It doesn't rust. It doesn't tarnish or undergo other unpleasant
reactions with chemicals.
Like any money,
gold has underlying value. Mostly, we think of its decorative value
across nearly every culture, gold is considered beautiful.
Women love it, and pleasing women's fancies is universally considered
a good thing. It has industrial uses due to its resistance to corrosion
and how thin it can be hammered.
Gold is also
rare enough to be valuable, but plentiful enough that it can be
widely circulated. Its supply grows, but never very quickly.
had to declare gold to be money. It arose as a good medium of exchange,
and in many cases it won out in competition against other moneys.
It didn't always win out to the exclusion of other types of money,
but it was probably the most successful money ever, thanks not to
some order from above, but thanks to gold's own attributes.
This is very
important: money doesn't come from government; it comes from civil
Schiff CEO of Euro Pacific
Precious Metals, a gold and silver dealer selling reputable,
well-known bullion coins and bars at competitive prices. He is author
Little Book of Bull Moves in Bear Markets and Crash
Proof: How to Profit from the Coming Economic Collapse. His
latest book is The
Real Crash: America's Coming Bankruptcy, How to Save Yourself and
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