Let There Be Money – Part 1

Why The Money Monopoly is Evil

Part One – by Aaron Koenig

Read: Part 2 | Part 3 | Part 4

We are used to money being issued and controlled by the state – but if we look at its history we see that money originates from the free market. Without money, a reasonable division of labor would not be possible. If humans want to trade with each other, bartering is not practical. If I have apples and need eggs, I would need to find a person that wants to trade his eggs for apples at this very moment, which is not too likely. On top of that, we have to agree on a ratio of how many apples have the value of an egg or vice versa.

When humans still lived together in small groups, an informal credit economy developed. You would share goods with your neighbors and keep track of the debt each had with one another. In the long run, everyone would try to maintain an even balance and to give as much as one would get. If you infringed this unwritten rule by fleecing others, you would quickly become an outsider. 

But such a system based on trust and social control no longer worked when humans began to live in bigger societies. To be able to trade with one another, a medium was invented to express the value of goods and services: money. In nomadic societies, the first choice for money was often cattle. This is why the Latin word for money, pecunia, was derived from the word for cattle, pecu. Throughout history many different goods were used as money, from arrowheads and seashells to cocoa beans and dried tiger tongues.

The Qualities of Good Money

Qualities of Good Money
Qualities of Good Money

Eventually, humans of different regions and countries started to use precious metals as money. They discovered independently of each other that some qualities of gold and silver make them especially useful as a medium of exchange. This is because precious metals are:

· scarce
· easy to transport and to store
· durable
· divisible 
· hard to counterfeit
· fungible – which means that one piece is as good as any other one.

The most important quality of money is scarcity. Precious metals are rare and can only be extracted from the earth with significant effort. The scarcer a useful good, the more valuable it becomes. Therefore it is much more practical to use gold than the abundantly available iron – otherwise, you would have to go shopping with a heavy pushcart. Another important quality of money is its durability: iron corrodes, gold doesn’t. So you can use it not only as a medium of exchange but also as a medium to store value over a long time.

Divisibility is another reason why cattle did not prevail as money: two halves of a cow simply won’t have the same value as a whole one. Diamonds also lose a lot of their value if you smash them into small pieces. Gold, however, can be divided without losing any of its value. By using gold, people have more ways to settle on a trade, even if they only have something less valuable to offer than a whole cow. Because of these special qualities, gold has served as the best form of money for thousands of years. As J.P. Morgan, one of the most successful bankers of the early 20th century, pronounced, “Only Gold is money, everything else is credit.” (4)

If you like this article, you will be glad to read one of our recent News Byte, “Bitcoin: The Absolute Store of Value” by Census Open Finance

Manipulation of Money

Piles of Money Towards the Bank
Piles of Money Towards the Bank

As long as money exists, kings and rulers have tried to manipulate it for their own benefit. They determined that gold could only be used in the form of special coins, usually ones carrying the king’s image. It became the state’s duty to guarantee the correct value and content of gold, so one did not have to weigh it. A popular way to manipulate coins was to file a bit off the edges. In fact, the decorative edge patterns we see on coins today were originally introduced to prevent fraudsters from using shaved coins. Another way to cheat was to dilute gold or silver with less valuable metals. Often, the rulers themselves used these tricks to secretly steal citizens’ property. But their possibilities to manipulate money increased by magnitudes when a new practical invention appeared: paper money.

To be continued…

Aaron Koenig's book cover page
Aaron Koenig’s book cover page

This is an excerpt of Aaron’s book A Beginner’s Guide to Bitcoin and Austrian Economics

Aaron Koenig is a contributor to the Census Blog. He is an entrepreneur, consultant, writer and film producer, specialized in Bitcoin and Blockchain technology. Aaron is the author of the books A Beginner’s Guide to Bitcoin and Austrian Economics, Cryptocoins – Investing in Digital Currencies and The Decentral Revolution

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