The Strange, Shape-Shifting Symbol of Value: Teaching Myself Economics, Part IV

By P.J. O'Rourke

In today's column, I'll write about the economic concept that's truly most difficult to grasp: money.

For the past three columns, I've been writing on the subject of how I went about getting self-educated in economics (here, here, and here). I had to trust my instincts and my eyes to see beyond basic textbook economics and learn anything important. But there was a little more to economics than just common sense and experience. In my last column, I wrote about Ricardo's law of comparative advantage, which required a little bit of arithmetic.

So today... money. The concept is so hard to comprehend, it's not just me who's confused. All the world's top economists, central bankers, and powerful politicians are failing this part of the course.

Why is this soiled, crumpled, over-decorated piece of paper bearing a picture of a man who was something of a failure as a president worth $50? Meanwhile, why is this clean, soft, white, and cleverly folded piece of paper worth so little that I just blew my nose on it?

And what exactly is a "dollar"? If it's a thing that I want, why do I prefer to have 50 grimy old dollars instead of one nice new one? This isn't true of other things – like puppies, for instance.

Of course, money is not a puppy. Money is not a specific thing. Money is a symbol of things in general, a symbol of how much you want things, and a symbol of how many things you're going to get. Money is an abstract representation of value.

But what is value? The brief answer is "it's complicated." Value varies according to time, place, circumstance, and whether the puppy ruined the rug.

Plus, some things are difficult to place a value on. This is why we don't use money to measure all of our exchanges. Kids get food, clothing, and shelter from parents. And in return, parents get... kids.

Important emotional, moral, and legal distinctions are made between sex and paying for sex, even if the socially approved kind of sex costs dinner and a movie.

We need economic goods all the time, but we don't always need money for them. And that's a good thing, since for most of human existence, there wasn't any money at all.

In ancient times, money didn't exist. Or rather, everything that existed was money. If I sold you a cow for six goats, you were charging it on your Goat Card.

Anything that's used to measure value, if it has value itself, is "commodity money." Societies that didn't have dollar bills picked one or two commodities as proto-greenbacks.

The Aztecs used cocoa beans for money, North Africans used salt (the origin of the word "salary"), and medieval Norwegians used butter and dried cod. (Their ATMs were a mess.)

Some commodities work better as money than others. Movie stars would make bad money. Carrying a couple around would be a bother, and you would have to hack a leg off to make change.

Precious metals, however, make good money and have been used that way for more than 5,000 years.

Metal commodity money is portioned out by weight. A commodity money coin is just a hunk of precious metal stamped to indicate how much it weighs.

Moving from weighing money to stamping coins is a simple step, but a couple thousand years passed before the step was taken. Nobody trusted anybody else to do the stamping.

When coins were invented, the distrust proved to be well-founded. The first Western coins were minted by the kingdom of Lydia, in what is now Turkey. They were made of a gold-silver alloy called electrum.

It's hard for anyone but a chemist (and there weren't any) to tell how much gold is in a piece of electrum versus how much silver. The king of Lydia, Croesus, became proverbial for his wealth.

In China, the weight of bronze "cash" was supposed to be guaranteed by death penalties. A lot of people must have gone to the electric chair (or would have if they had electricity).

A horse cost 4,500 "one cash" coins during the Han dynasty (206 B.C to 220 A.D.) and 25,000 cash during the Tang dynasty (618 A.D. to 907).

It's very hard for the people who issue cash to resist the temptation to debase that cash.

Kings, emperors, and even lowly congressional representatives have expenses. It is to a government's advantage to pay for those expenses with funny money.

One reason that the concept of money so often violates common sense is that governments so often do crazy things with money.

Another reason that money violates common sense is that we don't have to use real commodities as money. We can use pieces of paper promising to deliver those real commodities. This is "fiduciary money," from the Latin word fiducia, meaning trust.

In Europe, paper money was developed privately, in the 13th century, from bills of exchange traded among Italian merchants and from receipts given by goldsmiths to whom precious metals had been entrusted for safekeeping.

Public fiduciary money was first printed in Sweden. Swedish commodity money came in the form of copper plates. Thus, in Sweden, a large fortune was a large fortune.

In 1656, the Stockholms Banco began issuing more convenient paper notes. The bank issued too many notes, and the Swedish government went broke.

In 1716, Scotsman John Law helped the French government establish the Banque Royale, issuing notes backed by the value of France's land holdings west of the Mississippi. Banque Royale issued too many notes, and the French government went broke.

The largest Western experiment with fiduciary money took place right here in America. In 1775, the Second Continental Congress not only created paper money, but passed a law against refusing to accept it. The Continental Congress issued too many notes and... a pattern begins to emerge.

All fiduciary money is backed by a commodity, even if the backers are lying about the amount of that commodity.

Historically, the commodity most often chosen has been gold. By the 19th century, the major currencies of the world were based on gold, led by the most major currency among them, the British pound.

This was a period of monetary stability and, not coincidentally, economic growth. Some people think we should go back on the gold standard, and not all of them have skinny sideburns, large belt buckles, and live on armed compounds in Idaho. Money ought to be worth something, and gold seems as good as whatever.

But the relationship between money and value is endlessly perplexing. The high value of gold is a social convention, a habit left over from the days when bright, unblemished things (people included) were rare.

Gold may go out of fashion. I don't think this is likely, but a generation may come along that regards gold as gross or immoral, the way current 20-year-olds regard veal.

And gold is a product. We may discover different methods to get huge new amounts of it.

This happened to the Spanish. When they conquered the New World, they obtained tons of gold, melted it down, and sent it to the mint. It never occurred to them that they were just creating more money, not more things to spend it on. Between 1500 and 1600, prices in Spain went up 400%.

Presented with the vast wealth of America's oceans, fields, and forests, Spain took the gold. It was as if someone robbed a bank and stole nothing but deposit slips.

Gold is not an absolutely, perfectly rational basis for a currency. But the real problem with fiduciary money – from a government standpoint – is that it's inconvenient.

A currency that can be converted into a commodity limits the amount of currency that can be printed. A government has to have at least some of the commodity or the world makes a laughingstock out of its banknotes – "not worth a Continental."

So if a government can lie about the amount of a commodity that is backing its currency – the way the Stockholms Banco, Banque Royale, and Second Continental Congress did – why can't a government lie about everything?

Instead of passing a law saying one dollar equals X amount of gold, why not pass a law saying one dollar equals one dollar? This is "fiat money," from the Latin word for "a binding edict." And fiat money is almost the only kind of national currency left in the world.

Fiat money is backed by nothing but faith that a government won't keep printing money until we're using it in place of something more important, such as Kleenex.

Concerning this faith, the experiences of Weimar's Germany, Carter's America, Yeltsin's Russia, etc., make agnostics of us all.

The only thing that protects us from completely worthless money is our ability to buy and sell. We can move our stock of wealth from the imaginary value of dollars to the fictitious value of euros to the mythical value of stock shares to the illusory value of real estate, and so forth.

Our freedom to not use a particular kind of money keeps the issuers of that money – honest wouldn't be the word – somewhat moderate in their dishonesty... or it used to.

I emerged from teaching myself economics with two final lessons. Money is a symbol of value, but it's a symbol that's strange, shape-shifting, and hard to define. And value is something that's personal and relative, and changes from moment to moment.

Money can't always be valued. And value can't always be priced.

Regards,

P.J. O'Rourke