"Actually, money is one of the greatest instruments of freedom ever invented by man. It is money which in existing society opens an astounding range of choice to the poor man – a range greater than that which not many generations ago was open to the wealthy."
-- Friedrich von Hayek
What is money?
If the materials of manufacture are wanted, industry must stop. If provisions are wanted, the people must starve. But if money is wanted, barter will supply its place, though with a good deal of inconveniency.
-- Adam Smith
Money is a difficult subject to get your head around. Money was invented because barter was not the best method of exchange. Barter lacked some of the qualities that money had.
Because money is abstract it can often be useful not to think of it as a note, coin or digit, but to think of it in terms of 1/2 of a transaction not as an end in itself.
So if you were to sell a cow for $100 then don't think of it as you have $100 but you have a cow in money terms. Or you could think of the $100 in terms of what you would buy with it say 5 loafs of bread and a sweater.
Money is a medium of exchange and only 1/2 of any transaction.
"for when a farmer borrows fifty francs to buy a plough, it is not, in reality, the fifty francs which are lent to him, but the plough; and when a merchant borrows 20,000 francs to purchase a house, it is not the 20,000 francs which he owes, but the house."
History of paper money in England
- In the 16th century the goldsmith-bankers began to accept deposits for safe keeping.
- They gave receipts
( “running cash notes” ) for cash(
gold coins), deposited with them.
- Some of the receipts were marked, "Pay the bearer" - so that these receipts had value in themselves.
- Realising they always had gold in their stores they began to make loans of gold.
Bank of England
- Formed in 1694
- The amount of the note was handwritten, so any amount of pounds and shillings could have been written on it.
- Recoinage of 1696 meant only notes over £50 issued for deposits, which were lent on to the government. Average income was £20 a year, so most people never touched a note.
- From 1725 the Bank was issuing partly printed notes for completion in manuscript
- The £ sign and the first digit were printed but other numerals were added by hand, as were the name of the payee, the cashier’s signature, the date and the number. Notes could be for uneven amounts, but the majority were for round sums. By 1745 notes were being part printed in denominations ranging from £20 to £1,000.
- In 1759, gold shortages caused by the Seven Years War forced the Bank to issue a £10.
- The first £5 notes followed in 1793 at the start of the war against Revolutionary France
- £5 remained the lowest denomination until 1797, when a series of runs on the Bank, caused by the uncertainty of the war, drained its bullion reserve to the point where it was forced to stop paying out gold for its notes. Instead, it issued £1 and £2 notes. The Restriction Period, as it was known, lasted until 1821 after which gold sovereigns took the place of the £1 and £2 notes.
- The first fully printed notes appeared in 1853 relieving the cashiers of the task of filling in the name of the payee and signing each note individually. The practice of writing the name of the Chief Cashier as the payee on notes was halted in favour of the anonymous “I promise to pay the bearer on demand the sum of …”
- The First World War saw the link with gold broken once again; the Government needed to preserve its stock of bullion and the Bank ceased to pay out gold for its notes. In 1914 the Treasury printed and issued 10 shilling and £1 notes, a task which the Bank took over in 1928. The gold standard was partially restored in 1925 and the Bank was again obliged to exchange its notes for gold, but only in multiples of 400 ounces or more. Britain finally left the gold standard in 1931
- In 1833 the Bank’s notes were made legal tender for all sums above £5 in England and Wales so that, in the event of a crisis, the public would still be willing to accept the Bank’s notes and its bullion reserves would be safeguarded.
- It was the 1844 Bank Charter Act which was the key to the Bank achieving its gradual monopoly of the note issue in England and Wales. Under the Act no new banks of issue could be established and existing note issuing banks were barred from expanding their issue. Those, whose issues lapsed, because, for example, they merged with a non-issuing bank, forfeited their right of issue. The last private bank notes in England and Wales were issued by the Somerset bank, Fox, Fowler and Co in 1921.
Money must have the following properties:
"that the merchant finds it generally more easy to buy goods with money, than to buy money with goods;"
-- Adam Smith
- General Acceptability:
The material of which money is made should be acceptable to all without any hesitation. In this connection, gold and silver are considered as good money material bf cause they are readily acceptable to the general public. Apart from being used as money, these metals can also be put to other uses (e.g., making ornaments.)
Money should be easily carried or transferred from one place to another. In other words, the money material must have large value in small bulk. On this ground, various animals cannot be used as money.
Money material must last for a long time without losing its value. Ice and fruits cannot become good money because they lose their value with the passage of time. Ice melts and fruits perish.
Money material must be easily sub-divided to allow for the purchase of smaller units of the commodities. Cows, for example, cannot function as good money because a cow cannot be divided without losing its value; a fraction of cow is quite different entity than a whole cow.
Money should be homogeneous. Its units should be identical; they should be of equal quality and physically indistinguishable. If money is not homogeneous, the individuals will not be certain of what they are receiving when they make transactions.
Money should be easily recognized. If it is not easily recognisable, it would be difficult for the individuals to determine whether they are dealing with money or some inferior asset.
The value of money should remain stable and should not change for a long period of time. If the value of money is not stable, it will not be able to function as a measure of value, as a store of value and as a standard of deferred payment.
The money material should be capable of being melted and put to different forms. Gold, silver, copper, etc., have this quality.
Paper money always loses its value.
If you have a coin from Roman times, it has retained its value. But do you think a paper note from that time would have any value?
Paper money with no baking is dishonest money.
Video on trading without money (Bartering)
Internationally we use competing currencies all the time. Why can we not do that domestically?
Money is the root of all evil
Money is a medium of exchange, money they say is the root of all evil. Without products and services money would cease to be, product and services are the root of money.Money is not the tool of moocher, who claim your product by tears, or of the looters who take it from you by force. It is not the looters or moochers who give it value. What is the root of all products, mans mind. Dare tell yourself that the electric generation was created by the muscular effort of unthinking brutes.
-- Ayn Rand
Money is you video
Video is a bit strong, slow to start and US based. But makes an interesting point.
Lew Rockwell taks about Free market in money
- People do not understand why bad things happen, it is just magic/luck
- New money waters down the old and provides no boost in the economy and distorts economic structures
- Policies need to consider all groups not just a few and long run, not just short run -Not letting a recession to run its course causes further problems dow the line
- Bailouts are open to abuse
- Government is not competent to run the central bank
- People need to be free to manage their own affairs
- Stop using violence to interfere in economic affairs
- Stop interfering with commercial acts between consenting adults
- Let people do what they want based on their own self awareness and assesment of the advantages
- let property owners accept the risk and rewards of their own decisions
- Only punish force and fraud
- Government fails at everything it attempts
- The is nothing in nature that says government has to step in and take control
- The market is a process of trial and error
- Free market would work for money as well as the freemarket for anything else
Max kaiser on money
Ron Paul on money
- Money created from nothing
- Fixing of interest rates artificially
- People talk about depreciation and say we should print to avoid it, but printing money is just dollar depreciation.
- Regulation by the market is good, e.g liquidate the debt
Dollar from the german word "thaler" 16th century type of coin?