A somewhat long, but important essay from Beaver on money. It is, after all, something we all use everyday. Yet very little of us knows how money really works.
This is a topic which is difficult for me to broach as I am no economist, yet not only must I speak of it, but there are certainly things which can be said about it which you do not need great experience to understand.
First of all, what is money? Money represents production, no more, no less. Before the invention of currency, people did engage in bartering, but it is obvious that such a system has many flaws. The invention of currency helped solved many problems: By having something which represents a fixed unit of labor, it was possible to “stockpile” labor and use it to exchange it for the product of the labor of others. This in turn allowed greater specialization of the members of society, who could now easily produce only one thing, then exchange their labor for the other things they need. So, before I go on, always keep this in mind: All money is meant to represent labor, or rather the fruit of labor. To despise money is to despise labor, to despise labor is to despise what brings us life, to despise what brings us life is to despise life, and to despise life is to desire death. No more, no less.
Now, there are many questions surrounding more specific aspects of money, namely what form it should take, if it should be “backed” by a physical substance of any nature, what loans are and if they’re ethical, etc. Those three aspects I named are the most important, thus I’ll limit myself to those.
First of all, let’s discuss what form money should take, and whether it should be “backed” by some physical substance.
Originally, money was made of more or less precious metals, namely gold, silver and copper. The more precious the metal, the more precious the currency, of course. That was because, despite the fact that money is meant to represent labor, in a society without a centralized economy or government, the value of a currency is no more than the value of the labor it took to extract it from the earth and mold it into shape. A gold coin is always worth a gold coin, regardless of what happens. Of course, the value of the gold coin may change as the availability of gold changes, as gold extraction methods become more efficient and as molding methods become more refined. But a gold coin remains a gold coin. Thus, currency represented labor not merely figuratively, but literally.
As society developed and became more complex, economies centralized and difficulties arose with the use of precious metal for the manufacture of currency. Gold and silver mines ran dry while human production continued unopposed, meaning there was no longer enough precious metal to make into currency. Furthermore, actual practical uses were found for those precious metals, reducing their availability even further. It quickly became obvious that it would not be feasible to keep using precious metals as currency.
This is how we wound up with paper money and coins made out of nickel and zinc. In fact, you’ll find that the materials and labor needed to create coins are usually worth more than that needed for paper money of much greater value. But with a centralized economy, it becomes possible to get everyone to agree to merely consider currency to represent a certain value without actually being made of a substance which required the labor necessary to equal that value. Though this has its own inconveniences, such as how different economies will use different currencies which have different values, such a system becomes necessary when societies grow large and technologically advanced enough.
In fact, with the advent of computers and virtual data storage, currency has now taken a virtual shape, being little more than a number stored in a hard drive somewhere. After all, if currency no longer needs to literally represent labor, why would it need a physical form? Physical currency still has its uses, but will become less and less common as technology develops further.
However, for a long time, despite the fact that currency only symbolically represented labor, it was also “backed” by a substance of some sort, almost always gold. This meant that if you held money, you could go to a bank and get it exchanged for its worth in gold, and that this gold could itself still be used as currency, or again be exchanged for currency. This created a system where, though currency was itself not made of precious metals, it still represented precious metal which was stored in your name somewhere.
However, issues arose with that system. As said, the world’s production increased exponentially with the development of technology, while the stocks of precious metals remained limited. Furthermore, those precious metals began seeing use in production, meaning they could not merely be stockpiled and left to collect dust as symbols representing labor. They were needed. This meant that as time passed, currency represented smaller and smaller amounts of precious metals, to the point where a single unit (a dollar, a pound, a mark, or whatever else you want to call a unit of currency) represented such a small amount of precious metal that it became inconvenient to exchange currency for precious metals and vice versa. This is not because precious metals were worth more or because labor was worth less, but because the stock of precious metal necessary to represent production grew far, far slower than the production of human society.
Thus, fiat was proposed as a solution. Fiat currency no longer even represented a physical substance. It now represented the idea of labor itself. The one advantage is clear, which is that you no longer need to stockpile precious metals. But that is the only true advantage, and the disadvantages are far too often overlooked.
First of all, fiat currency’s value is at the mercy of the whim of some individuals in powerful places. Of course, they have little reason to mess with the system; their money is fiat as well as that of others, so their wealth is dependent on the system. Tearing it down would hurt them more than it would help them, so it’s sort of a power check on their ability to abuse it. However, these same individuals like to use that currency to buy actual physical properties, meaning a large amount of their wealth is not actually fiat currency, but houses, businesses, art pieces, resources, etc. Meaning that their own wealth is physical, while that of people who own little but currency isn’t. In the case of a crash of the currency’s value, they aren’t affected, at least not much.
Second of all, the value of fiat currency can vary wildly. It all depends on market forces, supply and demand, investor trust and most of all, cronyism. Two years ago, it took 120 units of currency to buy a barrel of oil. Now it takes less than 40. Without being backed by a physical substance, you are never guaranteed that your money, which can only be produced through labor, will be represented by a currency which will be worth its value.
Finally, fiat currency relies on a stable society. If a catastrophe of some sort should happen and the centralized forces which enforce the value of the currency were to collapse, that currency would suddenly find itself worthless.
Thus, it appears obvious to me that though gold-backed currencies have issues and should be replaced by something else, they are still far better to represent money than fiat currency.
And now we approach the question of loans. A loan is merely an amount of money belonging to one individual or organization which is given to another individual or organization, with the idea that eventually, the latter will pay it back to the former. The idea behind a loan is actually a good one: A man with little money has a great idea which would produce a lot of money and improve everyone’s condition, but he does not have enough initial capital to obtain what is necessary to achieve it. He goes to an individual or organization, proposes his idea, and if the latter agrees to the potential of the idea and trusts the man to see it through to the end, they loan them money, expecting to see not only their money back, but to profit from it. Loans are thus a way for those with the ideas but without the means to obtain the aid of those who do have the means.
What is contentious is how the loan actually works. In the example I gave, the loaner actually owns the money he is loaning to the man, and that money represents an objective amount of labor. However, change to a fiat system, and change the loaner into someone who has control over the creation of currency, and suddenly loans become an abomination, a threat to the economy. Suddenly, the loaner can create currency out of thin air and loan it to the man, who must then work to produce something, namely to produce money. He must then not only pay back the “air currency” which the loaner gave him, but a portion of the legitimate money he produced thanks to that loan. The principle remains the same as long as the man actually sees his project through and it does produce money. Otherwise, the damage caused by the loan is immense.
First of all, this means there is little to no risk to the loaner, as they can simply create currency. If the project goes belly up, they are not out of any money. The “money” they loaned wasn’t money in the first place, it was, well, nothing. It was faith. It was up to the man in charge of the project to see to it that he would create labor equal to the value of the loaned currency. If he didn’t, then that currency is worth less. And every one he paid with that currency is now poorer for it. In fact, everyone who uses that currency is now poorer, except the people who create the currency in the first place because, as I said, a large portion of their wealth is actually physical.
In summary, what can we draw from all this?
1. Money represents labor, which is expressed as currency.
2. This currency itself does not need to be made of a substance which required as much labor as it is worth as long as you have a stable society with a centralized government of some sort. It does not even need to be physical.
3. It should however be possible to trade this currency for a physical object or substance which requires labor for its production, though it does not necessarily mean that it should be gold.
4. Beyond, its other issues, a fiat currency system turns the beneficial act of loaning into a potentially very destructive one, where the loaner takes no risk and society takes all the risk for him.
This is why I advocate a return to a system where currency is backed by a substance of some sort. As explained, it is no longer reasonable to use precious metals for this purpose. But ANY physical substance which does not decay can be used, even sand or dirt, as long as that substance itself requires labor to obtain. Otherwise, we find ourselves in a society where the lower classes are little more than slaves to the whims of the upper classes. After all, their wealth is physical, while your wealth is only worth as much as they want it to be worth…
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