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What is Money?

24 Nov

MoneyOne of the major themes I am seeing come up time and time again in discussions about the Occupy Wall Street protests is the nature of money. Some people want it evenly distributed. Some want it to represent mineral reserves. Most think that the banks have too much of it and the workers have too little of it. Some want more government control of it. There are demands for restrictions of its printing while others want a decentralisation of currency and the right to print their own money rather than being required to use debt based currencies. There are a number of complex issues here which I can go into detail with in later articles, but there is a single pressing question that a true Jaminologist must ask before proceeding into any consideration of these demands. The question is: What is Money… Really?

CashNow before you go reaching for your wallet for a concrete example, pause a moment and have a think about the nature of value. What do you value in life? Health? Family? Food? Shelter? Security? Self Actualisation? Happiness? Does your wallet contain any of those things?… Okay. You’ve considered. Now go ahead and pull out your wallet and hold a note up to the screen. What you hold in your hand is fairly widely accepted as a measurement of wealth yet aside from the very brief history lesson you could pull from it, it has no real intrinsic value or worth. Its value comes from what it represents. So what does money represent?

To understand the purpose of money it is first necessary to look at life before money. Early human tribes functioned internally on each member working individually to add value to the tribe as a whole. Human tribes distinguished themselves from Neanderthal tribes by the division of labour: the men hunted live prey while the women gathered edible plants and cared for the children. The division of labour created the foundation of reciprocal behaviour. If I feel you have added value to my life, I have a desire to then add value to your life. This works within small family groups but in order to see this division of labour provide even greater benefits to the tribe there developed the idea of barter.

hand axe

Let’s look at two Neolithic craftsmen: Muurk and Gomp. Muurk is an expert craftsman; he is particularly good at making hand axes. In one day, he can make either six stone axes or two spears. Gomp is a less specialised craftsman. He is able to make either two hand axes or two spears in a day. Because it takes just as much time for Gomp to make a spear as it does to make an axe, he can benefit from any deal which brings him more than one axe per spear. Since Muurk can make a lot of axes, a spear is of greater value to him than an axe. If they both spent half a day on each, Murk would have three axes and a spear while Gomp would have one of each. If instead, Muurk spent the day making axes and Gomp spent the day making spears and they traded at the end of the day, they could each end the day with one more axe than they would have had otherwise. There is significant evidence that this kind of trade did happen in our prehistoric ancestors, and it is even believed that it is inter-tribal trade which enabled homo-sapiens to gain an advantage over the larger, smarter and stronger Neanderthal tribes which did not engage in a division of labour. Most hand axes which have been uncovered in archaeological digs were never used as axes but were created as aesthetically pleasing artworks which were exchanged for goods and services. They are arguably our first form of currency.

gold coinsWithout going into too many specifics, the hand axe currency works for animal hides and spears but doesn’t tend to be practical for big ticket items that nomadic tribes never needed to worry about. European nations settled this dilemma by a general agreement that gold is valuable and began minting coins. Aside from the occasional unexpected inflation caused by large discoveries of mineral deposits, this created a stable system of resource based trade. Eventually it became inconvenient to carry a lot of heavy metals around so bank notes were invented which would represent a contract on behalf of the person storing gold to pay an amount of gold to the holder of the note. The notes were therefore considered as good as gold. In 1931 the British government permanently decided that the pound was no longer redeemable for gold. The pound has lowered in value every year since then and interest rates are now controlled by the Rothschild owned Bank of England (which also owns all Australian currency). The United States of America was founded on an attempt to recreate a wealth based currency with a gold standard but this was also eventually dismantled, the right to set interest rates and profit from the creation of currency now belongs to a private company known as the Federal Reserve Bank.

Pathfinder offers a service to calculate how much a given amount of fixed income will be worth over time.

Money as it is today in Europe, America, Brittan and Australia is valued by steadily decreasing scarcity. Rather than backing the currency with mineral resources, money is worth only what people are prepared to trade for it. There is as much money in circulation as the central banks choose to create. Rather than placing a cap on the level of inflation (devaluation of currency) they will allow to happen each year, these banks control inflation through manipulating interest rates to make the economy behave the way they want it to. To increase growth, they lower the interest rate and encourage people to borrow money from banks (which add additional interest to cover risk, expenses and obscene profits) and stimulate the economy. Every time interest rates are set at a low level, the market is flooded with new currency, the supply of money increases which causes the demand to decrease and value decreases. The dollar you earned today will, on average, be worth 3.5% less each year. At this rate, the money in your wallet will be worth approximately half of its current value in twenty years time. If you have money in the bank which is earning less than 3.5% interest per year, you are losing wealth even as you gain money. If your employer gives you a 2% pay rise every year, you are actually getting paid 1.5% less every year.

The exponentially increasing wealth gap between the very wealthy and the rest of society is largely due to the difficulty of tracking money values with a brain that evolved accounting strategies for dealing with the trade of hand axes for the vast majority of human history. The intuitive understanding that a fair day’s work deserves a fair day’s pay does not extend to factoring in productivity ratios to product exchange variability. The rapid technological advancement of the last fifty years has enabled human labour in all areas to become increasingly efficient. We have taken the specialisation methods of Muurk and Gomp to the point where there are millions of specialised workers involved with the creation of a single product. Instead of benefiting the craftsmen as in the Neolithic example, this massively increased productivity is giving massive amounts of wealth to a few people who control the system. Inflation and a reliance on currency allows the workers to believe they are being paid more when they are really being paid less; and the cheaply produced products which are now available reduces the personal impact of the loss of wealth. Individually, members of both Western society and developing nations have a much higher standard of living than those

hand axe collection

Get him!

living before the technological boom, but these standard of living increases are in exchange for providing far higher profits to those who own and operate the system they sell their time to for an ever decreasing share in global wealth.

What people are angry about is that the concept of trade and fairness which allowed our species to thrive and advance is clearly being violated in this situation somewhere. While it isn’t entirely clear whose fault it is, there is a very efficient method also wired into our pre-industrialised minds for finding a person to blame: when you know there has been an injustice, look for the guy with the biggest collection of hand axes. There is a good chance he had something to do with it.

So what is money?

At its fundamental core, money is a manifestation of reciprocity. It is a symbol of gratitude for services rendered and goods provided. It is a method of tracking the value one individual has added to society in order to provide a fair trade of value added back into the life of that individual at a later date. Currency is a representation of money. For the value added for providing a standardised system within which people are required by law to trade, the banks have set the value of their service at half of everything you own every twenty years (plus interest and not including the effect of fraction reserve banking). If you agree with their estimation of how much value they have added to society then you can put that note back into your wallet, secure in the knowledge that in the time it took you to read this article it has lost 0.0002% of its total worth. If, however, you believe that this price is more than you are prepared to pay, you may want to start considering your options.

Now I want to hear from you.

How much value do you think a single, national or international economy adds to society?

What do you suggest as an alternative to centralised currency?

How has reading this article challenged your assumptions about the nature of money?

What do you think would happen if the rest of society adopted your current views on the nature of money?

What steps could you personally take to make somebody adopt a more beneficial view of money?

Do you think they’d pay you for it?

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1 Comment

Posted by on November 24, 2011 in Financial, Political

 

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One response to “What is Money?

  1. Tim

    November 24, 2011 at 10:20 PM

    Good article, gives a great understanding of the history of money to help understand why people think the paper in my wallet which doesn’t hold any intrinsic value, can trade for things of real value.

    I think we should return to a gold standard, the currency we use should represent money again, and gold and silver historically have been the money of choice by the free market.

    I think this is best done, by simply opening up competing currencies, just let people trade with whatever they want to trade with, and I think naturally people will want to start trading with something that will hold it’s value over time.

    If anyone is interested in some basic understands of how economics works (but not boring maths stuff) I recommend “how an economy grows and why it crashes” by Peter Schiff and “economics in one lesson” by Henry Hazlitt

     

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