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Understanding Money.

Updated: Oct 15



Money is a subject that is on everybody’s mind and the most obvious reason for that is that the great majority of people almost always do not have enough of it. Today, though we are going to look at what money really is and how money evolved through time and in society and the functions that many should have. My hope here is not to help the reader to make a fast buck or make money in the stock market or any other shady scheme but to give the reader a simple analysis of how money came about and how government and the bankers have hijacked money to their advantage.

So how did money come about or evolve? For that, we will do what the Austrian School of Economics calls regression analysis. Don’t worry it’s not that complicated as it sounds as all it means is we will go back in time to see how money came about. Prior to money and the evolution of groups of small tribes and families into villages, cities and then eventually countries or nations people used to barter.

Under a barter system, people exchange value for value. Let’s say a fisherman caught more fish than his family needed so he had a surplus of fish so what he would do was exchange his surplus fish for the farmer’s excess milk. The problem with barter is that one of the parties involved might not need what the other is offering or might not need the amount offered so what might happen is that the excess fish or milk might go bad if kept for too long. One thing we can note about barter, though, is that unless one has something of value to offer it is impossible to transact. A barter system also encouraged subsistent living which means that individuals and their families and small tribes tried to produce all the necessities they needed to survive.

The next step in the history of exchange came about when people started to realise that some goods or commodities were more marketable than others. More marketable just means that the good or commodity is desired but almost everyone. At this point people started trying to save this so-called most marketable commodity as they could exchange for almost anything else they needed or desired. So the most marketable commodity not only facilitated indirect exchange but it also allowed people to store or save that commodity as it was usually a commodity that was not only desired by everyone but it was also durable and easy to store.

So that is how money started out, as the most marketable commodity. Going back in antiquity and through different cultures, we have seen people used many different things as money. Salt has been used as money hence the term salary, seashells and beads have been used as money by the native American cultures, stones by some of the Micronesian people from the island of Yap. Even more recently, in the aftermath of their defeat in the Second World War and the collapse of the German State and their currency, Germans used cigarettes as money.

Over the last three and a half thousand years the commodities that have been the champions or top dogs of money have been the monetary metals like gold, silver and silver. The major properties that have made these monetary metals money are the following: rarity, desirability, intrinsic value, durability and divisibility. The other factors that have made gold the King of Money are that it is not consumed like let’s say wheat or oil. Almost all the gold that has ever been mined since the beginning of time is still around and that is what makes it good money.

Silver, as the old saying goes, is the money of gentlemen mainly because it has been found more abundantly than gold and can also bee consumed in the industry so not all the silver that has been mined can still be found like gold. For that reason, the intrinsic value of silver relative to gold has been less than gold. What that has meant through the centuries is that for one troy ounce of gold you will have been able to acquire about fifteen troy ounces of silver. So silver has circulated as money and currency a lot more, as gold because of its intrinsic value and storability has been saved and stored. Have you ever wondered why the word silver has been synonymous with money in countries like France (argent), Spain (Plata) and England (sterling)?

As we have seen the evolution of money came about from human action, necessity and convenience. Money was not invented by the chancellor of the exchequer or the governor of the Bank of England but by people conducting business amongst each other. The three main qualities of money are that it facilitates exchange, it is a durable store of wealth and is a measure of value.

So how come we do not use gold and silver as money or currency anymore? Why do we accept Bank of England, Federal Reserve or Euro banknotes as money or currency? For that, we need to go back a few hundred years and look at what the goldsmiths were doing. Basically very wealthy people used to store some of their money or gold coins with the goldsmiths. The goldsmiths would charge their clients a storage fee. The goldsmiths would write a receipt to their clients and it usually said: “ I, Mr Goldsmith from Threadneedle Street, promise to pay the bearer £5 of gold on demand”. Those promissory notes soon started circulating as a money substitute but it wasn’t really money.

The big Eureka moment for the goldsmiths though was when they realised that their customers would not all come at once and demand their money so they figured that they could basically lend their customers money without their permission. By doing this the goldsmith not only earned a deposit fee but also the interest on the loan. This nefarious activity of lending other people’s money without their permission is that also led to the goldsmith issuing a promissory note that was not backed by money or gold.

Eventually, the goldsmiths became known as bankers and in 1694 the English Crown did a deal with the bankers through a Royal Charter to create the Governor and Company of the Bank of England. So for the last 326 years, the bankers and the State have been tied at the hip. It wasn’t until the outbreak of World War One in 1914 thought that the elimination of gold and silver as money and currency started taking place.

With the outbreak of the war, the government and the bankers realised they had to stop the convertibility of the Bank of England promissory notes into gold or else they would not be able to finance the war and wars, of course, have always been a very profitable business for bankers. So since 1914 the Bank of England note has been an empty promise and as for the sterling silver coinage, by 1947 all the silver had been taken out of the coins in order to pay creditors for war debts and we got left with the copper nickels coins or tokens that we use to this day.

In the next article, we will look at how the elimination of gold and silver as money and currency has led to a century of inflation and inequality.


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