What is Money? (Part 2: Money Today)

So in the first article we talked about the origin (or theory of the origin) of money. To summarize, money started as a commodity that held value and was widely accepted as a media of exchange. One could expect to exchange the money he/she received in trade for other products they desired to consume. This all occurred through the market, so the idea of money was not created or instituted by a government force. Economic actors all mutually agreed on, and accepted, the money used at the time.

The question now is how do we define money today? It is most assuredly not a commodity based money we have today. If it were, we would not have all the financial woes and problems we see constantly occurring (the booms and the busts). So how is money defined today and why is it generally wrong?

Statists on Money:
First of all, and you can watch it here, Former Chairman of the Federal Reserve Ben Bernanke doesn’t think that gold is money. He calls gold an “asset”.1 Though, if we refer to what we have already established, gold has been used as a media of exchange, or money, for thousands of years. Why is that? Well, a long time ago, economic actors decided that gold was valuable. It was a voluntary decision to use it as a media of exchange. Our current monetary system however, is not a commodity based media of exchange. They are just paper or numbers in a bank account. In a voluntary system, why would economic actors decide to use worthless pieces of paper as a media of exchange? The answer is that they would not. Even Krugman acknowledges that the monetary system we have now is not backed by any sort of commodity or value but by men with guns forcing us to use them.2

If we, as actors in this economy, were given the choice, we would not use worthless pieces of paper to handle our economic activity but something else, a commodity like gold, to be used as a media of exchange in order to handle our financial affairs. We only use worthless paper money because we have a government pointing guns at us forcing us to use it. Because, lets be honest about this, would you rather use something that held value to store your wealth and handle exchanges or would you rather use inflated and constantly depreciating paper bills in order store your wealth? The economic answer is simple, you would choose the media of exchange that is most profitable for you and allows you to fulfill as many ends as possible. That means you would not freely use the worthless paper bills.

So why does someone like Bernanke not think gold is money? Simply because gold would be a competing currency if we were given the choice to choose a media of exchange for ourselves. If the market and the economic actors in it, did not have a government pointing guns at them in order to force them to use U.S. dollars, someone like Bernanke (and now Janet Yellen) would be out of a job.

These people are cheerleaders of the State. They think it is perfectly ok to point guns at people in order to force them to use a particular money and nothing else. It’s for our own good really… Right? They think that pointing guns, though violent, is the only way to reach prosperity. Any other idea, especially ones where voluntary exchange is involved, is not even considered. To these people, central control of all economic activity is the only tool, and when the only tool you have is a hammer, every problem looks like a nail.

Unfortunately, it seems the statist ideology is still firmly rooted as the only option when it comes to using a media of exchange. Hopefully someday, when enough people are sick of booms and busts due to distortions in the market created by government interventions, they will demand a return to the origin of money. A commodity based media of exchange.

“The whole entrepreneurial class is, as it were, in the position of a master builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master builder’s fault was not overinvestment, but an inappropriate employment of the means at his disposal.”3
This analogy of the master builder by Mises highlights how the modern definition and employment of money is all wrong. Every actor in the economy is this master builder and this is what causes the booms and the busts. The central bank pumps more fiat currency into the system, distorting prices and interest rates, thus making accurate calculations of resources impossible. This means a bust, or a return to normalcy in the market is inevitable.

1. “Ron Paul Asks Ben Bernanke – Is Gold Money? July 13, 2011.” YouTube. YouTube, n.d. Web. 26 Oct. 2014. <https://www.youtube.com/watch?v=G3TltMNbgGQ>.

2. “Consulting by RPM || Free Advice Blog.” Consulting by RPM Free Advice Blog RSS2. N.p., n.d. Web. 26 Oct. 2014. <http://consultingbyrpm.com/blog/2013/12/krugman-fiat-money-is-backed-by-men-with-guns.html>.

3. Mises, Ludwig Von, and Ludwig Von Mises. Human Action: A Treatise on Economics. N.p.: n.p., n.d. Print.

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