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L. Neil Smith's
THE LIBERTARIAN ENTERPRISE
Number 596, November 21, 2010

"Protecting our lives by depriving us of
any reason we might have for living them"


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It's... The Economy
by Jim Davidson
jim@vertoro.com

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Special to The Libertarian Enterprise

Chapter One: Money

And now for something completely different. It's...

Okay, it isn't Monty Python's Flying Circus. It's ... the Economy. As in, "It's the economy, stupid" which was the 1992 political catch phrase that eventually put Bill Clinton in office.

So you'd like to understand the economy, because things are bad. You can't find work. You wonder how much longer the economy is going to be sucking.

My plan with this series of essays is to explain some basic things about the economy. Yes, and to explain them in pretty basic terms. So that if you are very poorly informed (ignorant of economics) you might say, "Aha!" and think, well, that explains something that always seemed like a mystery.

Unlike James Carville, whose arrogance is legendary, I don't think you are stupid. After all, if you were stupid, you wouldn't be able to learn to read, and therefore you couldn't read this essay. Quod erat demonstrandum, which is Latin for "what was to be demonstrated" or more colloquially, "that has been shown." But nobody wants to say quod erat demonstrandum, do they? Too long. "I proved it" would be shorter, but QED is even shorter than that. See, something you didn't understand, QED, has been explained. Tell your friends.

Okay, so where to start. What the hell is the economy? Quite simply it is the sum of all economic transactions. Well that explains nothing.

What are economic transactions? Simple. When you trade with someone else, you give something they want and get something you want. That activity is one economic transaction.

You walk down the street, you say, "I'm hungry." You see a hot dog vendor. You go buy a hot dog, just the way you like it. The vendor tells you how much. You pull out some money, you pay the vendor, you eat the hot dog. That's an economic transaction. You paying for a hot dog, by agreement, is a single economic transaction. So the economy is just the sum of every single purchase that happens in the economy. Easy.

Okay, so that was too easy. Let's ask a harder question. What is money?

Now what kind of fool question is that? Money is that stuff in your wallet. Money is that stuff in your checking account. Money is that stuff on your credit card when they swipe it. (So if they swipe your card, how do you still have it? Oh, different swipe, right. Never mind.)

It turns out to be a significant question because without money, every transaction would be barter. You would have to barter for something that other people want pretty often, in order to be able to buy the things you need. Money, as E.C. Riegel noted in his 1949 A New Approach to Freedom money is simply a tool for making barter work faster.

There are three uses for money and five features of really good money. Maybe if we talk about those eight things, you'll have a better understanding of money.

Money has three uses. It is a store of value, a medium of exchange, and a unit of account.

Store of Value
As a store of value, money is something you can set aside today and spend tomorrow. Sounds great. And if you plan things right, every time you get paid "a part of all you earn is yours to keep." So why not set aside that part? Then when you really need money, you have some. And, meanwhile, that money can be invested in ways that produce income. Eventually, as you know, you won't be able to work. So wouldn't it be nice if you had money that you earn now, making money for you, so that by the time you can't work, you have enough money working for you that you can live off that income?

Sounds great. For money to be that effective as a store of value, it ought to retain its value year after year. If it doesn't, then you have to not only earn enough money to live off of, but also enough to replace that part of your money that loses value. So a really good money that functions as a store of value would be worth about the same, or maybe more, next year as this year.

Medium of Exchange
As a medium of exchange the main thing to look for is acceptability. If the money you have is acceptable to someone else, then you can use it to buy stuff. For example, if you have British pounds, and you go shopping in Los Angeles, they might not accept your money at the grocery store. You might have to go to an exchange service to get your pounds converted into dollars. So, a money which is a good medium of exchange is accepted where you shop.

One of the ways governments make their money "current" is by accepting it for the payment of taxes, fines, and fees. Which is great for the government, the parasites who work for the government, and the politicians who manipulate public sentiment. It is less good for you as an ordinary participant in the economy, a seller, or a buyer. So how did that scam get started?

Taxes are a whole separate essay, I think, so we'll run over it quickly. About 25,000 years ago, people moved around from place to place. They followed herds of animals. They gathered food like nuts and berries. Eventually they worked out ways to domesticate animals, and so, although they still moved around a lot, they often came back to the same grazing lands. Winds would keep some land clear enough in winter that the animals could graze. In Summer, there were plenty of good choices.

This pastoral and bucolic life eventually came to an end when people developed agriculture. I think that was about 12,000 years ago, more or less. We're not really sure because most people have always lived near the coast, and 12,000 years ago the Barnes ice cap which is now isolated to Baffin Island was actually the Laurentide ice sheet covering much of North America. As that enormous amount of ice melted, the sea level rose. Much of what passed for human culture was inundated. And many of the things we have used as artefacts, such as clay, wood, rope, and cloth are things that don't do well under twenty feet of sea water. In fact, sea water corrodes artefacts made of iron and even copper, given enough time.

So, what went so horribly wrong? Well, the development of settled agriculture meant that people had to stay in one place for most of the year. In Spring they had to be there to plant crops. Where rainfall wasn't always reliable, they had to divert Spring floods to irrigate crops. Then in Summer they had to keep pests to a minimum, pull up weeds, keep insects from getting too numerous, watch for rust or blight or rot. Eventually, in Autumn they could harvest. Then they could move, but by and large, they didn't. So Winter would come and they'd be stuck in their home or near it until Spring. Now, this life wasn't so bad, because with crops they could raise a surplus for trade. They also had periods of several days at a time when they could go hunting. And there were plenty of festivals.

Then came the bandits. The bandits had always preyed on trade and commerce. But with people moving around all the time, bandits had a lot of work to do. Sometimes there was a persistent trade from one region to another across a particular mountain range, so the bandits would focus their attention there. Once people settled into agricultural communities, though, they became targets for bandits in a big way. Eventually, bandits figured out that they didn't need to move, since the agricultural communities were tied to the ground. So the bandits stayed in one place and became a government. Government is the word we use to describe the bandits who won't move on. Other words include parasites, thieves, and assholes. You know, politicians.

Unit of Account
Of course, there's more to the story, but we're moving on. The third major use for money is as a unit of account. If we go back 25,000 years ago, and even further, we can find animal bones with tally marks. A line for each animal. In fact, a crossing line for the fifth. We're pretty sure these were used to count herds of animals. Some were evidently used for mathematics, including a fairly sophisticated understanding of prime numbers.

Now, as a unit of account, animals in a herd make pretty good sense. And, because they mate and have offspring, a herd of animals is a pretty good store of value. Sure, you eat some of them. And some of them grow old and die. But if you care for them, get them to water regularly, move them to fresh pasture every few days, you can expect them to reproduce much more than you eat, and more than die off. A family and a herd of animals can prosper together.

Mind you, as a store of value, animals aren't that great. You can test this theory by putting a camel in a shoe box in your attic. It smells terrible, and it annoys the camel.

We've used a great many things over the years as money. A man was said to be "worth his weight in gold" if his skills and talents were enough to make that equation come true on an actual balance scale. A man was said to be "worth his salt" because salt was a common payment. Roman soldiers received a "salary" which was literally salt. Other times they were paid in cattle, which is where we get the word "pecuniary."

Today we have an arbitrary money issued by the Federal Reserve System, printed by the Government Printing Office, and distributed through various private banks. It turns out to be a pretty abysmal store of value, so every year we have to adjust for monetary inflation. Doing so lets us make valid comparisons from one year to the next. And it is in this adjustment that we see dollars most clearly as a unit of account. The 2010 dollar is worth quite a bit less than the 2009 dollar, and accountants have to figure out how to compare this year's trade and commerce with last year's. A merchant wants to know if sales and profits are better this year than last. So the dollar is used as a unit of account, not necessarily because it is a great system—it would be better if it were a more reliable store of value—but because it is what everyone uses. So people can compare one company to another by looking at their dollar volume of sales, and the dollar value of profits.

Next, we come to the characteristics which make for good money. These characteristics are: convenient, consistent, divisible, durable, and valuable in other contexts. These are traditional characteristics, and it is said that Aristotle first remarked upon them.

Convenience
Good money is convenient. There were times in ancient China when iron was very valuable. There are actual wheels or discs of iron, weighing several pounds, which were used as money. While apparently a great store of value, they were not exactly convenient. Of course, grains of wheat can also be inconvenient as money, since you would need so many of them to buy a house or other large ticket item. Gold and silver are convenient in quite a few ways. They are easily tested for purity, they have a high monetary density, they don't corrode easily or rapidly, they are widely accepted, they are a good store of value (shoebox in the attic test works great—no smell, nothing annoyed), and you can hide quite a lot in a small volume.

Of course, paper money has also proven to be pretty convenient. It isn't as good in wet weather, but you can put it in a leather wallet to keep the rain off. Many people think that paper money was adopted when gold storage experts would issue paper warehouse receipts. Trading these receipts was in some ways easier than lugging bars of gold around. And, of course, once banks were holding the value in some form, people would keep a checking account and write cheques. Very convenient. With the development of credit cards (initially cardboard but eventually plastic) came the advent of debit cards. Even more convenient. Convenience can be measured by transaction speed—counting and testing gold and silver coins is slower than writing a cheque is slower than swiping a debit or credit card.

Consistency
It would be really great to use nearly anything as money. Cigarettes, chocolate, sugar, salt, wheat, cattle, warehouse receipts for these items, and even land—all these things and many more have been used as money. Sadly, not all tobacco tastes the same. So cigarettes are not perfectly consistent.

There are different types of chocolate, different qualities of sugar, different kinds of wheat, some cattle are better for steak and some are better for milk, warehouse receipts may depend on the quality of the warehouse (if it leaks, and the wheat gets wet, pray for beer). Land is particularly bad for consistency, because every real estate deal is location dependent. It is often said that three things determine how much a real estate deal is worth, and they are: location, location, and location.

Gold and silver coins turn out to be very consistent, by way of comparison. So much so that for about a thousand years (AD 385 to AD 1458) the Byzantine gold solidus was the standard gold coin. It was a standard unit of account even in places like Medieval England where the actual gold coins were scarce. A similarly consistent gold coin was the Islamic gold dinar which flourished during the Caliphate from about AD 650 to about AD 1253. It seems very likely that the Italian Renaissance period of flourishing culture, art, science, trade, commerce, and dissemination of knowledge was a product, in part, of this long period of monetary stability. And monetary stability is another way of saying "consistent money."

Why would that be important? Well, if money is worth the same this year that it is next year, you can make decent plans. If money is worth the same for many years, you can make valid comparisons about past years. You can figure out fairly quickly what works and what doesn't. Also, because consistent money is a good store of value, you can save money, invest it, and profit from your investments.

Of course, paper money is somewhat consistent. It is consistent from week to week except in periods of extreme hyperinflation. But it isn't consistent from year to year. And it isn't consistent from one country to the next. There were periods of hundreds of years when every European country had a gold coin that was about the same size— about 20 French francs, about 20 Belgian francs, about 20 Swiss francs, about 10 German marks, so many guilders, so many florins— the unit of account would be different from place to place, but the coin was gold, of the same purity, and identical weight. (To get the same result, Europe recently embarked on a common currency scheme which appears to have saddled their one successful economy—Germany—with a totally unworkable currency.)

Divisibility
Another word for divisible is fungible. But fungible has another peculiarity. It isn't just that you can divide the thing and keep dividing, but that each unit of a given size is inter-changeable with every other unit of that same size. So a gram of gold is a gram of gold is a gram of gold.

Now, it turns out that you can not only divide a 400 ounce bar of gold into ounces, and grams, and even grains of gold, but also you can store the bar and subdivide it as an electronic warehouse receipt. The pioneer in this area was e-gold.com in 1996. Brilliant effort, very successful until April 2007, totally ruined by the United States government in a deliberate and malicious false prosecution. That's probably one or more essays all by itself.

A work of art by Picasso might be considered "money." It is valuable. The value is consistent from one year to the next. Some of the things he drew were small. In fact, it is said he paid for some of his meals by making a drawing and turning that over to the proprietor of the restaurant. So, those would be convenient. But you can't take one of his paintings, cut it in half, and have two pieces of "money" that are each equally good. In fact, once you've slashed the art in half, you have destroyed much of its value. So works of art are not good money because they are not divisible.

Now, a given gem stone might be most valuable if it is cut and polished to a certain size and shape. You would destroy most of the value of, say, the Hope diamond, by cutting it into other gems. So, it is divisible, but not in a way that keeps all the original value intact. However, diamonds generally are a fairly decent money in that they come in all shapes, sizes, and colours. So you can substitute for divisibility by having various cuts, clarities, colours, and carats of diamonds. Of course, diamonds are not consistent from one to the next because of these various features. Diamonds are actually pretty prevalent, which makes sense given that carbon is so low on the periodic table. Emeralds are actually rare, in comparison. And emeralds aren't consistent, either. So while gem stones make for a good store of value, they aren't a very good medium of exchange, being neither consistent nor divisible.

Gold and silver are quite effective in terms of divisibility, as mentioned. A given paper note isn't by itself divisible, but you can "make change" with other notes. So that works out for paper money and divisibility. Cattle, by way of contrast, are not so divisible. You cut a cow in half, you need to immediately clean the carcass and dress the meat. If you don't have a freezer, you only have a few days to prepare the meat or consume it. Preparations such as salting and drying can preserve the meat for a time. But divisibility is not a key feature in cattle. On the other hand, one cow is much like another, so there is a fungibility factor.

Durability
You want your money to last. If you put a dozen silver coins in a shoebox in the attic, you'd like them to be there when you get back. So, although there was a tulip bulb mania in Holland and much of Europe during the 17th Century silver inflation (when so much silver was being brought back from the New World that it generated a temporary inconsistency), there was a real problem with durability. Bulbs out of the ground only last so long. Bulbs that aren't planted at the right time of year don't flower properly.

As with divisibility, cattle have a real problem with durability. You can leave those coins in the attic for fifty years, and they'll still be silver, still weigh the same. Many cattle die within five or ten years. And after a few good years, the meat on a cow isn't as tasty. A very old cow won't give milk. And a dead animal only has a finite duration as good meat.

Paper money doesn't do well in water. Gold and silver are comparatively durable, although a bit of bleach really brings out the tarnish in silver. Even tarnished, though, silver coins retain their weight. A little silver polish brings back the original lustre and the purity is just the same.

Salt, cigarettes, chocolate, and wheat are also troubled by water. You can also ruin wheat with humidity, with various rots and blights, with too much heat, with too much cold. Cook it and you have an even shorter time span for it to be good to eat.

If paper money were not constantly being created out of nothing, it might be more "durable" in the sense of retaining its value from one year to the next. Of course, the powers that be have decreed that we get lots more money every year. And, curiously, lots more government.

Value in other contexts
Finally, we would really like our money to be valuable in other contexts. Gold and silver, for example, are useful in electronics, in heat shields, as jewellery, and in other ways. Paper money, on the other hand, is an arbitrary value—as illustrated by various decrees. The assignat was made "no longer money" by the Directorate in France in 1796. They issued a new paper money called the "mandat." Which didn't last, either.

So you have the real problem of finding that your money has no value, at all, in any context. And there is only so much paper money that is in good enough condition, or rare enough, to make a collector's item. In July 1992, the Yugoslavian government replaced their dinar with the "reformed dinar." Inflation had sapped so much of the value from the old dinar that the reformed dinar was replaced at a ratio of 10 to 1. So if you had ten of the old dinars you could get one of the reformed dinars.

Then in October 1993, the government again replaced the pieces of paper. This time you needed a million of the reformed dinar to get one of the October dinar.

On 1 January 1994 they did it again. This time, to get one January dinar you needed a billion October dinars. Wow.

Finally on 24 January 1994, the government gave up issuing a distinct currency. Instead, they issued the "novi dinar" which was pegged to the German mark. If you had 13 million of the January dinars you could get one novi dinar.

You should probably not be surprised that the hyperinflation in France during the period of the national assembly and the directorate was accompanied by violent upheavals, economic chaos, and led to the ascension of Napoleon as dictator. The period of hyperinflation in Yugoslavia led to the break-up of that country, with much violence, economic chaos, genocide, and war.

So, good money seems to be related to stability, peace, prosperity, and developments in technology, the arts, science, architecture, and philosophy. Bad money seems to generate unrest, war, economic calamity, and stagnation in the arts and sciences.

In future essays in this series, I plan to examine other aspects of the economy. But, for now, you know that economic transactions when you buy something or sell something are the basis of the economy. The economy is simply the sum of all those transactions going on all the time, all over the world. Since we do most of our economic activity in money, it is important to understand what money is, the three functions it serves, and what makes for a good money. I think the five characteristics described above make for good money.

Obviously, I happen to think that gold, silver, and copper coins are good money. It so happens that for about the last ten or twelve thousand years, people have valued these items. Enough so that you can find ancient burial sites where discs of gold or silver or copper were included as "grave goods." Since these were probably not "buttons" it is my suspicion that Herodotus was wrong about Croesus inventing gold and silver coins. I suspect this may be a misunderstood translation, and that what Croesus did was invent a bi-metallic coin, perhaps silver in the middle surrounded by a ring of gold. Anyway, the Lydians had some nice coins.

Until next time, remember: It's ...the Economy.


Jim Davidson is an author, entrepreneur, and anti-war activist. His 1990 venture to offer a sweepstakes trip into space was destroyed by government action as was his free port and prospective space port in Somalia in 2001. His 2002-2007 venture in free market money and private stock exchange was destroyed by government action in 2007. He's going to Mars if he has to walk. His second book, Being Sovereign is now availble from Lulu and Amazon. He is currently working on a book about travel to Mars with John Wayne Smith, a book with international fugitive Chad Z. Hower on his story, a book on sovereign self-defence, and a book compiling his letters and essays in The Libertarian Enterprise since 1995. Contact him at indomitus.net or indsovu.com. Davidson has withdrawn from public life and does not make speaking appearances.


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