Guest Post: The Value of a Thing….

The Value of a Thing….

Ronald G. Pittenger

The Phoenicians invented it before there was any written history, anywhere. Every culture has used and is using some version of it. It is the only alternative to the whip or sword that drives the slave. It makes our lives easy in uncountable ways. I speak of money, obviously. Let’s speculate on that.

Some bright—probably lazy and cheap, too—Phoenician noticed that people everywhere would accept precious metals, gold or silver, in trade for most anything. For his own convenience, he melted his gold into lumps of about the same size and shape. When they proved hard to keep track of as lumps, he flattened them into disks. As disks, they could be stacked and counted easily. By making a few different sizes, he could buy a cow with a small one or a tract of land with a medium-size, or a Province with a large one. Thus, he created “trade” and “money” at the same time.

Why do people accept it? It’s a lot easier to carry around a few coins of money than to bring all your worldly possessions everywhere you go in hopes of being able to barter something the other person needs or is willing to accept for whatever you need to acquire. Barter can become complicated. If you need a horse, your neighbor has one to trade—but only for two swine that you don’t have, but your other neighbor does have—and your other neighbor needs firewood, which you have in plenty, but have no way to move without a horse… You get the idea.

So, what, exactly, is money? A good working definition could be “an honest entity’s promise to pay.” What entity? Any person, group, company, or government. Pay how? In any form they can, even if that form isn’t exactly what the bearer of the “money” wants to end up with. Not what the bearer wanted? How does money help? Because money is fungible and, at least in theory, every coin of a given denomination should be equal to every other coin of that same denomination. Thus, every coin is accepted at the same value. 

So, with one small gold coin, your neighbor can buy your wood. You then take that same coin to the other neighbor and buy the horse to deliver your wood. Everyone is satisfied. This is called “business.”

What happens if your neighbor cheats? Easiest of all: you go kill him. Then, you collect your debt from the spoils, in whatever form it happens to be, cows, sheep, pigs, slaves…. Or perhaps you feel charitable and one of your neighbor’s children happens to be visiting, so you simply enslave him/her until the debt is paid. Other variations on this theme can be imagined easily. But, the cheating MUST be punished, and as quickly as possible. Otherwise, no one has any reason to stay honest.

What if the dishonest seller is a government? Like ancient Rome? Like Weimar Germany? Like many South American countries in the 70s and 80s? Like current day Zimbabwe? Like the potential future America? If the offender has little of value to anyone else, perhaps not much happens. But, if the offender has things of value, the usual result is war. Then, if the offender loses, factories, minerals, foods, scientists, et cetera may be forcibly seized and transported away (see Germany after World War II).

Suppose, instead of refusing to pay, the government simply debases the currency by making it cheaper? Gresham's law is an economic principle that states: "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation." Or, simply stated, bad money/coins drive out good money/coins. Americans saw this firsthand when silver was removed from our coinage in 1965. Rome debased its currency so often merchants took to biting the gold and silver coins to be sure they were real (real gold and silver can be bitten, if they are relatively pure). 

Weimar Germany and Zimbabwe simply ran their presses to print more money until the currency became worthless. Old news-reel footage exists of people with wheelbarrows full of the worthless currency trying to buy loaves of bread. Not only was the local economy shattered, this helped set the stage for the World War that followed. At a coin show, you may well be able to buy a billion-mark note from that period; if it’s in a frame, the frame is worth more than the note, even today.

Does that Trillion Dollar Coin scam still sound like a great idea? If so, may I please ask for a few months notice so I can move to where the bloodshed WON’T be? The Chinese may decide to help us “stay honest.”

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Book Recommendation: The Ascent of Money: A Financial History of the World By Niall Ferguson

http://www.amazon.com/The-Ascent-Money-Financial-History/dp/0143116177/ref=sr_1_sc_1?ie=UTF8&qid=1337281448&sr=8-1-spell

I got hooked on Ferguson when a friend recommended Civilization: The West and the Rest. I followed that up with the equally interesting The War of the World, and I recommend both. Next up was The Ascent of Money. It’s very different from the others, but illuminating and I learned a great deal about how not only money, but stocks, bonds, credit, mortgages and other financial developments came to be—and the crucial role they play in civilization and our current standard of living. I also learned that a lot of the things that got us into trouble in 2008, credit default swaps, securitized mortgages and the like, are beyond me. And that our prosperity is not only beyond my control, but, frighteningly, apparently beyond the control of the supposed experts making the big decisions. I highly recommend this entertaining, well-written, informative and, alas, unsettling book. ~Bob Hall