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What is Money?

The following is a repeat from March of 2009.  Little has changed since it first ran – except the urgency of the message.  I’ll be back with a current piece next Monday.

People are willing to give up 40 or more hours a week to have it.  The lust for it drives some people to betray their friends’ trust, and the lack of it has driven some to suicide.  In our culture, there is nothing quite like money as a motivator.  So what is it?

forex2I got into this recently when I tried to explain how we got into the current mess.  It’s all a matter of values, a concept I’ve re-iterated a bit by dwelling on the way the rules of the economy are developed in a kind of social agreement.  But that’s not enough for a lot of you because, after all, this big thing called an economy is really all about money – and that’s what matters.  Right?

Asking what “money” is, as a concept, may sound like the stupidest thing possible.  It’s what it takes to survive and do all the things that a modern person likes to do, after all, and you don’t question something like that.  Yet the economy that we have is made up of money and the exchange of it, so the more we understand what money is the more we understand the current situation.  That’s why I turn to popular conservative icon Adam Smith, who said:

“All money is a matter of belief.”

Many people think there is a definite value to money, a sold meaningful purpose that underpins everything.  There isn’t.  Some will tell you that when we abandoned the Gold Standard and went to “fiat” (forced) currency we lost our sense of real value; they never tell us what gold is all about in the first place.  What matter is what people believe in, be that gold, the Federal Reserve, or Canadian Tire Corporation – money is always nothing more than what people believe it is.

Money only means something when it comes time to exchange it for something useful, such as a mortgage or cat food or beer.  That’s when we learn what the real value of it is, even though we have ideas about the value of money in our head from experience.  If there’s too much money floating around, the value of it goes down – which is to say the price of things goes up, taking more money per bag of cat food.  When lines of credit dries up very suddenly, there is a lot less money in the world suddenly, and prices may fall; that explains the massive sales many retailers had in 2008.

This is true no matter what the money is made of.  When Spain found they could loot the bejaysus out of Peru in the 16th Century, it thought that its troubles were over – but a period of terrible inflation set in that destroyed the nation and left it vulnerable to a outside forces that ripped it apart for 300 years.  Even when it’s gold, too much money in the wrong places can create the stagflation that we experienced in the 1970s.

The Dollar is nothing more than a certain amount of numbers that are maintained by the Federal Reserve.   If it looks as though the Dollar is worth less, they make it harder to get – and currently the shortage of Dollars has them doing everything they can to get more out there.  The problems come when you have to compare the Dollar to the Euro or the Yuan or the Brasilian Real.  In this case, the relative values have to be balanced out, more Dollars making it fall versus everything else and so on.  It’s hard to balance both at the same time, but that’s what the Fed has to do.

The other dimension of money that some of us will talk about is how it is distributed through an economy.  It’s clear that when the money is concentrated in a small number of hands the potential for real disaster is even stronger.  Concentrations of wealth marks the start of nearly every Depression, and this one is no different.

I’ve said many times that you can’t have an economy based on making something from nothing.  That sounds like a call to a fundamental law of money, something like Newton’s Laws of physics.  It isn’t.  If everyone suddenly had a lot of money, then money wouldn’t be worth much anymore.  This is nothing more than a practical consideration.  That means that for the rich to remain well and truly rich, they have to not only have a lot of money, they have to have more of it.  That’s the concentration of wealth that leads us around the great wheel of history to Depression.  Note also that if one nation has a lot of wealth, the same principle applies as it relates to other nations – unless they are producing something of real value.

So what is money?  It’s a way of keeping score.  People get so obsessive about it because we live in a world that obsesses over it.  That’s about all there is to it.  You may or may not think this is a good way to organize things, and that’s your opinion – but the basic principle, that money is nothing more than a matter of belief, is certainly true.

21 thoughts on “What is Money?

    • Thanks – but I have to try! 🙂 It’s a very important concept because money itself is nothing more than our ability to manage it. Forget all the political philosophies out there – the most important thing that government can do to keep the economy on an even keel is a firm hand on the tiller. That is what has gone wrong lately – on both left and right.

  1. “…the concentration of wealth that leads us around the great wheel of history to Depression…”

    This is what it seems to boil down to,

  2. Everything is only worth what people think its worth. I would hope everyone learned that who owned a house since 2004. The same is true for money. I still wonder what would happen if it all went away and we had to start over.

    • Good analogy. As for just starting over, that’s what the “New Deal” was all about – the hand had played out and it was time to shuffle the cards and start over. Ideally you do this in an orderly way, but if governments and banks can’t make it happen it probably will on its own. But … I think we’d prefer to not go through another Depression of 1929. If we really did learn anything – and we really can have a “Managed Depression” – it would be to avoid that. Let’s see how smart we really are.

    • Sometimes, I think my role is to be the little boy who says, “The Emperor is naked – and I think we can see why the Empress has a thang goin’ on the side, too!”” 🙂 A really dumb question that can’t be answered easily is a question that has to be asked, at least once in a while. A time of crisis like this may seem like the last point in history to do it, but we made it this far without asking it. Might be good to know.

  3. Giuseppe Zangara attempted to assassinate FDR on February 15, 1933 in Florida. He killed Chicago Mayor Anton Cermak instead. It’s a good thing FDR survived because he declared a national banking holiday on March 4, 1933. Faith in the banking system had collapsed and faith was restored with federal deposit insurance. The US was one bullet away from…Huey Long.

    • As a Miami native, I have a theory that everything bad in the world goes through Miami at some point. My daughter actually challenges me at times to find the connection when a story hits – and I usually do find the connection. In the case of FDR in Bayfront Park on that fateful day, we all dodged a bullet. It was, indeed, amazing. History is an amazing master.

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