Saturday, January 06, 2007

Money: What does it represent?

Recently, an idea of money that explains inflation as a natural phenomenon inherent to money in general, and not the result of fiendish collaboration between government and bankers, came to mind.

Lots of people on the side of the debate I generally find myself on look to the history of American money as the history of All Money, degenerating from the era of Gold, The Perfect Money, to the nefarious "fiat" money that is obviously so amazingly horrible because it loses value as time goes by. Now, I'm hardly an expert on the history of money, but I am aware that there are many things throughout history that have been used as money. The common features I see in historical forms of money are that they are durable, easily recognizable, sufficiently rare, and require a predictable amount of labor to introduce into the economy.

Gold generally (though not always) satisfies these requirements best. Being a metal that does not oxidize, it never rusts away. It is not difficult to know gold from other materials (though there are a few that can fool the uninitiated). It is sufficiently rare that an extrordinary amount of value can be represented by a very small amount (a single ounce goes for at least $600 right now, and that's in an economy where people aren't using it as money). Generally, gold enters the economy at a predictable rate, and a more productive economy can afford more gold miners. One historical example of a major devaluation of gold is when the gold supply in Europe increased drastically due to a sudden influx of booty by Spanish conquistadors. Silver has similar qualities, though I the supply of silver is a little more variable than gold.

I have read that Native Americans of the Rocky Mountains onced use shells from the Pacific coast as a sort of currency, and upon reflection, I can see why. While shells certainly aren't as durable as gold, they are still quite durable. It probably isn't that difficult to distinguish an ocean shell from a river shell. These shells could enter the economy no faster than the trade links between the Rockies and the Pacific coast could move them, and simply could not be gathered in the local area. For all these reasons, ocean shells could well have served as an excellent trade medium for the time in which it was used. Of course, the introduction of the horse alone undermines this entire system.

Wampum was the "currency" of the natives of the eastern seaboard. It has been suggested "clovis points" were used as a form of currency. I once read in an issue of The Lighthouse about an island culture that used massive, specially carved rocks as a form of currency. All of these shared certain features. I don't know how durable wampum is, but certainly an oversized stylistic arrowhead is like a coin, and those massive rocks last for generations. They all require--in a technologically stagnant setting--a predictable expenditure of labor to create. They are all highly stylistic in form, making them easily recognizable. Given the amount of labor necessary simply to collect enough food to survive, let along make additional luxaries, the labor involved in making them ensured their rarity. The demise of "clovis points" is prehistoric, though both wampum and those big rocks were undermined with western machinery.

Imagine for a moment we live in a "Star Trek" universe. Gold would have long ago ceased to be "money," given replicator technology would have long ago undermined the value of gold. For non-trekkies, a "replicator" is a device that can transform raw energy into any form of matter, including food (though it never tastes as good as the "real thing") and including gold.

History is no more the determiner of great monetary devices than it is of great technological devices, and it was while considering what money is actually used for that I realized monetary inflation is not necessarily a horrible thing that must be avoided like a plague.

The "base case" for an economy is your basic agrarian barter economy, the only level where barter can be used exclusively, I think. Producers travel to a central location to trade their produce. You might have a wheat grower, a vegetable farmer, a grower of tree fruits, a blacksmith, a potter, someone from the nearby mine, etc. They hope to give what they produce in exchange for things they need that others produce. The miner brings raw iron, the blacksmith brings finished iron work, the potter brings, pots, the vegetable grower brings vegetables, etc. The miner might need a pot, but the potmaker has no need for raw iron. Either the potmaker needs to accept iron, and then find trade iron for something he needs from the blacksmith, or the the miner has to trade iron for something the potter needs, and then trade that for the pot. It's not that difficult at this scale.

However, as the divisions of labor get more complex, this process becomes increasingly cmbersome. The introduction of some sort of medium of trade, something that all will accept in trade, is an innovation of extraordinary value, and the thing that makes our modern economy possible. However, one thing to note is that money has not replaced the things that they were previously trading; rather, it simply facilitates the trade, itself. And this money HAS to lose value as time goes by. Why? Because the things the money represents lose value as time goes by!

Think about the produce of the vegetable grower. Today, even in my modern refrigerator, I know well that I HAVE to eat my bag of organic salad leaves within a week. Many of the leaves don't even last that long. You think a 40% loss in the value of your trade goods over fifteen years is bad? Imagine a total loss over the course of fifteen days!

Each producer's goods depreciate at varying rates. The blacksmith's goods will last for many, many ears, possibly even generations, properly cared for. Of course, part of that care is repairs. And rust happens. Pots break. Even jewelry wears, requiring occasional tooling. And the food has to be consumed soon, or it will spoil, wasted. Now, I can't communicate a good, solid logical connection right now, but I can't help but think that money must reflect in some fashion the average of the economic properties of the goods it is meant to substitue for in trade. Sure, the depreciation of money isn't as simple as taking an average of the depreciation rates of all goods, but surely some depreciation is a natural feature.

The only thing that keeps a currency increasing in value is economic growth that is faster than monetary growth. The lettuce made last year is certainly compost by now if it wasn't purchased and eaten, but provided enough people were wanting to buy lettuce, there may well be two lettuce farms where previously there was one; and thus, the money is worth more now than it was before. However, if a culture has reached the point where it has reached an economic equalibrium with its local ecology and technological progress has hit a wall, I can't help but think it would be natural for a currency to depreciate at a rate comparable to the actual goods that can be purchased with it.

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