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SCI LIBRARY

Libertarian Land Philosophy:
Man's Eternal Dilemma

Oscar B. Johannsen, Ph.D.



BOOK II: Exchange and Money

Chapter 2 - Money



The purpose of this chapter is to derive a definition or concept of money which would be applicable in any society, primitive as well as civilized, and in any time period. As money is one of the central elements of this study, it is important that it be precisely defined for if it is not, then the superstructure built upon a loose and vague concept will be faulty.

As the reader has learned, money evolved because coincidences of desires do not ordinarily exist among men having goods to exchange. The employment of a specific good -- money -- as a medium to facilitate exchanges eliminated many intermediary barters which would otherwise be required.

History shows and logic confirms that an article becomes money because of many factors, such as its desirability for uses other than to assist exchanges; its durability, and even the nature of the community. In a seafaring area it could be fishhooks; in upland areas it could be an agricultural tool. While at first a number of articles might be utilized, eventually a particular one would become the article in common use. This would be the medium of exchange, that is. the money of the community.

The commodities which have served as money testify to the imagination and needs of men. At times, tobacco, furs, skins, cattle, cowrie shells, copper, silver and gold have been used.

The economic history of the United States is an excellent study of the development of money from crude to sophisticated forms. In America's rapid change from a primitive to a highly developed civilization, the evolution of money, which in other parts of the world probably took thousands of years, was largely telescoped into a short period of time.[1]

The Indians must have attained a relatively high level of culture because the American colonists discovered that the Indians had developed a fairly sophisticated form of money -- wampum. This was native aboriginal jewelry, but it was by no means crude. If one will visit a museum, he will find that wampum is exquisitely made and consists of blue and white beads which were made from whirls of periwinkle shells. Holes were bored in the beads which were then strung on fibers of hemp, or on tendons taken from forest animal meat, or else embroidered on pieces of deerskin to form girdles or belts, as ornaments and charms. The shell cylinders were about 1/8th of an inch in diameter and about 1/4 inch long. It required the work of a skilled artisan to bore the cylinders with a primitive stone drill and then long wearisome hours were spent polishing them on stones. The finished product was beautiful and does not suffer by comparison with jewelry today.

For many years wampum was the money of both the Indians and the American colonists and was essential for helping effect the exchange of goods easily and efficiently. As late as 1662, much of the revenue of New Netherlands was in wampum. However, the colonists also utilized many other commodities to act as mediums for facilitating indirect exchange. In 1631, Massachusetts passed a law that corn could be used in the payment of debts, and the colonists generally permitted taxes to be paid in commodities. Wheat, rye and barley were permitted in Massachusetts, and Rhode Island permitted beef, pork and peas to be used. It is stated that a student, who later became the President of Harvard College, paid his bill in 1649 with "an old cow". In the South, tobacco was used in Virginia for almost two centuries beginning about 1619. Near the end of the 17th century, one man's estate was said to be worth 131,044 pounds of tobacco. Commodities such as oats, bacon, dried fish, tallow, butter, cheese. sugar, brandy, whiskey and even musket balls were often used as money in colonial days.

Within the past generation, it is said that salt is used as a medium of Exchange; brick tea in Siberia, Turkestan, Mongolia and Tibet; with black and white shells in the Solomon Islands. During and after World war I, oilcloth, wood, porcelain and leather were used in Germany, and iron money was used in Belgium, Italy and Germany.[2]

Inasmuch as most of the early colonists were poor, they brought with them little or none of the metallic money which was being used in Europe at that time. Therefore, they developed their own money. However, with the expansion of trade, particularly with the West Indies, foreign money began to enter America. As there was extensive trade between the West Indies and the Spanish mainland, the islands in the Caribbean Sea had plenty of Spanish coins. These coins infiltrated the American colonies as a result of trade as well as the piratical operations of the buccaneers who preyed on Spanish galleons. By the end of the 17th century, the West Indies was the principal source of this metallic money. Thus, most of the coins circulating in America were Spanish and Portuguese rather than English. The famous Spanish silver dollar of eight reals, or pieces of eight, popularized in Robert Louis Stevenson's "Treasure Island". was the original of our American dollar and came to America through the Caribbean trade. This dollar was made into eight parts which could be divided up or 'bitten off', as it was said. If a quarter of it was 'bitten off', it was called 'two bits'. To this day, 'two bits' is slang for 25 cents in the United States. Other coins entered the country as pistols, doubloons, crusadoes and guineas.

The article which is used as money tends to have certain characteristics. It must be highly prized by people due to its capability to satisfy some desire of men other than the desire to employ it in exchange. It need not be universally desired, but wanted by enough people so the few who are indifferent to it do not affect its usefulness as money. Cigarettes served as money in parts of Germany right after World War II when conditions were chaotic. Non-smokers accepted the cigarettes as readily as smokers when they knew they could exchange them for goods.

The article must be relatively scarce because scarcity combined with almost universal desirability tends to give it a high preference rating in people's eyes. It is not surprising, therefore, that when the production of commodities such as tobacco is very great that these commodities cease to be used as money.

Physically, the article should be durable, portable, divisible, homogeneous and recognizable. Durability insures that wear and tear is not excessive in hand to hand exchange. Portability enables it to be carried easily. Divisibility assures that it can be used for a whole range of exchanges. Homogeneity insures that its quality is the same throughout, and obviously recognizability is a necessity.

If an article possessed all the characteristics enumerated, men could be reasonably certain they could exchange it for goods. They would not be absolutely certain but sufficiently so that they usually would not need worry over its acceptability. Almost invariably, the kind of money in use tends to go from the more or less perishable commodities to the almost imperishable metals. In the American colonies, while they utilized perishable goods, such as wheat, rye, and dried fish because they had to, these articles were not as desirable as commodities composed of materials which would decompose slowly, such as the metals. Thus, the colonies were always quite anxious to get 'hard money', as metallic coins are called.

Historically, it is known that many societies which used perishable commodities subsequently replaced them by agricultural implements and household tools, as spades, basins and axes. Then, usually came ornaments. At first glance, the use of ornaments may appear surprising. Why should money consist of something as useless, in a practical sense, as a part of a necklace or bracelet, when an article as useful as an ax could be employed?

Psychologists may some day give us a definitive answer. We do know, however, that ornamentation is a very important facet of human life for primitive as well as civilized people. Natives adorn themselves and dress up their crude tools almost as soon as they invent them. So important are ornaments to primitives that anthropologists and traders bring trinkets as gifts to the chiefs to gain their good will.

Probably, the love of ornamentation is so innate that it is as natural as breathing. Men and women give ornaments to those they admire, award medals to their heroes, woo the opposite sex with jewelry, and wear amulets to ward off evil. They express their veneration of God by expensive and exquisite ornaments which are placed on altars and they wear beautiful religious jewelry.

Earrings, bracelets and necklaces have been used as ornaments for thousands of years and have, no doubt, been used in indirect exchange for as many years. We know that rings and other jewelry were formed so as to be able to be used as money. Many were molded to a definite weight and were almost coins. The Bible stated that Rebecca received 'a golden earring of half a shekel weight and two bracelets for her hands of ten shekels weight of gold.' (Genesis, Chapter XXIV, Verse 22). This is evidence that ornaments were designed so they could be utilized as money.

To this day, money and ornaments are often interchanged. Probably as a result of thousands of years or persecution. the Jewish people have developed an exquisite taste for jewelry and usually wish to obtain much of it. By so doing, they not only satisfy their desire for ornamentation but they have a mobile form of wealth which they can use in the event they are persecuted and forced to flee to some other land. If the new country's money is gold, then in their gold jewelry they have that nation's money, although not in the form in which it is circulated.

The round and square pieces of metal strung on bracelets and necklaces were often used as money. This probably led to the minting of solid round pieces of metal, such as our coins are today. This is all conjecture. It is based on what appears to be reasonable assumptions plus information, sketchy though it is, of primitive money. Records obviously do not exist detailing the gradual changes in the kinds of money used. With but few exceptions, historical information on money starts when coins were already in existence.

Coins as we know them today date back 3000 years. In the West, the first known examples occurred in Lydia. an ancient maritime province of West Asia Minor, where in about the 8th century B.C. stamped pieces of electrum were produced. This is a natural alloy of silver and gold, and some of the coins are still in existence. Electrum was not too satisfactory, however, as the two metals varied considerably in mixture. Subsequently, it was abandoned for a system of gold and silver coins. King Crosus of Lydia, the symbol to this day of enormous wealth, substituted coins of pure gold and silver for electrum in the sixth century B.C. Ancient writers, as Xenophanes and Herodotus. believed that coins were invented by the Lydians, but there is proof that there was coinage before their time.

There is evidence that Greek merchants of ancient Ephesus in Asia Minor struck the first gold coins around 800 or 700 B.C. In Babylon and Phoenicia it is said that 'metal ingots bearing the stamp of the merchant who cast them passed by weight and became the basis of a highly developed banking and credit system'.[3]

In Babylon, ingots of copper or silver were stamped by merchants with a mark which indicated their weight and fineness. It is believed the Greek States were the first to put their seals on pieces of metal certifying that the metal was of a certain weight and fineness. Probably no one invented coins. They most likely evolved as a result of using ornaments for money.

As civilization grows there appears to be a gradual progression from the baser metals to the more precious ones. Bronze and copper might be used first, to be superseded by silver and then by gold. Today, either silver or gold is the money of most countries, although the laws of most nations restrain the use of such metals, particularly gold, in attempts to substitute what is known as 'paper money'. (This will be discussed subsequently.)

Silver has most of the characteristics of a good money. It is almost universally desired as jewelry and flatware, as well as for industrial uses, such as photography. It has all the physical characteristics desired, although it is not as easy to recognize because other metals have a sheen which is silvery. Its main defect is that it is much more plentiful than gold. For the United States, where commercial transactions involve huge quantities of goods, to use silver as its money would mean that cumbersome quantities of silver would need be exchanged. China, however, where business transactions are not as large nor as complex as those of the United States, is probably better off with silver as its money than gold. Silver is the real money of China, although it is used surreptitiously since the present government forces 'paper-money' into use.

The tendency is to utilize a metal which is in keeping with the standard of living and height of civilization attained. Without any conscious deliberation, people tend to use metals which are apparently of successively greater desirability and scarcity as civilization advances. Copper seems to have been supplanted by silver in ancient Greece and then by gold. In most countries, a similar progression appears to have occurred. If civilization declines, no doubt, a regression will occur. Instead of gold, silver will be used, and then if civilization declines still further, probably copper and bronze. (Parenthetically, it might be pointed out that although tokens are not money, yet their quality may at times be an indication of the state of the civilization. In the United States, tokens for the most part have been of silver. But now that America is retrograding from the heights it reached, they are of copper and nickel.)

Gold is nearly the perfect money. It is desired almost universally by everyone, savage as well as civilized. Combine this with its scarcity and the physical characteristics which a money requires, and we have a metal which it is difficult to surpass for use as money.

That it is scarce is shown by the fact that despite the thousands of years that it has been produced, and despite the constant search for it during all these years, the amount in existence is estimated to be only about two billion ounces or about 80,000 tons (Troy weight). Most of this was produced since the discovery of America. The world's average production of gold annually outside of Russia is over 41 million ounces or about l700 tons. Contrast this with the world's average annual production of steel of over 650,000,000 tons.

The physical properties of gold meet every test for a good money. It is practically indestructible. Gold ornaments and coins have been discovered which were produced thousands of years ago. The gold amulet gracing a lovely young woman today may have once been worn by some gracious lady of Biblical days. Gold is malleable, that is, it is capable of being hammered or rolled without breaking, so it can easily be divided into units of almost any size. So malleable is it that a gold piece which is the size of a silver half dollar can be rounded into a thin sheet covering 100 square feet, and it is so ductile that an ounce can be drawn into a wire about fifty miles long. Though its fineness may vary, it can be controlled and fine gold is homogenous in every respect. It has a characteristic luster and does not tarnish, which is one of silver's defects. It is portable. Since gold has these characteristics, in addition to being scarce and highly desired, it is hardly surprising that it has become the money of so many societies down through the ages.

There is nothing sacrosanct about gold. People might have chosen some other metal. but certainly today the psychology and desires of the people are such that gold suits them best.

As people started to use metal coins, questions would arise in their minds, such as what was the degree of purity of the metal comprising the coin, or how much actual silver or gold did the coins contain? Few would have the requisite skill or knowledge of the proper techniques to determine such questions. This would inhibit the use of coins in the bartering of goods. Eventually, it must have occurred to someone, possibly a reputable merchant, to place his stamp or insignia on his coins guaranteeing that they were of a specific degree of purity. Finds which have been unearthed of little globules with a variety of stamps suggest that they were private issues, such as might be expected of merchants. It is known that gold ingots bore the seal of merchants, temples and townships.

Probably not long afterwards, the thought occurred to someone to indicate not only the quality of the coin but also its weight. Thus was born the coin, such as we have today, with a stamp on its face which indicates its weight as well as its quality. The $20 gold piece issued by the United States Government, with its insignia of the Government, meant that it was composed of gold 9/10th fine, and weighed 516 grains (a little over an ounce).

According to the Encyclopedia Britannica, 'A coin may be defined as a piece of precious metal stamped with some mark or inscription showing that it is issued by some authority which guarantees its weight and purity.'[4]

The coin does not need be one of the precious metals, as silver or gold. Thus, by eliminating the word 'precious' from the above, we will have a workable definition of a coin. It should be noted that coins do not have to be issued by a government, but rather by some authority. This could be a government, but it could also be a bank, a corporation, or even an individual.

In most societies, not only coins but ingots are money. Although the use of ingots may have preceded the use of coins, it could very well have been that ingots, such as are in use today, developed when the business of merchants reached heights which would have required large quantities of coins for exchange purposes. To avoid the necessity of counting coins, it would be much easier to have an ingot or bar of metal, the equivalent of a hundred or more coins.

A study of monies of the past show that they are:

First: Articles of wealth, as fishhooks or coins.

Second, Articles which because of their intrinsic qualities are desired almost universally in a particular society and thus usable as a means of indirect barter.

Third: Compared to other goods, they have a relatively high preference in the eyes of people. This is due to their great desirability and also to their scarcity.

Fourth: At a particular time and place, they are the commonly used articles for indirect barter.

These facts have led to the following definition:

Money is an article of wealth which at a particular time and place is commonly used as a medium of exchange.

Not all the points listed have been explicitly included. For example, no mention is made of money's relatively high preference in comparison with other goods. This is implicit in the fact that the article is used as money. In addition, what is ordinarily, though erroneously, classified as 'paper-money' is obviously not money under this definition. While the paper is an article of wealth, it is not the paper which makes it prized by people. It is the words inscribed on it which have meaning to people and makes them willing to accept it. Subsequently. it will be shown that 'paper-money' consists of either receipts or promises to pay money, and that it is an unfortunate error to designate them as money. For the present, it is sufficient if it is recognized that money is an article of wealth, as a metal coin, and that it is never a piece of paper no matter how beautifully it is engraved nor how fine the paper on which it is printed.

Certain points might be stressed:

First : The definition is based on the nature of the thing itself; what it does. An attempt has been made to enunciate a definition without being verbose.

Second: Questions of legality are of no concern because a concept of money must encompass the medium of exchange which is used in all societies, whether they have governments or not. The definition must be as universal as one in physics, i.e.. true at all times and under all circumstances.

Third: people and only people create a medium of exchange and they do it quite unconsciously as they attempt to exchange the goods they possess for the goods they desire. Time and again governments have tried to foist on their citizens something which they want the people to use as money. If. however, the people will not accept it, then it does not become that country's money, and the government must adopt the medium the people have selected. The old Czarist government in Russia in the 19th Century wanted to make platinum money, but when the people were reluctant to use it and utilized as little as possible in their daily transactions, the government found it expedient to drop the idea.

Fourth: There is only one medium of exchange at a time, not two or three. If gold is the money in use, then any silver and copper coins which circulate are tokens related in some way to gold.

Fifth: Money does not entitle men to other articles of wealth. It is often stated that money is a claim on the wealth of the community. This is not true. Ownership of money does not entitle one to the wealth of some other person. Money is the most marketable commodity in the community, and therefore the likelihood is great that it can be more easily exchanged for the things men want than any other commodity. Nonetheless, the exchange desired may not be accomplished. A stationer's newspapers belong to him. If he does not wish to sell one to an individual he does not have to. During wars, when goods are rationed, people become acutely aware that money is not a claim on the nation's goods for at those times legally they cannot purchase many goods unless they also have the necessary ration coupons.

Sixth: Money usually is not capital. As has been explained, capital is an article of wealth which is being used to produce more wealth. It is a tool, as a hammer, a factory, or a blast furnace. Money, certainly in modern society, is not a tool. It does not produce more wealth. It merely helps the exchange of goods.[5]

Seventh, Although money in modern society is not capital, it is an article of wealth. It must be wealth in order to be money. It is used for exchange purposes precisely because of its usefulness to men for purposes other than exchange. Money may be composed of almost any conceivable material and in almost any form. In most modern countries it has been gold, and the shape in which it circulated is in coins of different size and in bars and ingots. It is this writer's contention that one of the great errors in monetary literature is to classify as money such items as banknotes, demand deposits, time deposits and tokens. These items are related to money in some fashion, but they are not money.[6]

While the reader may appreciate that there is validity in limiting the definition of money to an article of wealth, such as a coin or an ingot, which serves as a medium of exchange, nonetheless he may still feel that the definition should encompass other functions. However, the purpose of a definition is to enable all to have clearly in mind what is meant when the term in question is used. A saw may be utilized for other functions than sawing wood. It might be employed by some deft musician as an instrument on which to play tunes. Should this function be included in its definition?

Money may be used as chips in games of chance. It may be used as a paperweight. Should these functions be included in its definition? Money may also be used as a means of making rough comparisons and calculations in the exchange of goods. It may also be employed as a means by which one saves wealth until one wishes to exchange it. It is because of these last two functions that money ordinarily is defined not only as a medium of exchange but as also being a measure and store of value.

Money is a medium of exchange. That is what makes it money. The fact that certain calculations are made with it and that people save it comes from the fact that it is money. But that does not make it a measure of value. (Subsequently, it will be shown that it is not a measure nor store of value inasmuch as value cannot be measured nor stored. Value is a subjective concept existing in the minds of men.)

A query which is often raised is whether there is sufficient money in the world, which, in turn, usually means is there sufficient gold? This question misses the point. Only people make an article money. They adopt a commodity as money which best suits them. If there is not enough of a particular commodity, they will turn to another one. It is a matter of indifference to them whether copper, silver, gold, or any other commodity is employed as money. After all, men did not originate money because they really wanted it. They had to establish it because coincidences of desires did not exist among those wishing to exchange goods. People want certain goods in return for the goods they possess. Money merely makes it so much easier for them to effect this exchange. Why then use gold if there is not enough available? Men would not insist on it. Instead, they would use something else.

Parenthetically, it might be pointed out that inasmuch as people are relatively indifferent as to what money is, it has been mistakenly assumed that pieces of paper, such as banknotes, can be considered to be money and will do the job as effectively as a commodity. The sad history of inflation is more than enough evidence that such is not the case. People are indifferent as to whether gasoline or water is required to fuel the engines of their cars since all they are interested in is transportation. However, the fact that they are indifferent does not mean that they can use water in an engine. Similarly, pieces of paper such as banknotes, cannot effectively act as a medium of exchange, although this fact is not apparent because it seems as though they do. However. it also seems as though the sun rotates around the earth.

Brief mention of the present money of the United States may be of interest. Under the authority of the Gold Reserve Act of January 30, 1934, the President of the United States in a proclamation (48 Stat 1730) on January 31, 1934 defined a 'dollar' as 13.714 grains of pure gold. A grain is a weight. There are 480 grains in a Troy ounce. By dividing 480 grains by 13.714 grains per dollar, one arrives at 35 dollars. This is why people say the 'price' of an ounce of gold is $35.00. Actually $35.00 becomes a synonym for an ounce of gold. The important point to remember is that a "dollar" is defined as 13.714 grains of pure gold, or 1/35th of an ounce of pure gold. Thus, when something is purchased for a dollar, the buyer is exchanging 1/35th of an ounce of pure gold for the article.[7]

To most people the word 'dollar' conjures up some nebulous concept of value, but actually as the President's proclamation indicates it is just a weight of gold. The names of many of the monies of the world indicate weights and resulted from the fact that people would barter a certain weight of their money for the goods they desired. The English pound is an excellent example of this. Although it was never coined as a pound, it was composed of 240 silver pennies which equaled a pound weight of silver. Thus, when people purchased say, 100 pounds of sugar for an English pound they were exchanging 100 pounds of sugar for a pound of silver. What probably happened is that while at first people might have said. 'I will give you a pound of silver for 100 pounds of sugar', gradually they dropped oft the words 'of silver' and merely said I'll give you a pound and it was understood that they meant 'a pound of silver'.

The word dollar unfortunately gives no conception of weight for it comes from 'Joachimst(h)aler', a silver coin first struck in 1519 under the direction of the Count of Schilick in Germany. It bore a likeness of St. Joachim. from which its name was derived. Gradually 'Joachimst(h)aler' was corrupted into 'Thaler', or 'doler', · or 'dolar', and finally 'dollar', which came to mean a silver coin.

The United States Government does not coin any dollars or multiples at the present time. The only coins in existence are those coined before the redefinition of the dollar in 1934. when its definition was changed from 23.22 to 13.714 grains of pure gold. The most familiar coin is the old $20 gold piece. Instead of minting coins now, the Government mints ingots of gold. These ingots are exchanged only with other governments or the central banks of other countries. The fact that ingots are minted and exchanged indicates that actually the money of the United states is gold and not paper, as most believe.[8]


Recapitulation


Money is a commodity which almost everyone wants in order to make the exchange of goods easier. It is the most marketable commodity in the community. In exchanging money for goods, men are bartering a specific good called money for the goods they want. Money does not consist of beautifully engraved pieces of paper on which some government has printed words. Today, money in most countries is gold. This is true even though almost all governments, by one means or another, discourage the use of gold as money and instead practically force the people to resort to credit transactions in order to effect exchanges.

Money is an article of wealth which at a particular time and place is commonly used as a medium of exchange.


NOTES


  1. This writer is indebted to the work of Roy A Foulke, "The Sinews of American Commerce" from which much of the historical material is taken.
  2. Sinews, p. 30
  3. Elgin Groseclose, 'Money and Man', p.9
  4. Encyclopedia Britannica, 1952 Edition, Vol. XVI , p. 616 (Numismatics)
  5. In primitive societies, money might be a tool, as fishhooks, but almost invariably it is an article of consumption. When unusual circumstances occur, as in war periods, and a society's money is· not available, the tendency is to use some consumptive article, as cigarettes, temporarily as money. For all practical purposes, then, it can be stated that money is a form of consumptive wealth.
  6. Much of the perplexity surrounding money is caused by erroneous fundamental concepts. Of course, a person can define a word to mean anything he wishes. However, if the definition is too broad, or too narrow, then as the analysis progresses, confusion will develop which will probably lead to mistaken conclusions. Probably, the test of a definition is how useful it is in solving the problem being studied.
  7. After the above was written, on December 18, 1971, the President announced that Congress would be asked to re-define the dollar to be 1/38th of an ounce of fine gold (12.632 grains of fine gold). Subsequently Congress passed the necessary legislation. On February 12, 1973, the President announced that the dollar would be re-defined to be l/42.22 of an ounce of fine gold (11.368+ grains of fine gold) , and the necessary legislation was subsequently enacted.
  8. On December 31, 1974, citizens of the United States were once again permitted to own gold bullion. This meant that a free market in gold had been established. However, the government did everything it could to discourage people from acquiring gold. Technically, its definition of the dollar is still 1/42.22 of an ounce of gold, or as it is usually put the official 'price' of gold is $42.22 per ounce. On January 6, 1975, it sold at public auction 753,600 ounces of gold at an average 'price' of $l65.65 an ounce. Thus, in effect, it proclaimed to the world that it would not redeem its circulating non-interest bearing debts (its paper-dollars) at the official figure of 42.22 paper dollars for an ounce of gold. By this action, it acknowledged in the marketplace that these debts would not be honored at par.
Preface and Introduction

BOOK 1

Chapter 1 * Chapter 2

BOOK 2

Chapter 1 * Chapter 2 * Chapter 3 * Chapter 4
Chapter 5 * Chapter 6

BOOK 3

Chapter 1 * Chapter 2

BOOK 4

Chapter 1 * Chapter 2

BOOK 5

Chapter 1 * Chapter 2

BOOK 6

Chapter 1 * Chapter 2

BOOK 7

Chapter 1 * Chapter 2 * Chapter 3

BOOK 8

Chapter 1

BOOK 9

Chapter 1 * Chapter 2

BOOK 10

Bibliography