WHAT IS MONEY?

I was watching Discovery Science Channel this evening when it aired a documentary titled “Inside the world’s mightiest bank”. The title caught my interest and watched on and realized that it was about the US Federal Reserve, purportedly to be the world’s largest, busiest and most powerful financial institution.

The first few minutes of the programme, the audience was given a brief tour of the vaults where they keep the gold bars that used to back the US Currency. Well, it is no secret that the US Dollar is not backed by gold anymore as it is now backed by the confidence in the US Government. The dollar is fiat money, supported by nothing more than the faith that those that accept it in payment have in it, the belief that they can, in turn, exchange it for the good and services that they want to purchase.

This documentary stirs my interest on money and so, here goes….

Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value, and occasionally, a standard of deferred payment. Nearly all contemporary money systems at the national level are fiat money systems. Fiat money is without value as a physical commodity, and derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the national boundaries of the country, for "all debts, public and private".

Money, has taken many forms over the years and here are examples of a few of them.

a) In China in 140 BC White Deer Skin

b) In Malalita (in the Solomons) porpoise teeth - with red teeth being 20 times the value of white teeth

c) In New Guinea Boar Tusks

d) In Santa Cruz islands Red feathers of a jungle bird

e) In Egypt grain was used

f) In the Mediterranean countries Cattle was used

g) Coastal and Island peoples in India, China, the Middle East used strings of shell

h) In the New World Wampum (seashells) became the first currency.

i) In the 12th Century BC in China agricultural tools were used as currency and miniature tools were minted to act in the place on actual tools.

j) The first coins were minted by the Greeks in about 750 BC

k) In the 6th Century Croesus, the King of Lydia, minted coins of pure gold and silver.

l) Romans used salt as currency. The Roman word for Salt is Salarium which in its modern version is salary.

m) In the late twentieth century in New Guinea pigs were used; about 28 pigs were required to purchase a wife

A great philosopher once said "Money is a barrier against all possible evils.” With money, we can obtain an advanced education that may aid us in the development of genius and extraordinary achievements. It gives us the leisure to devote a part of our time to culture and art. Money can provide a powerful diversion for all or our troubles by permitting distraction from society’s anxieties that assail us.

So we must try to get a thorough understanding of all that we may possibly do, in an honourable and legitimate way, to conserve wealth. Even to those who have inherited wealth, idleness can be a certain cause of ruin. A great fortune needs genuine labour for efficient administration. Those who leave this duty to strangers may pay a penalty for their negligence.

Understanding the dangers of fiat money

Fiat money is risky business, as the government is no longer restrained by actually having to have a solid asset to back up the worth of the currency. Today's practice of monetizing debt, by selling debt instruments -- and we can all see how well that is working for the mortgage and lending industries and their investors – and the ability of the government to simply have money printed up when all else fails, places every dollar at risk of losing its value, or more plainly put, its purchasing power.

While the government never runs out of paper, the paper can run out of value. Paper money that is not backed by anything real has no value on its own. It's only value is what people think it is worth. As the worth of the dollar drops, then prices rise, as it takes more of these lesser valued dollars to buy the same things today that were bought a month ago. This is inflation when it happens gradually, prices creeping slowly upwards. When it happens rapidly, it is called hyperinflation.

It is always the people that suffer the effects of the monetary policies that produce such results. Inflation devours savings, as those dollars will only buy a fraction of what they used to buy. Inflation wrecks complete havoc on the budgets of individuals who are threatened with imprisonment for attempting to offset their debts by printing up cash. This is especially true now, as many in the middle- and lower-income classes have incomes that are consumed by the mortgage and consumer debt that they owe.