What is money?
Money, get back.
I'm all right jack keep your hands off of my stack.
Money, its a hit.
Don't give me that do goody good bullshit.
I'm in the high-fidelity first class traveling set
And I think I need a Lear jet.Money, its a crime.
Share it fairly but don't take a slice of my pie.
Money, so they say
Is the root of all evil today.
Many moons ago, people would trade goods and services by exchange (barter). I'd fix your fence, and you'd give me a bushel of wheat. You'd give me a pig, and I'd give you a cow. In other words, just a straight-up trade. This however, wasn't very practical.
For example, I may want to buy a loaf of bread from you, but only have a cow to exchange. You'd like to sell me the loaf of bread, but you need shoes for your horse. So in order to make trading with each other more efficient, a medium of exchange was developed - money.
Commodity Money - The first mainstream form of money was commodity money. In order to have something useful as a medium of exchange, it needed to be valuable, durable, portable, and easy to store. Many different commodities have been used over the years including, tobacco, dried corn, pelts, and of course, gold and silver.
Sometimes it would be a bit much to carry as many pelts or gold as needed, so to make it even easier, paper certificates redeemable in a commodity (usually gold) was used. This paper money was much easier to use due to being easier to carry and store. Being that the paper money was redeemable in a said quantity of its underlying commodity (gold), the reality is that people were still trading in gold.
Fiat Money - The second mainstream form of money is fiat money. Some felt that money backed by the value of a commodity was too restrictive. For example, they thought mining gold couldn't keep up with consumer demand for money. Other, more devious reasons for creating fiat throughout history includes various governments, whether it be a King, dictator, democracy or other, wanting to spend money it didn't have. Not being restricted by the requirement of an underlying unit of value (a commodity), they could simply create (print) all the money they wanted!
The value of a fiat dollar, not being based on an underlying commodity, derives its value only through our perception, or faith in its value. While commodity money has an intrinsic value (the underlying commodity (gold)), fiat money has no intrinsic value at all. Fiat money has value only in terms of the demand for it.
Another way of looking at this, is that fiat money is only as valuable as our desire to have it. This is why simply printing money doesn't create wealth. Our desire for money is based on the abstract faith that it can be exchanged for something else (used as a medium of exchange), but other than that, fiat dollars have no actual value.
As stated by the U.S. Treasury (emphasis added):
Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. This has been the case since 1933. The notes have no value for themselves, but for what they will buy.
Video 1: A Brief History of the American Dollar Part 1
Throughout history, people using commodity money weren't too excited about changing over to fiat. They were using notes redeemable in gold or silver, so logically they didn't want money redeemable in nothing. To overcome this resistance, governments declared fiat money as "legal tender," requiring taxes and public debts to be paid in fiat currency only, and also demanding by law, that people accept these dollars for private debts as well.
Since we all have to pay taxes, naturally we need to acquire fiat money. As we've already noted, this desire for the money is what gives it it's value, but have you ever noticed that your dollar continues to lose its value? Or let's put it another way ... have you ever noticed how prices for your basic goods and services keep rising?
This is what's called inflation.
Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. - Nobel Laureate Milton Friedman, The Counter-Revolution in Monetary Theory (1970).
In a fiat system, the government can print money at will. This is the moral and literal equivalent to a counterfeiter who prints money illegally. What happens is that government prints money, then spends it at today's prices. As this newly printed money circulates through the economy, it dilutes the value of the money already available.
This dilution of value makes it appear as if prices have increased. The truth however, is that our money has simply lost its value, so we end up needing more money just to buy the same products and services as we did before.
The government gets to use the newly created money to make purchases immediately, so they get to make their purchases at today's prices. Over time, as the newly created money circulates through the economy, thus diluting the value of the dollars already in circulation, you and I end up paying tomorrow's higher (inflated) prices. Hence, inflation is a hidden form of taxation.
The higher prices we pay are the result of the increase in the money supply created by the government printing press. People who save money, people on fixed-incomes, and the poor are hurt the most by this tax. The savers, because the money they saved loses its value, and the poor and those on fixed-incomes, because the limited money they have continues to buy less and less.
This is not a "free-market" or libertarian theory either. This is fact. So instead of quoting Ludwig von Mises or Milton Friedman, we'll instead read the words of progressive economist John Maynard Keynes, whose economic theories have been embraced by our government (as witnessed by the "bailouts"):
Lenin was right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. - John Maynard Keynes, The Economic Consequences of the Peace (1919).
Video 1: A Brief History of the American Dollar Part 2
We should now have a basic, but more thorough understanding of money. Many people (such as myself) have been loudly criticizing the Federal Reserve for years. Why? It's the bank that prints our fiat money!
Unfortunately, the many legitimate issues regarding the Federal Reserve have been ignored by most mainstream Americans. Fair or not, these issues have picked-up a "kook" factor, leaving most Americans to ignore the many problems with the Federal Reserve.
Our recent financial "crisis" however, has raised many issues regarding the Federal Reserve, such as "How does it really work?" Representative Ron Paul, who also (fair or not) has been labeled a "kook" in the minds of too many Americans, recently introduced a bill titled 'The Federal Reserve Transparency Act of 2009'.
Well ... the "kook" factor no longer applies!
The bill has 84 co-sponsors, and is currently in House Committee on Financial Services review. Mainstream Americans of all political stripes should now have the confidence to jump on the Federal Reserve bandwagon!
Seriously ... wouldn't you like to know where all that "bailout" money went?
Contact your representative today. Tell them to support this bill!
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