There are several aspects of the development of money which we need to grasp so we can apply them to our current situation. First, note that money is both conceptual and physical. It was the physical reality of being able to conduct barter arrangements that eventually led to the concept of money. The physical part of the concept was that the commodity actually existed and was considered to be valuable to both parties in the exchange.
As a consequence of the development of money, individuals were able to specialize in the work they performed (officially called the division of labor). People were freed from producing virtually all of their own needs and thus could concentrate of producing a constantly narrowing spectrum of products which could in turn be exchanged for other desired products. This in turn improved both the quality and quantity of the various items needed by all. Obviously, as the quantity of goods increased, it became possible to produce items that were not “necessary” for survival but rather were just desired or pleasing. Art and music come to mind as do refinements to food, clothing and shelter. The continuing developments led to ever larger groups or societies forming what could eventually be called a civilization.
Another important aspect of this development of money is that it occurred naturally. That is, no person or no entity directed it. It simply happened over many centuries and many generations as millions of people we able to make voluntary economic exchanges among themselves. However, as the larger groups developed into civilizations, there were always steps backward for one reason or another. The lack of a knowledge of the past (history) was one reason that some societies would go back and try goods or products that had been unsuccessful as a medium of exchange in the past.
Human beings have lived together for possibly as long as two million years. Money in its modern form, that is coin of fixed weight and denomination, came into use less than three thousand years ago. It took a long time to discover the physical good which best serves the purpose of a medium of exchange.
Whatever its complexity, a civilization and its economy depends upon a very basic foundation. First, Individuals must be free to think and act on their decisions; in addition, they must be able to reap the rewards of being right and must bear the cost of making foolish or wrong decisions. Second, they must be able to concentrate on what they do best, and what they most enjoy doing, instead of spending their time providing for their immediate wants. Third, they must be able to make provision for the future by preserving a portion of what they have produced. In short, they must think, they must produce, they must save. And to do that to the greatest and most efficient extent possible, they must trade with each other.
In an advanced economy, physical survival is seldom an issue but all the imperatives which confronted primitive societies still apply. The extent to which individuals can think, work, produce and trade freely determines the potential of the economy. The confidence with which individuals can save and invest long term determines the prosperity of the economy. To save, invest, and plan for the long term is a luxury not granted to very small and primitive groups. This is the domain only of those living in an advanced economy.
An economically advanced economy must, by its nature, be one in which there is indirect exchange, using money. In the place of the essentials needed for staying alive, there is money. Instead of working all day and part of the night to ensure one’s immediate needs for food and shelter, there is money. In the place of never being able to rest on past productivity, there is money. In lieu of being at the mercy of nature or dependent on the nature of mercy, there is money.
That is what money does. The evolution of any civilized society is dependent on the discovery of the idea of money, and on the discovery of something that can be used as money. The future of any civilized society is dependent on the quality of what is used as money.
Llet’s consider just a bit more history briefly. From Part 1, we remember that Lydia is the first known society to have coined a precious metal into money. It is true that many other products and goods have been used since then but always civilized societies have come back to gold. Thus we have a history of close to 2700 years in which gold was the ultimate form of money. This period ended in either 1933 or 1971 depending on one’s perspective. In 1933, FDR made it illegal for US citizens to own gold other than numismatic coins, however, the US Treasury still redeemed Federal Reserve Notes to foreign nations. But even this ended in August 1971 when the Nixon administration closed the gold window to every person or entity in the world. Thus, for the first and only time in modern history, there is no currency in the world that is backed by a reserve of precious metal or any other commodity.
Every modern nation uses a fiat currency, that is a currency that is given value only by the “full faith and credit” of the nation that issues that currency. Within the defined territory of each nation, by law, that fiat currency must used to settle all debts, contracts, and other obligations that involve the use of money.
Thus we are now at a point in time when gold is not considered money–that is not considered “legal” money by any government in the world. To see if, in fact, Gold = Money even today, we must try to determine why gold has been abandoned by ruling authorities throughout the world and this will be the primary topic of Part 3.