When people are confronted with the daunting question of “What is money?”, they usually stare at you like you’ve just asked them to explain the equation for special relativity.
Money is anything with inherent value that is used to measure the value people attach to products and services. It acts as a medium of exchange in order to facilitate trade. What started out as people trading physical goods for one another, developed into an immensely complicated modern economic system as more specialised products and services arose. People realised they needed a universal medium of exchange, and this led to the revolutionary invention of money.
There exists an interdependent relationship between money and goods & services: the value of money is measured in the number of goods and services it can purchase (purchasing power) and the value of goods and services is in turn measured in what amount of monies is needed to purchase it (prices).
As far as inherent worth goes, gold seemed a pretty solid option to use as money. Here’s why:
The amount of gold relative to the number of people is relatively miniscule; the demand outweighs the supply by far. Gold thus has a lot of value attached to it because of its scarcity. It thus makes complete sense to use it as a medium of exchange seeing as it is bound to keep its value.
As nations rose and fell and economies grew ever more complicated, governments the world over decided that the best way to maintain gold as the primary means of exchange, but also make it more “flexible” in order to adapt to modern specialised markets, was to have it represented by paper money and coins. Currency was thus invented.
Currency is different from money in that it has no inherent value. It merely represents the real money: gold. Currency is also easily divisible into much smaller units. Currency was essentially a middle man that nudged its way in between gold and domestic products and services. The gold standard was created.
The gold backs up the currency and gives it value and consequently purchasing power.
President Richard Nixon abolished the gold standard in 1971 and replaced it with a fiat currency.
The word ‘fiat’ is a Latin term meaning “let it be done”. A fiat currency is a system of currency that is backed not by anything of value but by a central government’s arbitrary authority. The only difference between a $1 bill and 1 Monopoly bill is that the government sanctions the former as a viable means of exchange. It has no inherent worth.
Currencies’ worth is now determined by market forces within the money market, the place where currencies compete for domination. The quantity of currency within an economy can now be adjusted by a central government in order to influence the exchange rate, internal interest rates, and thus the value the currency holds. Reserve banks can also influence exchange rates by actively competing in the money market, also known as ‘dirty floating’.
Experts such as Michael Maloney keep warning governments and central banks that they’re creating an unsustainable global financial bubble that is going to implode. There is no foundation on which modern economies are based. Money exists no more.
What we now have is an artificial form of “money” with no inherent worth. It is simply not sustainable. The Gold Standard has its systemic problems such as money supply growth being determined by the rate of mining of gold, but I believe that with a fixed value for gold that is incrementally increased in relation with economic output and the demand for money, the Gold Standard can indeed work. It will be no simple feat and its inherent flaws will have to be given lots of attention, but it is worth a new try.