Tuesday, March 15, 2005

Economics Lesson No. 3: A Better Measuring Stick than Just Paper Money

Up to this point, we have talked about the dollar, what it is, and more importantly, what it isn't (See Economics Lesson No. 1, et al.)

Most people function on the same level as our individual in Lesson 2, i.e. a dollar is worth to them about as much time and effort as it takes to earn one. Our early ancestors must have had a similar idea of the worth of the things they observed or wanted; but one day (so to speak), it occurred to the more astute among them that, instead of going to the market with apples (see Lesson 2) in order to buy the neighbor's wheat or the next village artisan's jewelry, it would be much more convenient to use something with "intrinsic" value, something light, permanent and transportable, to represent or symbolize the things we value and desire. After all, carrying around bushels of apples or fresh bread can get cumbersome and unpleasant, especially when they are no longer fresh.

They probably watched the jeweler bring unsold pieces back several times over a selling season, and thought, "Hey, I could use something like those 'old' but unspoiled pieces to trade for apples and bread, just as the jeweler does." It probably also occurred to them that they could even use these pieces to recompense a friend for his collaborative effort and time (labor), when he helped them build their house, for example. Eureka! Real money (as contrasted to today's unreal, unevaluated and unstandardized international monies) was born.

Heaven knows, jewelry was probably used a lot. It could be hung around the neck, or placed in a pocket or purse; but there are lots of things in this world that do have a greater or lesser degree of what has come to be named "intrinsic value" and that might lend themselves to serving as such a measure of wealth and store of value over time and distance. Beads have been used, but also cows and sheep. It doesn't matter what it is, as long as different populaces have a common evaluation of the object in question.

It didn't even have to be an object of extremely high value; in fact to the contrary (and this may seem counterintuitive), it is better when it is not, for it must be divisible into smaller lots of lesser value so it can be used universally for all types of exchanges, even the small ones. An example of one of the most lasting over the centuries was a pretty and small decorative shell called the cowrie. This shell money lasted for thousands of years. (For two interesting books, read "Money, Its Origins, Development, Debasement, and Prospects" by John H. Wood, and "Useful Economics" by Edward C. Harwood, published by the American Institute for Economic Research.)

By far the most perfect to date of these wealth measuring sticks as it evolved through the millennia is gold. There are some very good reasons for this. Gold is one of the only elements of nature that does not corrode or disappear with time (relatively speaking.) It is malleable and can be shaped into all sorts of things, including leaf, coins, or bars, and is thus transportable. It is highly valued as a decorative or jewelry item for its obvious beauty. Its stock has remained remarkably stable over history. The quantity of it within the earth's crust corresponds nicely with this expanded use as standard of wealth and store of value, and the means of extracting it progresses - also very nicely - with progress in technology. Next, it has proven most difficult (and probably will always be prohibitively expensive) to recreate chemically, thereby making counterfeiting quasi-impossible to date. (Alchemists tried for centuries, unsuccessfully.) Lastly, the relative purity of gold can be detected easily with the help of a good scale and a fine gauge.

The important point to remember about today's lesson is that unstandardized paper dollars, the quantity in circulation of which is not carefully controlled, are not a good measure of wealth, because they have no intrinsic value. Past societies have gotten around this hitch by attaching their currency to cows, or shells, or gold. So what is our dollar hitched to today? Nothing. Nothing, that is, except each one of our memories of what we bought with it last week, or what one dollar's worth of our labor feels like; and these memories have a tendency to vary tremendously from one person to the next, and to fade over time and distance. The next lesson will delve into why today our memory is just as poor a substitute for gold, or even for shells, as it was when real money was invented.

(By the way, please do not hesitate to ask me questions in a commentary. I will be happy to respond if e-mail addresses are given; otherwise, they may inspire a new post on the subject.)


Anonymous Anonymous said...

Keep up the good work on educating Americans about the Monopoly money they have in their wallets/purses. We're in the beginning phases of what I call "The Great Recession", a time of inflation of basic goods and deflation of their wealth and incomes. Middle class Americans have no idea what will happen to them over the next decade.

--Chuck DiFalco

6:22 PM  

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