What is Money? - Part One

0:00What is money? The question of money is probably one of today's most vital questions. Some people contend that it is the root of all evil, and some people contend that it is the root of all good. Actually, what it is, is the medium of exchange, and that's really all it's supposed to be. Money is the device that we use by means of which we exchange Goods for Goods, Services for Services, or Services for Goods. In the final analysis, all exchanges have to be translated ultimately into the area of barter. When we talk in terms of barter, we're talking in terms of a direct exchange, a good for a good, a good for a service, a service for a service.

0:52But because of the vast variety, kind, size, and presumed value of the things that we exchange, it is very helpful for us to translate whatever it is that we have that we want to exchange into a kind of neutral thing that we can then retranslate back into whatever it is that we want. It would be very, very cumbersome for us, for example, to deal in simple barter in a very complicated economy. For instance, consider the products that exist in a grocery store. We all have access to grocery stores today. Suppose you who work in a grocery store only had grocery store products to trade for other and the things that you wanted to buy.

1:48You'd be engaged in trading dozens of eggs or perhaps thousands of eggs in order to pay for your rent or to buy a car. Maybe you'd have to exchange so many hams for a car or so many jars of peanut butter for this, that or the other. It would be completely cumbersome and of course the number of exchanges would be reduced fantastically. Now in the early days, and whenever this was we don't know, I have read any number of presumably authoritative works on the origin of money, and most of the writers of these treatises come up with a date when they presume money was first put into use, but every one that I read has a different date as to when it was first used, and I've had to reach the conclusion that we're not really sure.

2:37We only know that money has been around for a long time. But anyway, back before money was used, before anybody had come up with the idea of money, we used to exchange things by barter. Now, when you're using barter, and this can be done, in fact, it's still done today. Small boys are constantly engaged in direct swapping. Small girls do this, too. And bigger boys and girls do it. There's nothing wrong with it. And whenever you find something that you want and you've got something that somebody else wants and you can make the exchange, fine, that's no problem. As a matter of fact, that's one way of avoiding income taxes. Because if you make an exchange that doesn't involve money, well, usually since there's no money involved, we don't even know that the exchange has taken place and conceivably you wouldn't have to worry too much about keeping reports on swapping something of presumed $10 worth of value for something else worth $10.

3:44There wouldn't be any income or any tax to pay in relation to it. So maybe it's a good idea in that connection. The only thing is it would be very, very awkward. Now back in the old days, how it used to be done was this. Let's suppose that there was an early tribe of people that became very proficient at manufacturing stone axes. It is true that many, many people did begin the process of making stone axes. So we'll imagine a tribe that was good at it. They made a lot of axes, more than they could use. And since they were good at making these particular objects, a lot of other people who weren't as good at making them were interested in getting hold of them.

4:32Now this would be the way it would be done. A tribe having a good in surplus would approach the location of another tribe that possibly might want to exchange something. And the procedure was to let the other party know that you're there with goods of whatever kind for exchange. So then the members of the other tribe come out, and you stand in a kind of a, well, it's almost in battle array with one tribe on one side of a field and the other tribe on the other, and everybody's very suspicious of each other. And then the tribe who has something to offer comes forward and they deposit little mounds of goods that they would like to exchange, and they put it down on the ground at intervals, and then that group withdraws.

5:25Now with them back out of the way, now the second group approaches these mounds that have been put down, and they examine what has been left, and then they in turn put alongside of it the things that they would be willing to exchange in order to acquire the mound that has been left behind, and then they withdraw. Then the first group comes back and examines what has been left there, and if they are are satisfied in each particular, that is, each individual, confronting now two stacks of goods, if he's satisfied with the offer made, then he picks up the offer that has been made by the other party and leaves what he offered first, and that exchange then is completed. He withdraws and the other party comes up and takes what was first offered.

6:13But if he's not happy with it, then he does one of two things. He indicates that he doesn't want to trade by picking up everything that he had first offered and he retires, or he takes some of that out, indicating that he would be willing to make the exchange but at a lesser price. And this kind of haggling can go on for days before anything is really exchanged. Well, obviously, it can work. If you have nothing else to do and you don't mind spending hours, days or weeks making a simple transaction, you can get along that way. Obviously, you could not conduct modern business in this method, but that's the way, undoubtedly, we began it. Somewhere along in the history of man, we came up with the idea of taking something that was just universally desirable and trading everything into that something, which everybody wanted, and then Then we could use that generally in making any kind of an exchange, and thus we come to the first and the major characteristic of money. If money is to be useful, it has

7:27to be universally desirable. People have to want it, for some reason. An ideal money would be a kind of money that any human being in the world would be willing to accept at any Any time in exchange for just about anything else you could come up with. Actually, we've never had such a money. But that would be the ideal. Something that is so universally acceptable that anybody would always be willing to accept it. Now, before going further, it would be important that we realize that money has appeared in three broad types. There is what we call commodity money. Then there is credit money, and ultimately there is fiat money, and there are combinations of these.

8:20What we call commodity money is simply this. It would be a commodity that is universally desirable. Everybody would want it, you see, or at least theoretically nearly everybody would want it, And then we would use it either as a commodity or as money. Now that's the characteristic of commodity money. You have a commodity that can be used either way at the discretion of the owner. The owner can call it money or he can call it a commodity. And we've had a long experience in this type of money. Actually, we have used so many different types of commodities here that the list is impressive and Almost Endless, One of the fantastic episodes in the history of money was the tulipomania that arose in Holland better than a hundred years ago, where tulips were being exchanged virtually as though they were money and items of tremendous value.

9:55Just the bulb of the tulip was the item in exchange. In addition to that type of food, we have used various meat products. We've used sides of beef or rashers of bacon. We've used living animals, food animals like hogs and sheep and goats and turkeys and chickens and ducks and cows. We've even used human beings as money. Men, women, and children have been used as money and exchanged for purposes of facilitating the happiness of people, if you can imagine.

10:40We've also used such things as other growing crops such as tobacco, hemp, various drugs, narcotics have been used as money. I'm told today that where American soldiers go, often there is a kind of money that is is used which we call tobacco. I'm informed by my GI friends that it's surprising what a person can buy today with a handful of cigarettes or maybe even just one or two cigarettes. And we have used chocolate and chocolate bars, incidentally, and silk stockings, I'm told. There's virtually a limitless array of things that are commodities in themselves but which which we can use as money to facilitate exchange.

11:31As I said, the list is almost endless. It's hard to think of an area here where we haven't ever used it as money. We've used hides, tanned and untanned. We've used leather goods, finished goods, lumber, building materials. You name it and it's probably been used somewhere as money. So it's a very, very big area, commodity money. Now one of the most successful types of money that we've used has been in the field of the precious metals. And in this particular gold and silver have probably had the best history, although there's no other metal that I know of that we haven't also played around with in this area.

12:17We've used iron and zinc and brass and copper, various alloys, and we are still using them, aluminum, tin. Again, it would be hard to think of a kind that hasn't been used. We've also used not the precious metals, but the coarse, the base metals. We've also used stones, precious, semi-precious, and not precious at all. that any time we use a substance or a thing that is a commodity, it fulfills a human desire for satisfaction, but in addition it could be used as money. Well, that's commodity money. That's what we call it. One of the reasons, for example, why gold and silver have done so well is because gold and silver seem to fulfill many of the requirements of For some curious reason, and I don't propose to know what the reason is, gold has almost always been acceptable by people. There is nothing magic about the metal. It has no particular qualities that place it in a class by itself, excepting that for some reason people like

13:32it. They have confidence in it. They believe in it. The expression, as good as gold, has has been around for many, many millennia. We keep thinking in terms of gold as being a standard for money. Why we do this, I cannot tell you. I only know that we do it. And because we do it, then, gold has that characteristic. In other words, one of the most important things about money is that it be universally acceptable. And gold is almost always universally be Acceptable. So that's a very important point. Another thing that we want out of money, we want money not only to be acceptable, but we would like it to sort of retain its purchasing power. If you trade a commodity into money, and translate it so you no longer have the commodity but you have the money, then when you want to spend the money, you'd like to be able to to buy with it the same amount of goods and services as you could have bought at the time

14:33you originally translated your commodity into money. If the purchasing power of the money has gone down in the interim, then you feel cheated because let's suppose that you sold, we'll say that wheat is selling at a dollar a bushel, You have 10,000 bushels. You sell the 10,000 bushels and get $10,000. And at the time that you got the $10,000, you could purchase a market basket containing, let us say, X, Y and Z. But time passes because you don't want all of X, Y and Z at once. But now when you finally do want to buy it, you go to the store and you discover that you can still afford to buy X and Y. But Z you cannot because the $10,000 that you obtained for your crop will now no longer buy it and you have to take Q minus 10. So you get X and Y and then Q minus 10 on what you really wanted with Z. Now you'll feel defrauded, cheated, because

15:41if you had made that exchange at the time you got rid of your wheat, you'd have gotten in the full package, but now you only get a portion of the package, the larger portion, but some of it you can't command anymore with the money that you had. So we do want to have money that tends to retain its purchasing power. That's a very important thing for us. Another thing that we want with money, we want it to be relatively durable. We don't want to—and this is one of the problems, of course, that has cropped up when we use food for money. We don't want a money that will melt or dissolve or spoil or be eaten by rats or something. If you've got your money in the form of grain and then the mice break in and eat your grain, well then you've lost your money, and that's pretty rough.

16:33So this is another reason why people have tended to like gold and silver and hard types

17:0810. Gold and silver tend to do this. You can weigh it out and get a precise weight, and then you can stamp on the metal just exactly how much it does weigh or what it is supposed to be worth, and the stamp goes right on the face of the metal, and assuming that the people who made it were honest and all the other factors, you've got a type of money that tends to resist erosion, it tends to resist wild fluctuations in purchasing power, It is easy to figure with, and it is universally desirable. What is wrong with it, then? The basic difficulty with metal money, notably gold, is that it is very inconvenient, and we want money that is convenient. It is fine for purchasing small items. Most of us would like to carry a few coins with us, gold or silver, or of some kind of metal, with which to buy the small daily little items that aid in our comfort and convenience and so on.

18:13You buy a newspaper and you ride a streetcar or whatever you do, and it's nice to have a few items of change. But if you wanted to make a major purchase and you had to depend exclusively on gold and silver, you might have to hire a truck to carry the amount of metal that you would need in order to make a substantial purchase. And so in terms of convenience, gold and silver, and notably gold, well silver too for that matter, tends to fall short of the ideal. It isn't really that convenient. Then there is another factor here that many people have raised as a point. I personally don't think it is too valid in this instance, but many people bring it out and that is that there is a scarcity. These metals are precious metals and they are valuable primarily because they are scarce. The characteristic of human beings is, as I'm sure you know, to value those items most that are in scarce supply and this may be one of the reasons we usually think

19:21so highly of gold. There's so little of it and it's a beautiful metal and we like it and gee, There isn't very much, and you can't seem to increase the supply readily, so we tend to like it. And then there isn't enough to go around, so it tends to be scarce, and many people feel that this is a real disadvantage. Actually, assuming a free market in gold and silver, assuming a free money market, what would happen would be that although there might not be an abundance of gold or silver, Power. The purchasing power of each unit of gold and silver would tend to rise. But with the kind of intervention that we have in the money market, it's hard to find out just what it would rise to, because we've never really been allowed to experiment with it very far in a free market, and consequently it does appear to have certain disadvantages in the area of supply.

20:19So although we have used it, we have never been content to use that type of money alone. We always add some other kind of money to it. Now I've been talking about commodity money, and the one advantage, the one basic advantage of commodity money is that it tends to be relatively safe. Even let's suppose you're using wheat as money. And let us suppose that the value of wheat as money declines so that it will not purchase what it would be for. Well, you haven't been totally defrauded. You still have the wheat. And you can, at your own discretion, reconvert it to wheat, grind it up, convert it to flour, and use the flour to bake bread and other products, and you've got some good out of it. Now, if you're dealing with a type of money that isn't a commodity, well, there There isn't any way that you can convert it to your own use without exchanging it.

21:21Commodity money could be converted to your own use without exchange, and that's why it tends to be relatively safe compared to other types of money. Now we'll take up the second type that I mentioned, and that is credit money. Credit, of course, is one thing, and credit money is a particular application of credit to money. Credit is merely a promise to pay. Credit is an incompleted exchange. Credit occurs where two persons meet who are willing to exchange, and one party completes the exchange, But the other party extends his side of the exchange in time. Time becomes a factor in all credit procedures. For instance, I go to the store and buy, let's say, a suit of clothing. The suit costs, let me suppose, $100. Fine. But I don't have $100. So I say to the tailor or to the storekeeper, I've got $25, which I'll give you at this time, and I'll be very glad to pay you $10 a month for X number of months until I have finished

22:46paying for the suit. And he says, well, fine. So at that point I take the suit and I give to him a portion of the sales price. As far as he is concerned, he has completed his exchange. He turned the whole suit over to me, and I now have it. But as far as I am concerned, I have not completed my end of it. I have only done a part of it, and now I have accepted the obligation to go on through time and finish paying for the suit. Assuming that I do, ultimately the exchange is completed and I end up paying the whole price of the suit. But he, the seller, doesn't get the benefit of the sale until I have finished my contractual relationship with him.

23:40Now that's credit. All credit is nothing more than the extension in time of an exchange. Instead of having an exchange occur at one instant, a part of the exchange occurs at one instant, but the rest of it is extended through time. Now when we're talking in terms of credit money, we are talking in terms of a kind of money that promises to convert to a commodity at a later time. So it is a kind of credit, that is, credit money is good, but it is good in a time context.

24:27In this case, I think, without exception, so far as I can presently think, we always have credit money in forms of paper or some other written evidence. It could be an Egyptian scroll written on clay, and that could be an item of credit. It could be written on papyrus or any other method for converting to writing the promise to pay. In other words, it would be a kind of an IOU. An IOU would be a kind of credit money. And what it merely says is, it would say on the face of it, that this is an item that we agree is worth so many units of purchasing power, whatever those units are to be called, and it is redeemable in terms of such and such a commodity at such and such a time or place.

25:27That's credit money. of all credit money would be the word redemption or redeem. Credit money doesn't purport to be money. It simply purports to be a bill of exchange, a method of redemption. It says you can use this to buy something and later on at a specified time the issuer will reclaim it in terms of some from Commodity. In the end, you see, all money has to be translatable back into goods or services. It is simply a medium in exchange, and it has to come back into the world of reality sooner or later. If you can't redeem it, well, it isn't any good. So credit money is a written promise to redeem. And as long as the party issuing the money is honest and One of the big advantages of credit money is that it's convenient.

26:35Since it does appear on paper usually, and isn't metal or sacks of wheat or sides of beef, you can get a lot of it and carry it around with you, and there's no appreciable weight or inconvenience to it. So credit money is a convenient device. Plus, additionally, because it is credit money, it tends to have at least a temporary speeding up effect on the market, because whenever you issue credit, you are in essence creating a facility that speeds up exchanges. You see, you don't really have the money yet, but you make a half of an exchange because you know that later on you can redeem it, and this tends to make things move more rapidly, And it tends to make people more prosperous and there's nothing wrong with it as long as it's not abused.

27:32So credit money is an important type of money and commodity money is an important type of money and in fact these are two types of money that we've had a great deal of use with. They're both perfectly valid. The credit money is more convenient than commodity money, but the commodity money is probably Money More Safe. And assuming a free market in money, that's probably about where our adventures in money would stop. We'd probably use both. We would probably use some commodity money, probably gold and silver, and then we would have credit money based on gold and silver. We would issue certificates that say this money is redeemable in so many pieces of gold We'll think some more on this subject of money before we're through.

28:32It's a very important topic. Thanks very much.