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Wednesday, September 25, 2013
Thinking About Money
Most people think about money much of the time. Do they have enough to live on, can they afford to buy a new car or house, or rent a better apartment, how much can they spend on food or clothes, pay for their children’s education,
the seemingly endless list of wants, desires and needs that everyone has? 
 
Even with all of the attention we pay to the uses of money, we rarely, if ever, think about money itself, the actual pieces of paper or coins that we carry around and use to buy things.
]Where do they come from, and just what do they actually represent?
 
Most of us rarely give it a thought. We tend to take our money for granted, generally thinking it’s the bills in our wallets or the coins in our pockets.
 
But, it is actually much more than just bills and coins. It’s also bank transfers, sending money almost anywhere in the world electronically.
 
But electronic money transfers have not always been possible. As a matter of fact, a review of the history of money reveals that money has often been various types of commodities.
 
Before money came into existence, people traded various possessions for something they wanted or needed.
 
What would you say, if instead of our printed currency, you were offered some beads or shells for the used appliance you advertised for sale? Or how about the car you’re trying to sell? 
Would you consider accepting beads or shells from your employer? 
 
Although we use paper money and coins, I don’t recall ever hearing anyone say anything about it, except that they would like to have or need more. So, what does our paper currency represent and where does it come from? 
 
No one seems to be concerned about it. Before the advent of money, barter was the method of exchanging goods and services. And, although barter in the U.S. is still used – to the tune of about $12 billion a year, it’s a relatively minor,
almost miniscule, part of an economy that totals over $16 trillion.
 
In early history (9,000 to 6,000 B.C.), livestock was often used as the medium of exchange. Later crops were used. About 1200 B.C., cowry shells were used in China. Tools made of metal were also used, which subsequently led to round coins.
Around 118 B.C., leather money (deerskin edged in vivid colors) was used in China. The first actual paper currency appeared in China, but was discontinued in 1455. Another form of currency was wampum (white) beads,
which were used by North American Indians.
 
It seems as though almost anything can be used as money. And, it can. The key, of course, is confidence. That is, the confidence to exchange (give up) property or provide services for pieces of paper.
We accept it because we are certain we can use it to acquire other property or obtain the services of others. 
 
No matter what form of money has been used, it worked because people had confidence that it represented the value of the goods and/or services that could be bought and sold with it. 
 
Initially, banks gave receipts to their depositors, which indicated that they could be redeemed for whatever goods of value the banks were holding (usually gold or silver).
These receipts were eventually accepted as money because they were as “good as gold.”
 
A new form of money has now developed: electronic funds, the transfer of claims for money that is held by financial institutions in our names, thus taking money beyond the physical possession of some sort of property,
even paper or coins, to a digital accounting system that keeps track of ownership with just a bookkeeping entry.
 
During the Free Banking Era (1837-1862), individual banks were allowed to issue their own currency, much of which was redeemable in gold or silver. Unfortunately, however, some of it was worthless, and by 1860,
some 8,000 banks were issuing notes that had no value.
 
In 1913, the same year the sixteenth amendment to the Constitution established the federal income tax, the Federal Reserve Act created the Federal Reserve Banking system, which is currently the foundation of the banking
structure in the U.S. today. There are twelve Regional Reserve Banks, which are owned by the member banks in each district, and a federal government agency, the Board of Governors, in Washington, D.C.
 
The U.S. went off the gold standard in 1971 and turned to the use of fiat money, which is not backed by a physical commodity (i.e.: gold).
 
Wikipedia notes that “Fiat money has been defined variously as:
§ Any money declared to be legal tender.
§ State-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.
§ Money without intrinsic value.
 
“The term derives from the Latin fiat (‘let it be done’, ‘it shall be’)”
While gold- or silver-backed representative money entails the legal requirement that the bank of issue redeem it in fixed weights of gold or silver, fiat money's value is unrelated to the value of any physical quantity.
Even a coin containing valuable metal may be considered fiat currency if its face value is higher than its market value as metal.
Instead, the only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it. In addition, legal tender laws require creditors to accept the government’s money in settlement of debts,
thus, although the currency and coins that are in circulation today are not backed by anything, we are forced to accept them.
 
© 2013 Harris R. Sherline, All Rights Reserved
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