Sunday, April 3, 2011

Money Matters 1.

Have you ever noticed how the four stages of money parallel the four stages of matter?

Barter, the direct exchange of goods and services, corresponds neatly to solid matter – which, in a very real sense, it is. Swapping one goat for a bushel of cabbages, or one goat for the labor of plowing three acres, is certainly a solid exchange. The advantage of barter is that it’s difficult, but not impossible, to cheat in such an exchange; a skinny sickly cow may be worth less than two goats, or one’s plowing may be of inferior quality – but in general the value of such exchange is pretty clearly seen and understood.

The disadvantage of barter is its clumsiness. If you’re a farmer who grows potatoes, and you have a toothache, you may have a hard time persuading the town dentist to fix your teeth in exchange for a lot of potatoes. It’s far easier to swap your potatoes for some kind of goods that everybody wants, and on whose value everybody agrees, and then go looking for a dentist you like. For this reason – some seven thousand years ago, as near as the archeologists can tell – people developed specie money, still called liquid currency. Even in that early age, everybody could agree on the value of certain useful metals – gold, silver and copper – so reliably equal weights of these could become trade-standards. The oldest form of money the scientists have found is uniform silver rings, made of extruded wire wrapped around a rod and cut at the same point. This is also, apparently, the beginning of the custom of wearing earrings; in an age before the invention of pockets, one’s ears were the safest place to keep one’s money. The advantage of specie currency is its fluidity; as in the example of the potato farmer, you can swap any goods or services for the trade-standard, and then exchange the trade-standard for anything else. The disadvantage is, again, that it’s difficult but still possible to cheat on its value – by giving short weights or less-than-pure metals. Still, such cheats are necessarily minimal, and liquid/specie money is generally as reliable as barter.

Sometime during the Middle Ages, modern banking was invented – and paper currency with it. It began with jewelers, who usually had big sturdy safes to protect their materials: safes where other people could rent space to protect their gold or silver money. The jeweler/banker would then give the renter a paper receipt for the stored coins, and the renter could then trade the paper receipt for goods and services as if it were the real coins. This corresponds to the gaseous state of matter, in that paper promises – like gas – can expand to fill all available volume. Paper receipts can be forged, or outdated, and otherwise make cheating easy. There are banks and whole governments today whose paper-promise money is backed up by questionable ownership of questionable goods – or by nothing at all. This is the stage where inflation(!) becomes common.

Finally we come to credit, which corresponds to plasma in that it takes constant input of energy to maintain it at all. Credit is all promise and no substance, maintained purely by faith: faith that the borrower will repay the promise with real money, and faith that the lender will – if not repaid – come after the borrower with the force of law. Obviously, credit can expand as widely as gas – and can collapse on no more than a loss of faith. Is it any wonder that the portions of our economy that were based on credit have begun failing? A sober reflection would show that they should never have existed in the first place.


Aya Katz said...

Leslie, there is nothing wrong with lending and borrowing money. People have been doing this since money was invented. Before they did that, contracts to do something in the future in exchange for getting something else now existed even in the barter stage. That, too, is credit.

Credit is based on trust. It collapses when honor and accountability collapse. We need the means to collect debts, and the sense of shame that used to accompany reneging on a promise. Credit is collapsing because honor is gone.

idiotgrrl said...

Nice analysis and nice analogy. And while credit, like gas, is necessary, our economy became top-heavy with it, and floated away like a big balloon. Which is now deflating.

Leslie Fish said...

Hi, Aya. (Yes, I got your book, and will review soon.) Of course borrowing and lending have been done since the days of chipped flint, but in the cases of barter and specie currency, the money/valuable-items themselves were provably real. This meant that more than just honor-vs.-shame kept borrowers from ducking out of their debts; the lender could prove, before witnesses, that the borrower damn-well owed him X-Y-or-Z, and the whole community could then lean on the borrower. Credit, as practiced today, is a promise-of-a-promise, and all too easily ducked out of. It's not just honor that's gone, but accountability.

Hi, Grrl. Credit in the sense of lending is one thing, but our modern system of lending-on-top-of-lending is something worse than gaseous. I truly believe that it wouldn't hurt at all to fire the Federal Reserve and go back to specie currency -- maybe not based only on precious metals, but on physical property, of which the fed. govt. owns a lot. The point is to back our money up with something solid, not with promises that fewer and fewer people believe.

Aya Katz said...

Leslie, well, if that's what you mean, then I agree wholeheartedly. The problem is that the "money" we use is of no value and not backed by anything. It's not about not keeping a promise. No promise is even made anymore when they print the money. You can't redeem it for something else.

I'd be very happy to go back to using silver and gold. I'd also happily do away with the Federal Reserve.

Why should the government be in the business of printing money at all? Why should they have a monopoly on that? Why not leave that up to individuals in the free market?

Leslie Fish said...

Hi again, Aya. The only legitimate thing I can see the govt. having to do with money is to set standards (weights, purity, etc.) and define values (three healthy goats equal one healthy cow). Then again, a private organization -- like Consumers' Union, or Underwriters' Laboratories -- could do that too.

--Leslie <;)))><

Aya Katz said...

I thought the marketplace was supposed to determine how many goats are worth a cow! That's the sort of thing that changes day by day, depending on supply and demand.

Leslie Fish said...

Hi, Aya. Heheheheh. Yes, the market can determine if a cow or goat is more valuable, but the government -- or some other quality-control group -- can define what constitutes a healthy cow or goat. Somebody has to set some minimum standards of fit and unfit. Traditionally, govts. have done this -- but there are perfectly good alternatives.

--Leslie <;)))><

ravenclaw-eric said...

Our "beloved leaders" have forgotten the example of the Confederate States, which, in Rhett Butler's memorable phrase, "ran a printing press instead of a mint." If the CSA's currency had been hard, their economy wouldn't have imploded and they could have waged a far more effective war.