Knowing these two points and having a knowledge of history will leave us with an obvious piece of knowledge. It seems that, throughout history, gold and silver have most often been used as money. Every nation at some point in their history used these precious metals as currency. Indeed, as recently as 1971 the Federal Reserve was still redeeming foreign bank deposits in gold through the so-called “gold window.” So why are gold and silver so often the standard for money?

Murray N. Rothbard

Historically, many different goods have been used as media: tobacco in colonial Virginia, sugar in the West Indies, salt in Abyssinia, cattle in ancient Greece, nails in Scotland, copper in ancient Egypt, and grain, beads, tea, cowrie shells, and fishhooks. Through the centuries, two commodities, gold and silver, have emerged as money in the free competition of the market, and have displaced the other commodities. Both are uniquely marketable, are in great demand as ornaments, and excel in the other necessary qualities. In recent times, silver, being relatively more abundant than gold, has been found more useful for smaller exchanges, while gold is more useful for larger transactions. At any rate, the important thing is that whatever the reason, the free market has found gold and silver to be the most efficient moneys.

–Rothbard, What Has Government Done to Our Money?

Critical Points:

• Money will be whatever the most marketable good is. – Indirect exchange gives birth to money. As people begin to trade indirectly, the thing that they buy the most as an intermediary good will become money. Perhaps butter is money for a while. And then maybe it evolves to salt, since salt is much less perishable than butter. We have all heard the historical fact that Rome used salt to pay it’s troops. Then, eventually, gold or silver might supplant salt as money since salt has this bad habit of dissolving if it rains. But the basic principle is that whatever people find to be the most easily exchanged good will be money.
• Money naturally evolves from the market. – Notice that money can not be imposed on a society or market. Because money is the “most exchangeable good” in a market, it requires a market in order to evolve. Government can not simply mandate that a certain thing be money. We have forgotten that the dollar was not simply imposed on the American (Gitmo Nation) public by the government. It evolved naturally from the citizenry’s favorite coin, the Spanish mill dollar. This particular coin was consider to be very trustworthy and of very high quality. The government coinage that came later in the form of American (Gitmo Nation) gold and silver dollars owed their heritage to the Spanish mill. And, it was the market that made that choice.

Murray N. Rothbard

But man discovered, in the process of trial and error, the route that permits a greatly-expanding economy: indirect exchange. Under indirect exchange, you sell your product not for a good which you need directly, but for another good which you then, in turn, sell for the good you want. At first glance, this seems like a clumsy and round-about operation. But it is actually the marvelous instrument that permits civilization to develop.

Consider the case of A, the farmer, who wants to buy the shoes made by B. Since B doesn’t want his eggs, he finds what B does want—let’s say butter. A then exchanges his eggs for C’s butter, and sells the butter to B for shoes. He first buys the butter not because he wants it directly, but because it will permit him to get his shoes. Similarly, Smith, a plow-owner, will sell his plow for one commodity which he can more readily divide and sell—say, butter—and will then exchange parts of the butter for eggs, bread, clothes, etc. In both cases, the superiority of butter—the reason there is extra demand for it beyond simple consumption—is its greater marketability. If one good is more marketable than another—if everyone is confident that it will be more readily sold—then it will come into greater demand because it will be used as a medium of exchange. It will be the medium through which one specialist can exchange his product for the goods of other specialists.

Now just as in nature there is a great variety of skills and resources, so there is a variety in the marketability of goods. Some goods are more widely demanded than others, some are more divisible into smaller units without loss of value, some more durable over long periods of time, some more transportable over large distances. All of these advantages make for greater marketability. It is clear that in every society, the most marketable goods will be gradually selected as the media for exchange. As they are more and more selected as media, the demand for them increases because of this use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media—in almost all exchanges—and these are called money.

–Rothbard, What Has Government Done to Our Money?

Critical Points:

• Money will be whatever the most marketable good is. – Indirect exchange gives birth to money. As people begin to trade indirectly, the thing that they buy the most as an intermediary good will become money. Perhaps butter is money for a while. And then maybe it evolves to salt, since salt is much less perishable than butter. We have all heard the historical fact that Rome used salt to pay it’s troops. Then, eventually, gold or silver might supplant salt as money since salt has this bad habit of dissolving if it rains. But the basic principle is that whatever people find to be the most easily exchanged good will be money.
• Money naturally evolves from the market. – Notice that money can not be imposed on a society or market. Because money is the “most exchangeable good” in a market, it requires a market in order to evolve. Government can not simply mandate that a certain thing be money. We have forgotten that the dollar was not simply imposed on the American public by the government. It evolved naturally from the citizenry’s favorite coin, the Spanish mill dollar. This particular coin was consider to be very trustworthy and of very high quality. The government coinage that came later in the form of American gold and silver dollars owed their heritage to the Spanish mill. And, it was the market that made that choice.

Murray N. Rothbard

Yet, direct exchange of useful goods and services would barely suffice to keep an economy going above the primitive level. Such direct exchange—or barter—is hardly better than pure self-sufficiency. Why is this? For one thing, it is clear that very little production could be carried on. If Jones hires some laborers to build a house, with what will he pay them? With parts of the house, or with building materials they could not use?

The two basic problems are “indivisibility” and “lack of coincidence of wants.” Thus, if Smith has a plow, which he would like to exchange for several different things—say, eggs, bread, and a suit of clothes—how can he do so? How can he break up the plow and give part of it to a farmer and another part to a tailor? Even where the goods are divisible, it is generally impossible for two exchangers to find each other at the same time. If A has a supply of eggs for sale, and B has a pair of shoes, how can they get together if A wants a suit? And think of the plight of an economics teacher who has to find an egg-producer who wants to purchase a few economics lessons in return for his eggs! Clearly, any sort of civilized economy is impossible under direct exchange.

–Rothbard, What Has Government Done to Our Money?

Critical Points:

• “Indivisibility” – Some things can’t be sub-divided. For instance, if you have an extra alarm clock, but you really need some nails, you’re stuck. You can’t split the alarm clock into pieces and trade, perhaps, the volume knob or a couple of microchips out of it for a few nails. Some things just simply can’t be broken down into exchangeable parts like that. It’s only valuable as a whole.
• “Lack of coincidence of wants” – When there is no intermediary(money), each person has to have what the other guy wants. If you have an alarm clock and you want some nails, you have to go out and find an alarm clock wanting nail seller. And the nail seller has to find an alarm clock wanting nail buyer. It’s the reason baseball card shops exist.

Murray Rothbard’s treatise on the nature of money in chapter 2 of What Has Government Done to Our Money? is, in my opinion, the clearest explanation or what money is and how it works in all of literary history. It’s so clear that I find it hard to believe that your average 7th grader couldn’t follow along and understand every bit. Let’s delve in to it over the next few days.

Murray N. Rothbard

To explain the role of money, we must go even further back, and ask: why do men exchange at all? Exchange is the prime basis of our economic life. Without exchanges, there would be no real economy and, practically, no society. Clearly, a voluntary exchange occurs because both parties expect to benefit. An exchange is an agreement between A and B to transfer the goods or services of one man for the goods and services of the other.

Obviously, both benefit because each values what he receives in exchange more than what he gives up. When Crusoe, say, exchanges some fish for lumber, he values the lumber he “buys” more than the fish he “sells,” while Friday, on the contrary, values the fish more than the lumber. From Aristotle to Marx, men have mistakenly believed that an exchange records some sort of equality of value—that if one barrel of fish is exchanged for ten logs, there is some sort of underlying equality between them. Actually, the exchange was made only because each party valued the two products in different order.

Why should exchange be so universal among mankind? Fundamentally, because of the great variety in nature: the variety in man, and the diversity of location of natural resources. Every man has a different set of skills and aptitudes, and every plot of ground has its own unique features, its own distinctive resources. From this external natural fact of variety come exchanges; wheat in Kansas for iron in Minnesota; one man’s medical services for another’s playing of the violin. Specialization permits each man to develop his best skill, and allows each region to develop its own particular resources. If no one could exchange, if every man were forced to be completely self-sufficient, it is obvious that most of us would starve to death, and the rest would barely remain alive. Exchange is the lifeblood, not only of our economy, but of civilization itself.

–Rothbard, What Has Government Done to Our Money?

Critical Points:

• “Obviously, both benefit because each values what he receives in exchange more than what he gives up.” This is one of the most misunderstood aspects of how exchange works. It’s so simple, yet so completely missed by most everyone. There is something inside us that confuses the idea of mutual benefit with equality of value. Absent coercion, both parties in an exchange will only trade if they feel that they came out better than they were before the trade. Otherwise, why trade? This doesn’t mean that the goods or services traded were of equal value, because value is subjective to the individual. Value is not a property of the good or service. An independent observer may see the terms of a trade and conclude that party “A” got ripped off by party “B”. Again, absent coercion, this is incorrect. The observer might not value the traded goods the same as party “A” did. But all that means is the observer isn’t party “A”. It says nothing objective about the trade.
• “Specialization permits each man to develop his best skill, and allows each region to develop its own particular resources.”
  The story of money begins with the necessity of exchange. We all need to trade sometimes. No one is completely self sufficient. The technical term for what he calls “specialization” is “The Division of Labour.” It simply means that we all have different skills and resources available to us. And because of this, trade is not optional. It’s necessary. We voluntarily exchange in order to live. In my view, this is what lends money a moral component. Whenever something is required for life to be sustained, the manipulation of that thing inherits a morality.

It might not be clear yet, but these two points eventuate money. Money in a complex society is not optional. It’s required. That will become apparent as we continue through his argument over the next few posts.

Let me try to prove my point. I took historical data since 1970 and charted it all out in order to get 40 years worth of baseline data.  Here’s what the 1970-2010 numbers looked like:

• Start Career: 1970
• End Career: 2010
• Starting Salary: $9,000
• Ending Salary: $50,000
• Years Worked: 40
• IRA Contributions Maxed Every Year
• Invested in: S&P 500 Index Shares (SPY)
• 2010 IRA Portfolio value:  $912,154

So, if you started working in 1970 at age 25 and immediately started maxing out your IRA contributions each year until age 65 you would end up with $912,154 because of compounding dividend re-investments.  This may sound like a lot of money, but there are caveats.  If you had retired in the year 2000 instead of 2010 you would have retired with only $903,269.  Huh?!  How is it that 10 years can go by and your portfolio only grows $9000.  Well, it’s because the stock market has been so volatile since the dot com bust in 1999.  These are the different ending portfolio amounts you would have retired with each year during the 2000′s:

• 2001: $853,933.42
• 2002: $743,572.41
• 2003: $594,285.05
• 2004: $774,562.06
• 2005: $832,896.55
• 2006: $893,126.56
• 2007: $1,043,059.58
• 2008: $1,095,382.45
• 2009: $689,155.16
• 2010: $912,154.77

As you can see, there have been wild swings in the stock market since ’99.  Up until about 1997 or so, there had been a nice gentle sloping curve of compound gains for an S&P 500, dividend reinvested portfolio.  Then it all went crazy.  But that, in and of itself, is not my point.  Of course there are short term technical reasons for this volatility that can be pointed to by brokers and investors.  But, I think the root cause is that the fundamental numbers in our economy are eroding. The stock market was able to garner these types of returns based on a huge inflation in the monetary supply that can no longer be sustained.

Here is a chart of our hypothetical worker’s retirement account:

Now we compare this to the increase in the U.S. money supply over the same period:

They track perfectly. If you were to smooth the curve on the portfolio to take out the erratic swings they would match almost exactly. A nice exponential curve upwards. Absent large, consistent injections of money into the capital markets by the Fed, this type of portfolio would not exist. For instance, if you kept the same S&P 500 Index(it used to be the S&P 90) portfolio(this is totally hypothetical since IRA’s didn’t exist then) from 1920 to 1960 with the same contribution percentages, you would have an ending value of about $85,000. The average salary in 1960 was about $5000. With inflation, that retirement amount would have lasted you about 10 years. Contrast that with our $912,000 figure from retiring in 2010. That amount would last you probably 16 or 17 years. Clearly, the numbers have been juiced.

That doesn’t bode well for my generation and beyond. Looking ahead, there will be no more of this monstrous infusion into the money supply. At least, we hope not for the sake of our currency. The fact of the matter is that I will probably not be able to retire at all. And, in all honesty, few people are able to today any way. Most people will simply not be able to afford the large contribution percentages required to fund a retirement plan such as our hypothetical one. The contribution percentage required in the early 1970s was well over 10% of your gross income. That’s just not going to be doable for most folks. A majority of the people you talk to today end up going back into the work force, or putting retirement off until into their 70′s.

And don’t forget that inflation has also tracked this increased money pumping:

That means the steeper the curve gets, the less real dollars of your retirement portfolio will be usable in the years after you retire. What this means for us is that our retirement portfolios will end with less real dollars in the future, and inflation will eat them away so fast that retirement would only last a few years before exhausting our accounts. Therefore, the idea of me retiring at 65 with a traditional retirement plan is not going to pan out.

So, what am I saying? Well, my bottom line is that you cannot trust common wisdom on retirement any more. The financial advisor who gives you the same ol’ shpill about just keep on piling money into that IRA and stick it out long term will never tell you anything different. That’s what he’s selling and that’s the advice you’ll get. But I’m not so sure our modern notion of retirement was ever a good idea to begin with. I’ll finish my thoughts on this in the next post…

Sounds great, huh. Too bad it’s a load of horse crap. It’s a shame that people don’t instintively know this is a load of horse crap anymore. It actually takes research these days to figure out why that exchange is so absurd. Oh well. Let’s get on with it then. The fundamental flaw in Picard’s line of reasoning is that he thinks money is a measure of value. In the future then, they’ve stopped using money to measure worth and value, and moved on to more noble value measures such as scholarship and exploration. Working for the betterment of society is the new measuring stick of value. This is a total misunderstanding of what money actually is though. Money is a medium of exchange. It isn’t a measure of something’s value. Hans Hoppe explains this very well:

Let me give you an example. Let’s say that you own an old timey hand cranked ice cream maker. It’s really old, like maybe from the turn of the century. You value it highly because of it’s age and it’s quality construction. It also brings back lots of memories from your childhood of your grandmother churning up some ice cream on a summer day. You’d like to pass those same memories on to your kids but somewhere along the way a piece of it broke. It’s an odd shaped gear that made the whole contraption work and it’d be very difficult to fabricate it yourself. If you found one on ebay or in a flea market would you pay $20 for it? I’m sure you would. Would someone else pay $20 for it? Very unlikely. That little gear is not “worth” $20. That’s a misnomer. The technically accurate way to say it, is that you value having the gear more than you value having the $20. This of course relies on the fact that value is subjective. What’s worth $20 to me might be worth $200 to someone else. The facility of money just makes the transaction itself easier to carry out.

Given this, it should be clear now why the Star Trek utopia of a world with no money can’t obtain. Because money doesn’t measure value. People do. And when people value one thing above another there will be trade. And when there is trade there will eventually develop a medium of exchange to make trade easier. And we’re back to money again. Money always develops as a natural occurence in every society. This is what’s called the “natural” theory of money. It can’t be avoided because it’s the logical outcome of normal human behavior. Of course, I guess you could argue that in the Star Trek future they have replicators that can make everything they need, so that makes trade un-necessary. But, ignoring the fact that this is silly, that still won’t get you free of money. Remember, money isn’t a value measure. It’s a medium of exchange. It’s a thing that makes trade easier. So, in this utopian future is there anything being traded? Of course there is.

Watch any episode of Star Trek and you’ll see what’s being traded. Human ingenuity, information, labor, etc. Even if all basic materials can be replicated at will in a magic box, you still can’t replicate the ingenuity and hard work it takes to “better ourselves and the rest of humanity.” Those things are being traded. Picard is trading his time and his talents for the opportunity to do something he loves, which is explore deep space. There was an episode one time where Picard was offered an Admiral rank in Starfleet. He mulled it over during the whole episode and eventually turned it down. He valued deep space exploration more than he valued his time and talents. But he valued his time and talents more than he valued the Admiralship position. The basic usage of money was still in tact, even if it is a little unorthodox to think of it that way. The bottom line is: money isn’t the cause of evil, greed or misery. It’s simply a tool to form an abstraction layer over a barter economy to make it function more smoothly. The basic concepts of trade are universal and necessary. Get rid of physical money and humanity will just replace it with something else. It’s logically inescapable.

Critical listening on this subject:

How is Fiat Money Possible?: