This essay got out of hand and way too long, so it will appear in two installments.<\/p>\n
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Wealth and Money I<\/strong><\/p>\n When America adopted the US Constitution, the forefathers, who had read Adam Smith’s “Wealth of Nations,” and who had had bitter experience with fiat money during the Revolutionary War knew full well the meaning of “not worth a Continental.”\u00a0 The paper money that was circulated during the war became so totally worthless that no one would accept a “Continental” bill, printed under the auspices of the Continental Congress, tendered in payment of debt.\u00a0 The simple fact is that if you wanted to hold your investments together, you accepted British, Spanish or French money … for the most part coins made of gold, silver, copper or brass … or failing coinage, you bartered.\u00a0 You could trust Spanish doubloons, for instance, as each separate coin bore the stamp of the man who had assayed its weight and purity.\u00a0 This begs the question, “why did the people of revolutionary America reject the paper Continental bills of their country and opt instead to barter or trade their goods for foreign coinage?”\u00a0 The answer to this question lies in the difference between money and wealth.\u00a0 Let us explore the difference between the two.<\/p>\n Long ago, in the pre-dawn of history, a mountain man, possibly named “Og,” eked out a living by hunting, fishing, skinning, tanning, gathering and generally accumulating things that Mother Nature provided in the wilds.\u00a0 Og had a cousin, possibly named “Smed,” whose branch of the family had tired of being dirty, smelly, bee and mosquito stung … and hungry.\u00a0 So they, some years before, had wandered out of the mountains into the valleys below where they met some people who put seeds into the ground, watched them grow to maturity, and then put them into storage so that they could have regular meals.\u00a0 Og had often visited Smed and knew about the clay pots full of seeds and the tasty root crops.\u00a0 He may have even tried the lifestyle and rejected it.\u00a0 He admired their clothes made of linen from the flax plant and their cotton shirts, but he too had things of value … Smed was always after him for his leather shoes, belts, gloves and other accessories which he said were much superior to anything that the community where he lived had.\u00a0 It is a sure cinch that Og and Smed traded each other\u2019s goods.\u00a0 Barter was born!<\/p>\n We can easily see some of the problems that might have arisen.\u00a0 Og being a consummate leather worker, a man who took a lot of pride in his work, soon had saturated his market because his quality stuff didn’t wear out.\u00a0 However, the stuff that he traded for, asparagus, liverwort, rhubarb, turnips, parsnips and such, not to mention the barley cakes and burnt un-leavened flour disks, all of which he loved to mix into his diet of meat, blood pudding, animal lard, liver and head cheese, was very quickly consumed.\u00a0 Smed soon quit trading, because he had no use for the surplus leather goods.\u00a0 Og, however, had acquired a taste for Smed’s goods and craved them mightily.\u00a0 Og thought about swooping down out of the mountains, thumping Smed on the head with his animal conker and taking his stash, but he, being a pretty bright guy, thought it through.\u00a0 If he knocked Smed in the head and took his stuff, it would soon be gone, and since he didn’t know how to grow the crops and with Smed dead, he reasoned that he would have killed the “goose that laid the golden egg.”\u00a0 Og was beside himself … then he had an epiphany … “the golden goose.”\u00a0 Gold!<\/p>\n Og, being the powerful mountain man, remembered a place far away up a stream where his friend “Goldermaniaca” had shown him a stream bed that was covered with a shiny metal.\u00a0 Og had decided to name the shiny stuff “gold” in memory of his friend who had fallen off a steep ledge the very next day.\u00a0 The rest is history … Smed was dazzled by the metal and willingly traded his goods for the gold.\u00a0 After he had gathered quite a bit of it, he crossed over into the next valley to see “Argmak,” the dairyman, who similarly dazzled, traded a milk cow for what Smed had.\u00a0 It wasn’t long before everyone was in on the deal.\u00a0 Argmak couldn’t help but see the beautiful leather goods that Smed was wearing and asked him where he had gotten them.\u00a0 He knew Og and on his annual vacation in the mountains he bought his own leather trousseau from Og with the gold that he had gotten from Smed.\u00a0 We can imagine that the descendants of Og also mined copper, silver and tin.\u00a0 Since these commodities were easier to extract and refine, it took a heavier measure of them to fetch Smed or Argmak’s products.\u00a0 Soon Og’s kin would have made all these metals into small, easily carried tokens which they tendered for smaller things like chickens and clay pots.\u00a0 Og’s grandson, Ack, named these base metal tokens after his introverted daughter, Coyne; he called them “coins.”<\/p>\n What do we see from the above example?\u00a0 Real wealth and the beginnings of money.\u00a0 Nothing would have happened if our friends had not used their minds and muscles.\u00a0 Each, starting from nothing, fashioned a livelihood from their surroundings.\u00a0 Their strivings resulted in useful commodities … property … wealth.\u00a0 All the husbanded items above, all useless in nature, became wealth when man’s efforts reduced them to commodities.\u00a0 Each of these primitive men had acquired property.\u00a0 We can see that each man, using the resources of the Earth combined with the sweat of his brow, had acquired tangible, fungible assets … property.\u00a0 So, we see how that man, early on in the rise of civilization, had taken his greatest assets, his mind and his labor, combined that with the largess of nature and created wealth by making a commodity.\u00a0 We see that any commodity, leather, vegetables, livestock or metals like gold, silver or copper could be bartered for another, and that any of these could be money.\u00a0 It is also apparent that of the things above, that the metals lend themselves best to being money.\u00a0 Og found that leather goods were much desired, but of limited demand.\u00a0 Smed’s commodities were of great value as money, but soon disappeared because of their dual purpose nature; they were soon eaten.\u00a0 Argmak’s commodity, the cow, was not easily replaced and its by-products were too perishable; his stuff was probably too valuable or cumbersome\u00a0to be a convenient medium of exchange, to be used as money.\u00a0 The only commodities that lent themselves by value and bulk to be money were the metals.\u00a0 It turns out, because of relative supply, that gold is about twenty times as valuable as silver and silver is about 100 times as valuable as copper.\u00a0 Our forefathers recognized this when the monetary system of the US was instituted.\u00a0 They valued an ounce of gold at $20.00, an ounce of silver at $1.00 and, initially, an ounce of copper at 1 cent.<\/p>\n The history of money is long and convoluted, so once we define it we will trace its history in the US.<\/p>\n Trading metal coins for other commodities is almost certainly as old as human agriculture.\u00a0 We know that, among other things, coins were used in the Mesopotamia in antiquity and were certainly in vogue in the Roman Empire and Hellenic Greece … Jesus Christ chastised the “money changers” in King Solomon’s Temple.\u00a0 But throughout antiquity well into the Dark Ages money was a metallic commodity.\u00a0 Of course there were many types of coins and some people, the money changers (the first bankers), made a good living converting one kind of coin into another (keeping a substantial portion of the value for their trouble) in order to allow their customers to have the money of what ever realm they happen to be in.\u00a0 All of this would have worked out very well except for a clinker … the local government.<\/p>\n As we have discussed at length elsewhere in this blog, government should be instituted to enforce God’s Law, but, man being man, there has always been a group who for one reason or another eschewed making commodities.\u00a0 These are the minions of government and\/or the “Church.”\u00a0 The first way that the “minions” got money for their needs was by taxation.\u00a0 Of course “government” never has enough revenue, so throughout history governments have resorted to that method which the primitive Og, in his musings rejected.\u00a0 They stole it, usually not from the local populace, because they needed someone to feed them, but generally by knocking some foreigner in the head and taking his stash. Down through history, this has been the general “modus operandi.”\u00a0 It worked great for the Romans and Spanish until they had stolen all that was available from their conquests.\u00a0 After the well dried up, if you study ancient coins, you can see that other methods were attempted.\u00a0 One of the best examples is the study of imperial Roman coins.\u00a0 A typical coin, when first minted was magnificently opulent, of good diameter and quite thick.\u00a0 After a while it lost about half its thickness, then slowly, inexorably, it lost diameter until it was finally a tiny wafer \u2026 but always professed to be the same denomination of coin with the original value.\u00a0Another trick that was used was to debase the alloy, for instance mixing silver or other metals with the gold. (hence the difference between 24 carat and 10 carat gold)\u00a0 The crenations on the edge of noble metal coins were put there because some people (including the government) made a living shaving the rims of smooth edged coins.\u00a0 As you can imagine, any trick to steal value that could be thought of was tried.\u00a0 Of course, two different types of thieves were involved;\u00a0the free lance entrepreneur, who was often jailed for his efforts and the government who would jail you if you would not accept their debased money.\u00a0 Once again, though, the word got out and your debased dinar, ducat, real or other coin continuously lost purchasing power.\u00a0 The government, then as now, blamed the resulting \u201cinflation\u201d of prices to buy goods on the \u201crich\u201d, the Jewish bankers, the evil merchants, the hoarders \u2026 anybody but themselves.\u00a0 And then as now, the value of the metal commodities remained and remains relatively quite stable in relation to other commodities.\u00a0 The only thing that happened is that the government in some manner or another debased the money.<\/p>\n In Italy about the time that the Americas were discovered a new phenomenon appeared \u2013 modern banking \u2026 The promissory note.\u00a0 As world trade exploded and industry began to appear, not to mention the advent of modern (expensive) warfare it became apparent that there simply was not enough gold to finance the projects being anticipated.\u00a0 The bankers generally had some reserves to lend \u2013 at high interest, to be sure \u2013 to those proposing some expensive enterprise.\u00a0 But bankers were frugal men that accumulated cash and they didn’t have enough … they had to do something.\u00a0 They began accepting deposits from the populace for safe keeping, giving the customer a note of credit for the deposit.\u00a0 But, by far their greatest source of funds came from issuing interest bearing bonds.\u00a0 With the purchase of a bond, a private person could not only protect his money by entrusting it to the bank, with the additional benefit that the bank would also guarantee a fixed rate of return (interest) on his deposit.\u00a0 The bank had the use of the person’s money for a fixed period (usually ten years) and the purchaser could realize an annual return on his investment by cashing in the annual coupon.\u00a0 A side benefit was that the purchaser could sell the bond to a third person if for some reason cash was needed … the bonds were negotiable instruments.<\/p>\n The beauty of this arrangement was that it allowed the banker to lend the deposited money to borrowers at a higher rate of interest than the bond yielded with no fear or current obligation to repay the principal to the bond holder … his only short term obligation was to the annual interest.\u00a0 It did not take long for the bankers to figure out that they could lend out more money than they had on deposit.\u00a0 In the beginning a typical bank would lend three dollars for every one on deposit; the ratio has steadily enlarged over the years until now banks lend (legally) nine dollars for each one on deposit.\u00a0 Of course, they did not lend coin, but issued paper bills that stated that the bearer was entitled to a certain amount of gold or silver or some certain coin … imagine — nine times as much paper as metal on deposit.\u00a0 Initially, banks did this but, — this was too good a deal to be left to “evil” bankers — very soon governments got into the act.\u00a0 They soon had usurped the paper money market, making it illegal for banks or individuals to print money, reserving the right to themselves exclusively.\u00a0 Nice, but few could see the evil that the government could or would do with this power.<\/p>\n More in a week or so …<\/p>\n <\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" This essay got out of hand and way too long, so it will appear in two installments. Wealth and Money I When America adopted the US Constitution, the forefathers, who had read Adam Smith’s “Wealth of Nations,” and who … Continue reading