The Weiner Component #54 – The History & Use of Money

Money cash

Over most of human history money, gold coins, have been an object of value that have been exchanged for either goods or services of equal value.  This changed in 1933 when money became essentially a paper note with symbolic intrinsic value, which was still used for the exchange of goods and services.  Finally in 1969 the last vestige of theoretical gold was removed from paper money and all coins became copper sandwiches where before they had contained silver.  Since that time there has been nothing behind the dollar except the word of the United States Government.

Economics exists on two levels: one, which affects everybody, is Microeconomics, and the other, which effects only the Federal Government, is Macroeconomics.  Microeconomics deals with individuals and family incomes and budgets; with any entity that lives on a fixed specific income, be it taxes, rents, dividends, or earnings.  Macroeconomics deals with the government adjusting and fine-tuning the entire economy of the nation.  It has to do with adjusting the money supply, interest rates, and the functioning of the nation.

Money, the amount of money one has or earns, determines where that individual fits in the general society.  If one has an adequate amount with which to live then it is not overly important; but if one never has quite enough, then its lack supplies an endless pressure on an individual and his family’s life.  Unfortunately the majority of the population does not ever have quite enough.

What is the problem with having enough money?  Better yet, what is money?  What is it really worth?  Why is money unequally distributed among the population?

Historically, during ancient times, precious metals like gold and silver were exchanged for goods.  This was done in addition to barter.  The metal would be weighed and the weight would determine the value.  Probably the Phoenicians, who traded along the Mediterranean Sea, began this practice well over two thousand years ago.  They traded value for value.

At some point in history, again probably by the Phoenicians, money was invented.  A set amount of gold or silver was stamped with some image, usually a ruler of some dominion.  The coins were uniform, always having the same weight, thus being of a constant value.  This eliminated using scales for the exchange of goods and services.  It made doing business easier.  The basic concept remained the same, trading something of value for a metal of equal value.

The invention of coins, as less valuable metals were gradually used, allowed over time for an end of barter and an extension of the exchange of goods and services for money, which could be traded at any times for other goods and services in virtually any region or state.

How long did it take for this system to become established throughout the ancient world?  Probably it took at least hundreds of years for it to become common practice.

What developed was a system of exchanging goods and or services for an equal value in metals (coins, money).  Once this was established business could occur anywhere.

Probably from its inception or shortly thereafter there were never enough coins to handle the amount of business possible.  This kept the value of the metal high and allowed for slow economic growth.

The Roman Emperor, Nero, from what we know, was the first or at least one of the first rulers to “water the money;” that is, to add a less expensive metal to the molten gold from which the coins were cast.  The process increased the amount of money the state could spend but I also resulted in a continuous inflation during his reign by lowering the value of the coins.

With the exception of the 16th Century, when Spain looted the New World and brought seemingly endless shiploads of gold to Europe that were immediately turned in currency (gold coins). This brought about a period of inflation that lasted about ninety years.  During this period wages stayed the same but the value of the money continually decreased.  It was a time of rapacious inflation

Outside of this period there has always been a shortage of gold in relationship to the amount of trade (business) that could be done.  Also By the 16th Century Letters of Credit were developed in Europe by banking houses, which made the transfer of money in large amounts fairly simple.  In fact, the Hanseatic League and the Renaissance banking houses created a form of checking.  In essence modern capitalism began here.

In order to stretch the needed money supply and increase their profits banking houses issued paper money that, presumably, could be turned into gold (coins) at any time.  Of course, if any negative rumor occurred, and all the depositors brought their paper money in to exchange it for gold there would be a run on the bank.  The bank would run out of gold, the balance of the paper would become worthless, and the bank would become bankrupt.  These periods brought about the business cycle, periods of prosperity and depression within the respective nations.  Modern capitalism thus came into existence.

The Great Depressions of 1929 and 2008 were results of this type of action.  The great banking houses of the United States brought them both about.  Prior to 1929 the banks lent endless amounts of money to people with which to buy stock.  The margin rate was 10%.  For every dime the citizen invested he could buy one dollar’s worth of stock.  This drove the price of stocks through the ceilings, creating multi-billions of dollars.  With the competition to get rich quickly stock prices continually rose until they reached a point in 1929 when this whole house of cards collapsed and the investors and the banks went bankrupt within a relatively short period of time.  The nation teetered on the point of economic collapse until 1933 when Roosevelt became president.  He was able to bring about partial recovery until 1939 when World War II broke out.  The war ended the Great Depression in 1939 in the United States since there were endless orders for war supplies and food production coming into the U.S.

What Roosevelt did in1933 was to double the money supply by collecting all gold coins and issuing paper in their place.  He also doubled the value of gold from $16 an ounce to $32 dollars an ounce, thereby doubling the money supply and giving the government the ability to spend billions in economic recovery.

But, if we go by the value of the Stock Market, it was not enough.  The value of the Stock Market went from 86 billion dollars to 16 billion dollars.  Roosevelt needed to increase the value of gold to 64 dollars an ounce to match the amount of money that existed in circulation before the 1929 Crash.  This he could not do.

With the Real Estate Debacle, which occurred late in 2008 the situation was similar.  The banks over a thirty-some year period had discovered that they could bundle mortgages into massive packages and sell them as hedge funds, supposedly as safe interest paying investments to innumerable investors.  What the banks did was to issue the mortgages, sell them off in bundles, get their original investments back, and then process the funds for fees on several levels.  In essence they controlled the mortgages without having any money invested in them.  This was continued until the banks were issuing loans based upon 125% of the appraised value of the real estate.  This process continued over three decades until the bubble burst and property values dropped like lead weights from tall buildings, leaving many of the homeowners underwater, owing more on the property than it was suddenly worth.  Both Presidents Bush and Obama pumped money into the banks, bailing them out before the entire financial structure of the United States collapsed.

In both the above cases the banks were motivated by intense greed, endless profits, exploiting the system to become super-rich.  In 2008 the bankers were earning in the multi-millions as their compensation packages, and those below them were not far behind them earning lesser million in fees.  The real estate industry was going berserk with the multitude of fees they were earning.  Many homeowners were happily using their real estate as bank accounts and industry was prospering.  It was a happy “twilight state” that lasted until the bubble burst and the economy tanked.  Then if not for the steps taken by the Obama Administration, the entire nation would have collapsed.

The major historic problem still exists, even though the government prints and issues money as needed, there is not enough money in circulation to allow for all the exchange of goods and services needed within the society.  Can this problem be rectified?  The answer is easily by the Federal Government using both fiscal and monetary Policy.

The major problem here as far as the overall population is concerned is that most people still think of money in terms of gold.  With Macroeconomics it is a tool that the government uses to enhance productivity.  In itself money has no real value except that assigned to it by the government as a token of exchange.  The Federal Government can issue as much as it feels is needed.  The only limitation on this is inflation.  If there is too much money in circulation, more money that goods and services needed then we could have a rabid inflation.  This and this only would limit the amount of currency that the government can circulate.  Money is not gold and should not be treated as such.  This behavior can limit productivity and bring about a continuing recession as it has since the end of 2008.

Unfortunately the Tea Party Republican controlled House of Representatives has not only not used fiscal policy but has also seriously restrained Federal spending, exacerbating the problem of unemployment.  We are still in a recession with a seven plus percent level of unemployment.  This could easily be rectified if the Federal Government could take proper action.

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