Economics is called the dismal science because it is. Tedious, complex, burdened with an exotic vocabulary, the study of economics is only for the stouthearted. Unfortunately, when people think of money, they think of economics: of using money, investing it, saving it, earning it, etc. But this modest screed is about money itself: the NATURE of money.
The only difficulty in understanding money in this way is that its simplicity impairs comprehension. Nature abhors a vacuum; and the human mind abhors simplicity. We can cope with Einstein's famous E=mc˛, but the nature of money has us scratching our heads. But let's take a shot at it.
"Money is whatever people think it is." This idea, often expressed, is absolutely true, and often misunderstood. The reason for this is because it contains two simple but somewhat contradictory words: IT and THINKS. If money is "it," then it is something. But what people think it is may not be anything at all; or so-called "paper money." Well, of course, paper is an IT. Couldn't paper be money? Of course! In fact, though, it isn't, never has been, and probably never will be. The proof of this is right before our eyes every day of our lives, and therefore virtually invisible. If money were paper, and a dollar of it were a rectangle of that paper about two and a half inches by six, and weighing about a gram, then ten dollars would be ten of those pieces of paper, or a single piece ten times as large. If paper were money, here's how to get it without working: buy a beer for a buck, give the bartender a five, and get back four times as much paper (i.e. "money") as you gave him, plus the beer! Better yet, give him a hundred! Instant fortune. Only a very naive person would attach any significance to the numbers on the paper! (Let's hope the bartender is among them.) After all, when you buy a pair of shoes, you don't settle for one shoe with TWO written on it! If you're selling milk, you won't find many customers who will pay a gallon price for a quart with FOUR stamped on the bottle! So you surely wouldn't be naive enough to do ten times the work to obtain a piece of paper with Fifty engraved on it, when your base rate was Five!
But wait a minute. As long as you can convince other people that they're getting more "money" when they accept a scrap of paper with a larger number on it, what's the difference? It's what people THINK that matters, right? Well, maybe.
The problem with the paper, regardless of what people think, is that paper is everywhere, and anybody could print rectangles of it with enormous numbers on them. In fact, governments have regularly done that, just before their economies imploded. So if mental money, represented by numbers on paper, is to be considered valuable, it has to be made to seem rare, which means that, equal protection of the laws notwithstanding, not everyone can print it.
Moreover, those who do print it cannot sell it, for what would they take for it? Would you pay more for a ONE than ONE? Would you sell a FIVE for less than FIVE? And if you had these bills, why would you use them to buy others just like them? And if you print these bits of paper which everyone THINKS are money you can't take them in exchange for other goods, or services, because you don't need those goods or services. Sure you could, (and banks do), use the paper for your own needs, but to place it into circulation, you'd have to find some other way than simply selling it, or exchanging it for other goods, or, God forbid, giving it away. The solution? Rent it. Persuade people that they can have the numbers, but they have to return them, because they are so scarce and precious that you need them back. People will believe this, because you are a grown man in a suit, and you say this with a perfectly straight face in an obviously expensive building. A child might see through it, vis-a-vis the Emperor's New Clothes, but children don't borrow money.
This rental of "money" is a master stroke. No matter how much is loaned, more must be repaid than was loaned. Where is the extra to come from? Why, from the source of this "money," and that's you! Your customers will scramble to service their debts by raising their prices, which will, in turn, drive more people into your bank to borrow. "Things are getting so expensive!" they will exclaim. "We're just going to have to borrow." The economy--which is, essentially, our productive work--can grow by leaps and bounds with this infusion of inflation, er, "money." The faster it grows, the more of our productive labor is siphoned off for interest payments, until the economy is so saturated with debt (or money) that even the most obtuse can see the futility of borrowing more. In that case, foreign borrowers are solicited, and their governments are seduced with easy loans, and visions of re-elections, until they, too, become exhausted with debt, and the goons from the IMF open their eyes to what they were too blind to see before.
If money were still an "it," it would need to be measured, like other things. It is strange that we use a singular term of measurement for money, and it varies from country to country. Isn't a liter the same everywhere? A gram? An hour, or a meter? In America, money, or what people THINK it is, is measured in dollars. Because the money is only a mental concept, this term of measurement must, of necessity, be undefined, and you can easily confirm this for yourself. Ask the IRS, for example, which forces you to swear to the "true, correct, and complete" measurement of your income in dollars, to define that term. They can't, and won't even try. (It's like trying to swear to your true, correct, and complete height in cubits, when nobody will tell you what a cubit is.) But in that case, how can you sign contracts, when the terms cannot be specified? Are prices rising or falling, when they are measured in a term which is undefined, and indefinable? Every day, important decisions are made, based upon some apprehension of a rise or fall in the price of something in the future, yet there is no way to measure this. We have, true enough, the cost of living index, but this is an arbitrary measurement based upon a "standardized" market-basket of goods and services, and these are periodically changed! Some standard! And if you are not involved with the goods and services listed in the market-basket, the information you can obtain from the "cost of living" figures is as apt to mislead as enlighten.
Is money whatever people think it is? Sure. Salt was money at one time (salus, in Latin, from which we get salary) and was used as such in the more remote areas of the South Pacific until World War II. Tobacco was money. Cows (pecus, in Latin: pecuniary). But if people think money is something when it isn't, they're in trouble. Unfortunately, the system allows them to do this, and thus be in trouble, with the greatest of ease. It doesn't matter a whole lot what money is, but if it isn't someTHING, we'll all suffer, regardless of what people think!
Dr. Paul Hein
17 March 1998
Also by Dr. Hein:
A Way Out
Some Thoughts on Inflation
The Magic Pen
It's The Truth That's Being Devalued
What's the Lek Lacking?
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