Something about Money (and cake) – Francis Turner

Something about Money (and cake) – Francis Turner

 

Money is one of those human inventions that is about as fundamental as the taming of fire. Every civilized society and many (possibly all) savage tribes of humans have some form of money. Societies that have attempted to do away with it have generally ended up both failing to and in the process killing people. Yet not many people understand money properly and, as a result, much suffering is brought into the world.

 

So what is money?

The glib answer from an economist’s text book is something like this:- money is a medium of exchange and a unit of account. Which is fine except that it’s got lots of words or more that one syllable and some of them have various meanings. So lets go back to basics (as the politician said to the archbishop).

 

The root idea of money is to store IOUs so that we can have distributed barter efficiently.

 

Without money, if Alice wants Bob to build her a table then she needs to have something that Bob wants in exchange. It could be that she offers to cook him four cakes. Which is fine if Bob likes cake. Alice and Bob have agreed that one table is worth four cakes and both are happy. Alice has her table and Bob has his cake.

 

Except that Bob doesn’t like cake but does like beer. But maybe he knows that his mate Charlie the brewer needs cakes so Bob swaps those four cakes for a keg of beer from Charlie. Charlie in turn feeds two of the cakes to his three children and offers the other two to Daphne in exchange for her cutting his hair and the hair of his cake-stuffed offspring. Daphne now has enough cake that she can stuff herself while watching some mindless romantic drama on TV. Everybody is happy (well apart from Bob because he’s got a hangover but he was happy earlier), and Alice has her table.

 

That second chain is where money steps in. It was only because Charlie heard Bob moaning about being offered payment in cake and then offering the swap that things worked out. Otherwise Alice would have had to offer something else to Bob or would have to have found Charlie directly and offered to trade beer for cake. And even then Daphne might have been left out except that she heard Charlie’s children griping about how they hated cake, particularly when they had to ingest it through greasy hair.

 

In an isolated small village (or tribe) it is possible to do this kind of barter chain with some success. It may take a while for Alice, Bob, Charlie and Daphne to figure out the relative value of cake, beer, tables and haircuts and who will do what in exchange for what, but it could be done in an afternoon in the village square. It would have been much more efficient if everyone sold things for some known unit of money (say a spondoolick). Alice sells her cakes at one spondoolick each, Bob sells tables for four spondoolicks, Charlie sells beer kegs for four spondoolicks and Daphne cuts hair for half a spondoolick a head. Now Alice simply goes to Bob and offers him 4 spondoolicks for a table. Bob takes the spondoolicks and hands them to Charlie for the beer. Charlie pays two spondoolicks to Daphne so that she cuts his hair and his children’s hair and buys two cakes from Alice for another two spondoolicks. Finally Daphne also buys two cakes from Alice for a spondoolick each and is much happier because her scissors aren’t all cakey.

 

Spondoolicks as a medium of exchange make things much better. Not only can we now have chains of transactions that also involve Edwin, Fiona, Gerald, Henrietta and Ian, it is quite possible for Fiona to be in the village on the other side of the hill and for Henrietta, Gerald and Ian to be in the local market town. So long as the two villages and the market town agree (more or less) on the value of a spondoolick Alice can sell her cakes in the market town on the table Bob built to Fiona and everyone is happy.

 

Trade occurs when the two villages and the market town disagree on the relative value of things as priced in spondoolicks. The only reason Alice takes a day to go to the market town and sell her cake is because in town she can sell them for 2 spondoolicks each, especially to idiots like Fiona who have more spondoolicks than sense. On the other hand Charlie used to hate the town because Edwin, the brewer there, sells his beer at a discount, especially if you buy 10 kegs at a time. But then he realized he could buy 10 kegs for 6 spondoolicks and sell them back in the village for a spondoolick each and even with the spondoolicks he had to pay Bob for loan of his cart he can sell beer at a profit and have more time with his children because he doesn’t need to actually brew beer any more. And next week he suggests to Alice that rather than she struggling to market with all her cakes and that stupid table, why doesn’t she just sell them to him for one and a half spondoolicks each and let him deal with the table and dogooders like Gerald who try to tell Fiona that two spondoolicks a cake is a rip off.

 

And this is where we get to the concept of the merchant and the idea of money as a store of value. The merchant (i.e. Charlie) acts as the middle man between people in Aliceham who need something (e.g. beer) and people in Brewersville who have too much of it. The merchant buys the excess of beer from Brewerville at a price which is lower than he can sell it at Aliceham and then in reverse takes all the extra cake from Aliceham and sells it in Brewersville.

 

Later, as the fame of Alice’s cakes spreads far and wide, Charlie and Ian from the land Faraway come to an agreement so that Ian buys most of the cakes from Charlie at a price of 20 spondoolicks per dozen and transports them to Faraway and sells them to would be gourmets at 10 bongoes a cake. He uses those bongoes to buy tools, spices and hops which he brings back to Brewersville market and sells to Charlie (who then resells the spices to Alice and the hammer to Bob) and Edwin the brewer and so on. As a result his initial outlay of 20 spondoolicks turns into 30 spondoolicks. Again he buys a dozen cakes but that leaves him with a profit of 10 spondoolicks which he leaves with Gerald so that next time he comes back to Brewersville he can buy two dozen cakes. Similarly when he gets back to Faraway he can save up his bongoes and buy even more spices, tools and so on.

 

Of course it isn’t totally clear what the exchange rate of bongoes to spondoolicks is. One way to look at it would be to use a cake-index and say that since Ian buys cakes for 1 ⅔ spondoolicks and sells them for 10 bongoes then the rate is 10 bongoes == 1 ⅔ spondoolicks (i.e. 1 spondoolick = 6 bongoes). But that ignores the fact that Ian makes a profit of 10 spondoolicks on his sale of Faraway goods in Brewersville. So perhaps a better way to get to the equal value thing would be to look at the price of hops (etc.) in Bongoes and Spondoolicks as well and then take the verage of the two. In fact probably 1 spondoolick is worth between 4 and 5 bongoes and taking a look at the retail price of cakes in both Brewersvile (2 spondoolicks each) and Faraway (10 bongoes each) 5 bongoes to 1 spondoolick sounds about right,

 

Of course when Daphne wants to travel to Faraway, Charlie, Ian or someone like them will charge her a commission on the trade so she only gets 4 bongoes per spondoolick and when Jessica comes to Brewersville from Faraway she finds that her bongoes are only worth 1/6 of a spondoolick when she tries to exchange them – unless of course she meets Daphne. And that of course is the point. A currency is worth what you are willing to exchange for it and the person on the other end of the deal has to agree.

 

We will note that in this example we haven’t yet said what a spondoolick is (or a bongo for that matter). It could be a lump of metal, seashells, leaves, pieces of paper with the words “! spondoolick” written on them or some electrons or magnets sitting in a computer somewhere. The critical thing is that we trust that a spondoolick today will be worth (more or less – famines and other major events excepted) the same tomorrow and next month. Related to that we have to be able to be sure that someone (e.g. Charlie) doesn’t produce a few extra spondoolicks now and again because his kids need a haircut and he doesn’t have any spare right now.

 

Historically lumps of gold and silver (and copper etc.) of known weight/purity have been a popular choice for what to make a currency from, but the temptation for someone to use slightly less precious metal than there should be (or even none at all) has also been popular. Similar issues have plagued every other way to keep track of currency though electrons (in the form of bitcoins) have generally proven to be less vulnerable although they have proven to be relatively easy to steal or lose. Either way one critical thing about money is that once we agree on what it is and what it is worth (more or less) a spondoolick from Alice is just as good to Daphne as one from Jessica, you can trust them equally and financially we don’t care about their past life (except for when it turns out the money is fake or substandard). Moreover paying with them is anonymous or can be. Apart from people seeing him sneak in the door, no one can tell that Charlie has a beer at Edwin’s place every market day. As long as he gets paid there’s no need for Edwin to care who it is he is serving and likewise no need for Charlie to care which pub he goes to in Brewersville because only one will accept his spondoolicks.

 

Something else we haven’t mentioned yet is “Government”. While, historically, governments have generally had a big say in money that is mostly because governments are what we trust to stop the Bobs of the world from getting away with counterfeiting money – both by setting standards for what money is and by punishing the fakers when caught. Although of course governments have also historically done an absolutely bang up job in debasing currencies themselves and a cynic might say that the reason why governments go after private counterfeiters and the like is that they hate competition. Governments are not required to do the whole thing for money to work. A number of countries (e.g. Hong Kong and Scotland) allow banks to print banknotes themselves and while this can cause problems when the bank gets in trouble or when someone tries to use, say, a Scottish banknote to buy a round of beers in London (though it probably works in Carlisle or Newcastle), it is generally not a major issue. Indeed when you consider the use of US dollars in countries like Iran or Zimbabwe, sometimes the fact that the local government has nothing to do with the currency is a major plus.

 

The key thing about money is that it only works when there is trust. When trading both parties to a transaction have to agree than the monetary object in question is genuine and worth an agreed amount of stuff. Similarly when storing money somewhere the person storing the money has to trust that the place he is storing it is safe and will give it back to him when he needs it. When we all stick our money in a bank and then, later, decide we don’t trust the bank that produces a bank run and it gets nasty when (as is often the case) the general lack of trust in the bank turns out to be well founded. Stopping bank runs from turning nasty is, actually, one of the things that we probably do need government for. The bank runs in the bitcoin world have been pretty catastrophic.

 

Mention of banks leads us to the concept of loans and interest. Again this isn’t anything complex. Alice cooks Katherine a cake today because she happens to have all the ingredients and a week from now Katherine cooks one for Alice. Effectively Alice loaned a cake to Katherine for a week. Assuming the cakes were the same then there was no interest on the deal. If Katherine’s cake was bigger than Alice’s then difference in size is interest on the loan (if it was smaller then the interest was negative and Alice makes a note to never bake a cake for Katherine ever again). Interest is a way of measuring the different value of money over time. Katherine really needed a cake today but didn’t have any flour. Next Sunday she’ll have loads of flour so she can bake a bigger cake for Alice than the one Alice cooked for her.

 

We can extend the example further – say Alice cooks a big cake for Katherine and in return Katherine gives Alice a sticky bun every day for a week. If 6 sticky buns used the same ingredients as a cake then that 7th sticky bun is Alice’s interest and the profit on the deal. If Alice did this a lot then (apart from becoming overweight and sick of sticky buns) she’d get called a loan shark or worse because 1 cake in 6 is 16.7% and 16.7% interest for a week works out at something like 6000% on an annual basis. Of course if she got paid one bun a month it would still be steep but much more reasonable (~30% annual rate).

 

Now lets assume lots of people deposit excess cakes with Alice and agree that they’ll take back either sticky buns or cakes when they feel a touch peckish. If Alice now had 30 cakes which she loaned out to Katherine and 29 other people, she’d get just a single sticky bun every day but in 7 months she’d have a 5 extra cakes (or cake equivalents – remember 1 cake = 6 buns and 30 loans of a cake for 7 buns gives you 30 extra buns). Nice work if you can get it especially if the other cakeowners who gave Alice their cake only ever want a sticky bun at a time and no more than one of them wants a bun each day. It goes a bit wrong however if one of the other cakeowners (Louise) shows up with no warning on Saturday a month down the road and demands her entire cake back now because it’s her child’s birthday party. Unless Alice has a spare cake (or can make one quickly) she can’t pay Louise back as she promised which will make her very unhappy – and of course she’ll tell the mothers of the other 5 kids who were invited to her birthday party and they’ll start wondering what happened to their cakes and on Monday Alice will have demands for 5 more cakes which she won’t have either and that news will spread and so on. That is what we call a bank run and it probably results Alice getting a load of sticky buns in places she won’t enjoy.

 

Now Alice could avoid this situation by not loaning out all the cakes she got (perhaps she gets 40 cakes but only loans out 30) or by writing a contract that says that you can’t get your cake for 6 months or that you have to wait 6 days after you request a cake for it to be provided to you or some combination. For example Alice might say that if you want your cake back now you get nothing, but if you leave it with her for a year you get a cake and a sticky bun. In other words Alice is paying you interest for leaving the cake with her for a fixed period of time and she might make a rule that you can only withdraw one bun a day unless you give prior notice. With these sorts of rules and with 10 spare cakes sitting in her freezer Alice can be confident that Louise will be satisfied when she wants her cake back. Alice will get a decent surplus of sticky buns even assuming that some people decide that they’d rather have a cake and a sticky bun next year than just a cake today.

 

But it also assumes that all the 30 people Alice loans cakes to give her a bun a month. If Maria doesn’t pay after 3 months and Nina doesn’t pay at all then Alice is out a cake and a half. If that’s all it’s not too serious. The other 28 people will pay their full amounts so instead of ending up with a surplus of 30 sticky buns Alice ends up with 19 (7 lost from Nina + 4 from Maria). But if she gets it wrong and another three are like Nina then that 19 bun profit will turn into a loss of 2 buns.

 

Of course Alice could solve this by paying Bob a couple of sticky buns to go around to Maria and Nina and stand over them menacingly while they cook their buns (a 2 bun loss is far less bad than an 11 bun loss) and if Bob does it right to Nina when she hasn’t paid for 2 months then maybe Maria hears about how nasty it all was and manages to pay off her loan even though she really wanted those sticky buns herself. Either way Nina and, possibly, Maria now have a terrible credit rating – no one will lend them a cake again unless they show they really have turned over a new leaf and they probably have to pay 8 sticky buns back instead of 7 to cover the risk that they don’t pay back any sticky buns unless (or even if) Bob goes around and (threatens to) beat them up..

 

Right now we know what money is, how it works, how loans and interest work and things like that. This is all a basis for what we need in a possible new currency. Our new currency needs to be trusted, consistent in value, storable and able to be used anonymously. Sounds easy….

 

 

Notes: Richard Tol in http://www.the-american-interest.com/2014/12/10/hot-stuff-cold-logic/

 

In a barter economy, one needs to know the price of everything relative to everything else. How many eggs for a liter of milk? How many slices of bread for a liter of beer? How many iPads for a yacht? In a monetary economy, however, one needs to know the price of everything in money only. In a barter economy, there are n2-2n prices (with n being the number of goods and services for sale). In a monetary economy, there are only n prices. That is why, at some time in the deep past, many human civilizations of diverse origins independently invented money.

158 responses to “Something about Money (and cake) – Francis Turner

  1. Nicely explained. Thanks!
    I don’t suppose you could give this little lecture to Congress? And make them pass a test?

  2. You missed the part where government inflates the currency and thereby steals the value of everything you own and all your savings. The savings being whatever tiny fraction of your labor they didn’t just TAKE in taxes.

    In this regard, vintage cars are instructive. I have a Buick Riviera, which in 1964 cost about $6,500 off the showroom floor. The equivalent of that car today would be… Well there isn’t an equivalent, because the Big Three stopped making Awesome back in 1970. Because government.

    However, let’s just say the best American car from GM right now is the hot Cadillac, the CTS. One of those things loaded with the big motor and all the trimmings starts at $75,000 dollars.

    They moved the decimal point twice since 1964. 50 years, TWO orders of magnitude. the tax that keeps on taking.

    • Good point about inflation. And to make it worse, modern education has created the myth that a healthy economy has modest inflation. The correct answer is that a healthy economy has modest DEflation because productivity is increasing, so the cost per widget keeps dropping.
      I can think of two great explanations of money. One is short but intense: Francisco D’Anconia’s speech (rant) on “what is money” in Atlas Shrugged. The other is long and very deep: “Human Action” by Ludwig von Mises (free download at mises.org). Highly recommended for those who haven’t read it.

      • Deflation as good or bad depends on if you are a raw materials producer or consumer. The Farmers’ Alliance and Grange movements in the 1870s-1900s developed because the ongoing deflation caused so many problems for debtors (farmers). They allied with the hard-rock miners in the West because of the arguments for “free silver” – inflation by an increase in specie available.

        David Hackett Fischer’s _The Great Wave_ is about cycles of deflation in Western history. In general, over the very long term, it is good. But the process hurts a lot of livelihoods while the currencies and associated economies are deflating.

        • Forgot to add that before 1940+/-, deflation meant more goods chasing less currency/specie. One of the concerns is that today, deflation means people charging less for goods and services (with lower profits and incomes) because the economy is so poor that people are less able to buy, even though the amount of currency remains steady. And we won’t even consider the mess the US Fed has been setting up for the last 7-8 years.

    • There’s only one order of magnitude difference between 6,500 and 75,000 (and a CTS is closer to $70k).

      Any modern car is faster, safer, more comfortable, more fuel efficient, and has more technology than anything from the 1960’s. Not too many automakers were offering GPS navigation, blind-spot monitoring, back-up cameras, or adaptive cruise control back in 1964.

      That’s a big problem with measuring inflation, some things just aren’t comparable between eras. Some things, like blue jeans and shovels, are while others, like computers or lawn maintenance, aren’t.

      • Some things, like blue jeans and shovels, are while others, like computers or lawn maintenance, aren’t.

        Even in this, you can have a heck of a time figuring out quality– I’ve got some Faded Glory jeans from when I was about 14, and they’re still wearing, while the ones I got five to ten years later already have gone to the waste bin. (I follow the “grab a pair of jeans and wear it” theory, so they probably haven’t had totally different patterns of wear.) For that matter, I inherited some of my dad’s t-shirts, and he’s got shovels that are older than his marriage to my mom…

      • Manufacturing changes come into play, too, because if you put all that stuff on the Cadillac using 1960s processes, it would likely cost twice as much (or more).

        What burns me is that they decided to claim that things like food and fuel shouldn’t be counted in inflation, when those are some of the most reliable indicators.

        • The problem with using fuel or food as indicators is that they’re volatile for reasons that have nothing to do with the value of the currency. Fuel prices are falling because of geopolitics. That doesn’t mean we’re entering a deflationary period, and if we did factor it into inflation it could mask real inflationary pressure elsewhere in the economy.

          • Yes, but then the .gov uses the inflation number as an index on how much to pay, say, the retired folks who need to walk out teh door and buy…food and fuel.

            As an indicator in an economic model or a surveillance tool for overheated sectors the “exclude food and fuel” makes sense. As an index for promised benefits that go directly to food and fuel it sucks. And I say this as one of those folks who wishes that SocSec would just get a cutoff date and be allowed to wither away, replaced by something like a universal 401k/IRA – even in that case, the people who made the contributions and were promised an inflation-adjusted income would still be getting screwed.

            • Don’t speak so loud – the .gov is about to roll out myRA, a federal retirement savings plan.

              • So on the one hand, we have “just give all your money to .gov and when you’re old we’ll give you a pension from the lockbox, indexed so it’s not worthless.” OK, we know how that goes. I’m our beloved and most evil hostesses age, and I don’t know anyone within five years plus to 20 years minus who is counting on one dime from SocSec.

                On the other hand, we have “just put all your money on these tax-deferred IRA/401K accounts we just legislated into existence, and we REALLY REALLY PROMISE to not change the tax law out from under you in the future to take away that money. Especially the Roth IRA – DO NOT FEAR! Never will we look at those balances and shout ‘Hoarder!’ and sieze them for shovel ready projects.” I fear as the boomer population (and thus retirement) bulge moves to intersect the deficit spending bulge, we will all see how THAT goes.

                On the gripping hand, I’ve never ever lost any money buying guns. Not once. If I had done some wholesale buying when I bought onsey-twoseys in the past, I would have really made out.

                The reader is invited to draw their own conclusions.

                • Really good tools (a gun is a tool) are always a good investment, particularly when you can use them to make more useful things.
                  Yes, I got a table saw for Christmas!
                  Also books.

          • Chicken and gas are actually pretty good indicators, along with cigarettes if anyone still smoked. In the early 60’s chicken was $.25/ lbs, gas $.25/gal, and Lucky Strikes $.25/pack. Laminating resin was $5/ gal.(I pay attention)
            Now chicken is ca$2.50/lbs, gas $2.50 and up, I don’t think they make lucky strikes any more, and laminating resin is $30-$50/gal.
            Looks to me like once we quit using silver (1965), the money has been devalued at least 1000%.

            • Chicken is very sensitive to changing technology and The Power of Stupid; the price jumped up a lot when a bunch of lawsuits made it harder to mass produce chicken by requiring the cages to be 1.243 inches larger, or animal rights activists horribly abuse animals on tape and claim it’s X company policy.

              • EVERYTHING is sensitive to changing technology, but the government is still cooking the books and lying when they don’t count food and fuel when they calculate inflation.

                • While it’s important to count food and fuel when you’re trying to figure out the cost of living, it doesn’t change that chicken is not an awesome metric.

                  • Awesome maybe not, indicative over 60 years, very much so. I’m open to your suggestions of better long-range indicators. Meat is pretty basic, and until it’s cultured in vats, it’s pretty low-tech. Lumber is another basic
                    item – priced redwood lately?

                    • “Meat” might work. “Construction supplies” might work. Categories of stuff that’s used regularly, so that you avoid artificial spikes and dives from non-economic factors.

                      “Chicken,” however, is what was suggested and thus what I pointed out the issues with.

                    • Foxfier, he has a point, simply because it used to be harder to raise chickens commercially, so over 60 years the lack of antibiotics back then probably equals crazy eco people now.

                    • Except that sixty years before that the chickens you raised were a Big Huge Sunday Treat, because it wasn’t practical to centralize production and ship them– and even if the antibiotic issues are the same as the activists, there’s a big gap there in the middle where stuff went much higher in ROI.

                      Thus, broad categories– I’d go with “meat” rather than “protein,” but that’s probably because I think adding tofu and beans would interfere with figuring out the cost of living at roughly the same level too much– over specifics.

                      For better accuracy, we’d have to figure out how much time and resources go into the food, too; when my mom was a little kid, she’d go out to the well house and trim the fuzz back off the beef hanging there, then slice off dinner, vs our paying more to get meat that’s on plastic sheets and keeping it in a freezer. (They skipped the icebox phase.)

                      Mostly, I’m tired of pointing out stuff that deserves consideration in making a model, and getting a response for a totally different model (“meat”) that attacks a point I did not make. (That prices have not gone up, and significantly.)

            • Chicken, gas, and cigarettes are horrible indicators (an indicator doesn’t become good just because it shows you what you want to see). They are all subject to severe and unpredictable demand signals – a new fad for buffalo wings, China becoming an industrial nation, and coordinated anti-smoking campaigns have all played absolute havoc on the prices you mentioned. The supply side isn’t that great either, disease outbreaks in poultry or tobacco or problems in the Middle East can cause prices to spike in the short term. None of those price fluctuations have anything to do with the value of the dollar.

              • Christ on a crutch in the foothills! The Basic Point is simply that there has been massive inflation and the PTB lie about it big time when they don’t count food and fuel as part of the index. The dollar is approaching the cost of the paper its printed on. Nickel coins are now worth more as metal than coinage, and a penny is no longer copper but plated zink. And we’re arguing about indicators?

                • The basic point is that you are deeply confused about several concepts under discussion, not the least of which are “inflation” and “value.”

                  Here’s a hint: It doesn’t really matter what a dollar could buy in 1965, because you aren’t buying anything today in 1965 dollars. You might be somewhat interested in how much a 1995 dollar is worth, since some of those dollars might be in your retirement account. We should be very interested in how a 2014 dollar compares to a 2015 dollar, because most of us are getting pain in ca 2014 dollars, and the short term inflation rate tells us how the economy is doing relative to the money supply. That’s why food and fuel are excluded, their prices are determined more by forces extraneous to the money supply.

                  • I thought we were talking about money here, and monetary inflation has a bit to do with value. !965 dollars may be irrelevant now (unless you collect coinage), but they do tell you something historically. The short term inflation tells us something about what the Fed and banks are doing with the currency and credit. Deflation, if any, might be an indicator of increased productivity as well as lessened demand.
                    BTW, “getting pain in ca 2014 dollars” is certainly one of your better typos.

                    • Inflation doesn’t have much to do with value, it’s mostly determined by the size of the economy versus the size of the money supply. That’s why long term currency comparisons aren’t terribly useful. You’re comparing one ratio to a completely different ratio. About the only use for it is in translating costs across timescales (when I was reading “How to Lie with Statistics” I was amused when a $12,000 annual salary was a good job)

                      Short term measures are useful in determining what the money supply is doing in relation to the economy, but food and fuel aren’t useful for that measurement because on that timescale they are subject to price fluctuations driven by supply and demand, not the value of the dollar. Fuel prices are falling due to geopolitics, should the Fed start pushing out dollars (negative interest FTW!) to fight this “deflation”? Should interest rates spike when there’s a drought in the midwest?

    • So one reason why I ignored the inflation thing is that I’m trying to show what is needed for money that would not be as subject to inflation as your typical government controlled fiat paper stuff. That’ll be part 2 sometime in the new year

  3. The key to government intervention in money is not setting a standard and keeping counterfeiting down. Professional associations do that easily. For example there are well known standards for diamonds.
    The key action of government is obligating you to use their money so that no trade or transaction falls outside their purview and taxation. You MUST value every transaction in say – dollars. They define and regulate what money IS.
    The difference between money now and money a century ago is that it has no standard. Money always used to be redeemable in goods. For thousands of years money WAS metal – gold or silver or copper. Rarely money was wheat or land or barrels of oil. But always a measurable form of goods.
    This was so basic that J.B. Morgan said: “Gold is money and nothing else.”
    Well now gold is not money – BY LAW.
    Money now is debt.
    The government defines the value of money as “The full faith and credit of the United States Government.”
    The dollar is based on:
    Your future labor.
    The ability of the government to tax it.
    The willingness of the government to issue credit against their ability to tax and their reputation.
    They regulate the value of money by how much they allow to exist – since it is no longer attached to any physical thing.
    They own all the land by holding the deeds. You are are only allowed to lease it for a year at a time for taxes due.
    They just happen to own all the former gold reserves which by decree are not money.
    They say who may raise food and who may treat the sick. They define who may follow various professions. Who may be married and if they can keep their children. Who may travel the public highways and fly on an airplane.
    Understand now slave?

    • 🙂

    • No, it isn’t.

      • Please enlighten us.

        • Here’s a hint: money isn’t “based on” anything. Ever. Whenever you have a currency that is based on something that currency is nothing more than a transferable gift certificate for the actual money.

          • Silver certificates are currency, not money, but the silver you could redeem them for is money? right?
            FWIW In 1980 monel quarters were worth more as clench rivet washers than as money and were so used in the boatyard I worked at.

            • Up until 1873, yes. After that silver was no longer money in the US, it is merely a commodity like steel or paper.

              BTW, quarters aren’t Monel, they’re cupronickel. The former is ~2/3 nickel while the latter is 75% copper in the cladding (the copper core pushes the total above 90% copper). If the specs called for Monel, your employer engaged in fraud.

              • It worked for the guys at the Sausalito Wooden boat Coop and didn’t seem to have any bad galvanic action with the monel rivets. They were building their own boats and the quarters and nickels were cheaper than SS or monel washers. No fraud, climb down off your horse.
                Up until 1965 much of U.S. coinage was 90% silver, so unless silver dollars etc. were not money, you’re not correct. A silver dime will still get you 10 pennies change, sounds like money to me.

                • Since both Monel and cupronickel are essentially copper and nickel – the only difference is the ratio – there wouldn’t be any galvanic issues. The reason people use Monel instead of the cheaper cupronickel is because the latter is significantly weaker.

                  A dime is money, regardless of composition. The monetary aspect is tied to the form, not the substance. Prior to 1873 a quantity of silver had a set value, the monetary aspect was attached to the substance.

    • There are problems with any system of money, but having money based on some arbitrary commodity doesn’t magically solve all of them.

      What if the intrinsic value of gold went down? Suppose we got room-temperature superconductors that don’t tarnish, and fashion turned away from it? Then why would it keep its value? And if that value went down, what would happen to the money supply?

      Also, there will reach a point some time when the easily-accessible gold will be gone, and the cost to mine it will go up. What then?

      We have reached a point where a standard base doesn’t work as well as it used to. I won’t dispute most of the problems at the bottom of that comment, but they are not caused by taking away the gold standard. Also, the part about the government deciding how much money they allow to exist has been true since before the gold standard was ended, because they bought all that gold that formerly backed the money with the same sort of credit promise. It didn’t magically flow from the miners to the people.

      • William O. B'Livion

        What if the intrinsic value of gold went down?

        Gold has no “intrinsic value”. It’s value *used* to be that it was a very pretty metal that wasn’t any good for anything that other metals weren’t much better at except being pretty, then we invented electronics.

        It’s main feature is that it’s (relatively) rare.

        Of course, putting hte US on the Gold Standard might be a way of getting Russia to advance it’s space program to the point where it can get stuff to the asteroid belt and back.

        • One notes that its scarcity was a serious problem. Gold rushes were often followed by economic booms because the amount of money let people make more trades. The effect of New World gold spread as far as China.

          • Except when the sheer volume of gold pumped into the system starts massive inflation, like Europe after Spain started using New World gold to pay for the wars of the 16th and 17th Centuries. But that may be the exception that proves the rule.

      • We should back our money with energy. If someone finds a huge gold deposit, or mines an asteroid, or figures out how to get it out of seawater… then it seems like we have a lot more money but we don’t really have that much more wealth and problems stem from that. If someone invents a way to get a lot more energy then it looks like we have a lot more money and we actually do have a lot more wealth too so the changes in money supply would accurately reflect the amount of wealth.

        • Some stories have used energy as the basis of their money supply. I’ve also seen man-hours used in a story, but that would get a little complicated, because different jobs would have to be rated as different quantities of the basic Labor Unit.

          • Not to mention that each worker produces different amounts in an hour….

            • I think it was predicated on actual labor being standardized in their production, like some Union shops I have heard of (guy I used to work with said he worked at a furniture company where daily output was specified at so many pieces per day. If you got done early, you stood around and killed time for the rest of the day).

          • Yes, I’ve read some and think it is a good idea. Labor isn’t wealth (as it can be hugely efficient, wasteful, or counter-productive depending on what you do and how). Energy seems better to me as it is the closest physical thing we have that is almost pure wealth.

            Also it is handy because it is hard to have bank-runs on it due to power transmission limitations. Want to convert your BTU-notes? Just get in line at the car-charger stations in the local post office, Federal Bld. parking lot, or military base and use ’em. The line may be long but it runs 24-7 and there’s plenty of thorium in Montana.

  4. “We will note that in this example we haven’t yet said what a spondoolick is (or a bongo for that matter). It could be a lump of metal, seashells, leaves, pieces of paper with the words “! spondoolick” written on them or some electrons or magnets sitting in a computer somewhere. The critical thing is that we trust that a spondoolick today will be worth (more or less – famines and other major events excepted) the same tomorrow and next month. Related to that we have to be able to be sure that someone (e.g. Charlie) doesn’t produce a few extra spondoolicks now and again because his kids need a haircut and he doesn’t have any spare right now.”

    Leaves?

    Sarah, you wouldn’t have happened to have been sitting in a bath when you wrote this?

    ;(

    The problem isn’t if Charlie produces a few extra spondoolicks, but that doing so is rear or hard to do as to keep the money supply stable.

    Interesting note inflation and deflation originally just meant an increase. (inflation) and decrease (deflation) of the money supply, and the prices would fluctuate accordingly.

    Currency is government issued money.

    These terms have very specific meanings that we now conflate with other terms that have very specific meanings that make taking Econ challenging because you have to stop and check how people are using the words.

    😦

    “In a barter economy, one needs to know the price of everything relative to everything else.”

    In a Barter Economy you need to know what things you needed and their value to you are. It even helps to know what your neighbors value or need but this is not required.

    And as always my favorite answer to the question of, “What is Money?” is Bastiat’s.

  5. Video with crap captioning is useless to the deaf.

  6. Money is an abstract method of storing tiny bits of human life. Which is why any time you hear some damnfool say of a huge expense “if it saves just one life, it’s worth it” you should kill him with a stick.

  7. My way of explaining it is that money can be thought of as stored work or effort. For the most part, we work to get money. We then exchange that money for the work (or the product of the work) of someone else. Therefore, money is just a way to store up that work, like batteries are a way to store up electricity. Money is not the work itself, any more than batteries are the electricity. I guess by this analogy, a hyper-inflated currency (a la Weimar Germany) is a dead battery.

    Anyway, I think your explanation works pretty well too. Thanks.

    On another topic entirely: Sarah, what would you say about one Daddy Warpig’s assertion that if you put the four members of the Evil League of Evil together in a room and brought up any topic of significance, an argument would break out?

    • The last paragraph made me 😀 .

    • A spirited debate, surely. The ELoE are all much too polite to argue with those they respect.

    • Well, John C. Wright said he didn’t think it would be a problem, but added that Vox Day would likely disagree with him on that.

    • William O. B'Livion

      What was that joke about wrassling with a pig in the mud?

    • BobtheRegisterredFool

      My position is that, to my knowledge, Daddy Warpig has an incorrect understanding of the scope of the Evil League of Evil. I’ve attempted to argue it out with him, but have not fully checked everything he has said since on his blog or podcast.

      There are other members of the Evil League of Evil. Wright, Hoyt, Correia and Beale might be considered to be riding, respectively, the White, Red, Black and Pale-Green Steeds. If so, Kratman is Captain Planet. Then there is Freer, Green, Paulk…

      Of course they identical and interchangeable. They are all very biddable people, who don’t have strong opinions on anything. They don’t have wildly different backgrounds, which hence cannot lead them to evaluate things differently.

      They all choose to live in Utah.

      You can look forward to more stories from Writer Game Night at Monster Hunter Nation. John will run Oracle of Dark Air, Theo the Oracle of Dark Earth, Tom Dark Void, and Sarah Blood.

      • Christopher M. Chupik

        “By your powers combined, I am Captain Kratman!”

        No offense to the Colonel.

        • Why do I suspect that using his name in the same galaxy as Captain Planet, let alone the same sentence, would be offensive to the Colonel?

      • Patrick Chester

        “If so, Kratman is Captain Planet.”

        O_o; ?!

        • BobtheRegisterredFool

          I was attempting to describe in writing the qualities of Beale, Correia, Hoyt, Kratman, and Wright as argumentative writers. I think I gave up when it proved an unworkable digression. Kratman seemed to have some of the notable qualities of Beale, Correia, Hoyt and Wright.

          For example, compare cases where some persistent newbie comes in, and tries to defeat Kratman or Wright in an argument. Perhaps the style is learned in law school, but I’ve come across enough with law degrees who come off poorly in comparison.

          The ‘combined powers’ aspect seem close enough for cuteness, and there were some other now unimportant factors. So, in the context of Wright claiming that Beale was Sauron, I decided that Kratman was Captain Planet to the four.

    • Well… we probably agree on um…. um…. um…. Well, we agree that people should be allowed to write whatever they want and that SFWA and professional awards should be by professional achievement, not political correctness.
      As for the rest, Vox and I would quickly come to blows — if we were the kind that comes to blows over that stuff. We’re more likely to be chill and civil — on everything ranging from Europe/America to race/culture. For the rest? I don’t think so? I can’t imagine having an argument with John. We disagree on many things, mostly late Heinlein, but they’re not the sort of things you have a to the death argument about. I really haven’t found something I disagree with Larry THAT much on. MAYBE religion, but I don’t argue religion and I have so many Mormon friends I sort of see their point while disagreeing with it. He’d probably want to SHAKE me for having too few guns, but I’m working on fixing that. We have different shadings of where free will and government go, but heck I disagree with myself on that, on different days. So…. meh. In the ELoE Vox and I are sort of at the poles, I’d say, but I maintain he’s in the left pole (because I’m evil, that’s why. No, because he’s in the European right, which is left for the US) and I doubt we’d agree on much more than “let people be who they are” and “Men and women are different.” Weirdly, though, the SJWs lump us together and also I don’t feel we’d get badly along in person, provided the task was, say, setting up dinner or fixing something.
      So, first we fight the SJWs. Afterwards we can sneer at each other and make faces 😉

      • Bingo. We’ve got work a-plenty to be doing all around us without sniping and infighting.

      • Oh, something else Vox and I very much agree on: men are very badly treated in our society.

      • Typical siblings, even if only in a semi-spiritual kinda way:
        VoxD: “You’re wrong.”
        SAH: “No, YOU’RE wrong.”
        Outsider: “You’re both poopyheads!”
        VoxD and SAH: “Get ’em!!!”

      • BobtheRegisterredFool

        Do you play RPGs or War Games? Because i get impression that Vox, John and Larry might have interests in that area that overlap.

        • Nope. Never have. it’s too much like (writing) work.

        • Mr. Wright and Mr. Correia for sure. Mr. Wright has written extensively on the topic, and I loved his approach to gaming as if you were in the Amber multi-verse. Mr. Correia’s love of tabletop figurines is self-evident. Mr. Day… I have no earthly idea, though I do see him recommending a number of old-school videogames on that recommendation site thingie I signed up for a while ago, so he’d probably be on board.

          • BobtheRegisterredFool

            Do Wright and Correia’s tastes overlap enough that they would enjoy the same campaigns? I dunno, maybe. Tastes are hard to judge with certainty. Beale seems to have tried many different types of games. I’ve seen him mention Advanced Squad Leader the most, and I get the impression he prefers wargames.

            • Possibly the impression is biased because he’s gaming with kids kids, but I got the idea that Mr Wright’s tastes were more in the “fun and/or zany mash-up” direction than the “kaboom” direction– BESM rather than 40K.

              • BobtheRegisterredFool

                Yeah. Correia and Beale game with their kids too.

                Wright seems to run a bunch of homebrew stuff, the sort that doesn’t really need miniatures, like Amber Diceless.

                Correia seems to like the stuff with a focus on an individual combat system that benefits from knowing where people are.

                Beale is starting a series, talking about a combat he is running with his son with, IIRC, two week turns.

              • Here’s an account of how he runs games:
                http://www.scifiwright.com/2014/09/an-anecdote/

      • Realizing that I’m only a minion…getting into an argument with John would seem to be a very bad idea. He uses words with entirely too many syllables. And he knows what they mean. 🙂

        As a fellow gun nut, the gun thing is forgivable…so long as you’re actively working on the problem. As a side note, while you can never have too many…you can have too small of a safe!

        • Polysyllabic eloquence?

        • William O. B'Livion

          Jeff Cooper said:

          …Living as I have all my life amongst shooters, I cannot think of anyone who owns only four guns. On the other hand I think that when you get up into the hundreds you are overstating the case.”

          So I’m in the “ok” range.

          • Yeah “overstating the case” is when you have more guns than the militaries of small countries (Mad Mike vs Monaco say)

        • Guns do tend to accumulate, don’t they? I just don’t get to shoot often enough.
          Then there’s the matter of ammo. I was in Cabela’s on Friday (bad move) because I wanted to pick up some Federal HST’s in 9mm. I found one box, and the line was to the back of the store, so I put them down and vowed to come back later. Today I went back, and they were all done. 😦

          (I know they don’t have the best prices, but I have $50 in gift cards, so it’s free)

      • Christopher M. Chupik

        I expect a Certain Troll will read this and quickly run to his blog and say that the Evil League is falling apart and that Sarah is as bad as Vox.

        • Nah. Sarah is much worse. The female of the species and all that.
          The difference between us and them is that we know the difference between allies and clones.

          • Christopher M. Chupik

            Though I wonder if he has the time for reading us these days. I hear he has some problems right now . . .

            • *counts days left in year, calculates karma balance sheet* I hope nothing ill occurs to him and that his problems resolve in a fashion encouraging of mutual peace and good will. *folds hands, tries to look pious and sincere*

              • Alibis, get your alibis here! Fresh off the dock, all witnesses and documentation certified! Prices so low, I’m cuttin’ me own throat…

            • Blunt Force Karma.

              (apropos of nothing, it’s just one of those little phrases that accumulates on the whiteboard in my kitchen. /disclaimer)

          • Christopher M. Chupik

            Well, you are worse than Caligula, by your own admission.

        • William O. B'Livion

          I wish I was (from that perspective) just as bad a Vox.

      • William O. B'Livion

        He’d probably want to SHAKE me for having too few guns, but I’m working on fixing that.

        Next up: http://www.mossberg.com/product/shotguns-autoloading-mossberg-international-sa-20-sa-20-railed/75778

        Just the thing for my wife to use to repel boarders.

        • I’d prefer something in a nice, handy bullpup, but I’m known to be weird. *grin*

          Of course, if money’s an issue, there are those quite a lot cheaper out there and still useful and effective.

      • Hmmm, perhaps I had a poor choice of words. I do not automatically assume “argument” to be acrimonious. I can think of a number of topics on which there would certainly be spirited disagreement, though. And, as has been said several times, everyone would leave as friends. (Cookies optional, although I would be glad to provide them myself. How do homemade chocolate mint cookies sound?)

        • I don’t like mint.
          Oh, recreational arguing is guaranteed. But even if the other side disappeared tomorrow and we had leisure to fight, I don’t anticipate more than making faces at Vox and maybe referring to him as “that gentleman” when he gets on my nerves.
          Look, he’s not, under any circumstances I can imagine, going to prevent my making a living. Heck, if his house takes off he might HELP me make a living in the future. I don’t actually get in fights with people unless they’re trying to injure me and mine.

    • My way of explaining it is that money can be thought of as stored work or effort. For the most part, we work to get money. We then exchange that money for the work (or the product of the work) of someone else. Therefore, money is just a way to store up that work, like batteries are a way to store up electricity.

      Hold on to that thought. It’s how we get to new non-governmental money

  8. The idea of money as a medium of exchange is not new and has been covered by both Adam Smith and Karl Marx among others, but this explanation is a good as any I have seen. What I find interesting here though is not the ideas expressed above, it’s the effort to define them.

    Oddly enough, most people in our society take the existence of money for granted. It has, after all, been around for centuries in one form or another. In the United States, which was cash-poor before the discover of gold in California in 1849, money has been used as a form of exchange since the earliest European settlements. It just has.

    It’s nice to see someone explain the concept of money in a new way instead of merely trying to figure out how to either make more of it or divide it up more efficiently. Sometimes examining ones assumptions is the key to unlocking new wisdom. I’m not sure if there is something profound here or not, but it is this type of thinking and examination that can lead to something world-altering. Now someone just needs to figure out what it is.

  9. Does anyone else have a desire to play the bongos using a well-licked spoon in an effort to make money to buy stick-buns and beer? Just wondering.

  10. Phantom,

    Re: inflation

    A quibble- governments do not inflate currency, they devalue it. This is usually due to printing more of it, though a printing press need not always be involved. Inflation is what occurs to prices as a result. Devaluation is also a classic way of reducing the national debt. If the value of a dollar or ruble or whatever is cut in half, in effect so are all debts owed in dollars or rubles or whatevers.

    Inflation can also (and often does) result from economic pressures outside direct government control. Currencies are traded, and the relative values of the dollar, euro, ruble, etc. shift as traders attempt to estimate the relative economic health of the economies backing the money and the potential for investment returns. I presume that since currency trading is closer to a zero-sum game than the overall economy (money supply usually changes slowly) the effect of worldwide improvement in economic conditions must also devalue the US dollar over time, in comparison to other currencies.

  11. “Trade occurs when the two villages and the market town disagree on the relative value of things as priced in spondoolicks.”

    Not true. Trade also occurs when they agree, but only one side makes a thingee.

    • I think we’re in agreement here just not getting the terms right. Money and trade work to shift surplus stuff around to places where it is in shortage.

      If spondoolicks in village 1 can buy twice as much stuff of every sort as they can in village 2 then we may have a problem about the value of money. OTOH it depends. If you go to Portugal most things will be cheaper in Euros than they are in Finland. That’s one reason many people from Northern Europe retire to the miditerranean

      • Doesn’t that rather depend on if “work” is included in the twice as much stuff category? If it doesn’t, then it sounds like folks should be moving to where the wages are higher. 😀

        And I’ll define “work” as “job done to the same quality as judged by buyer”– not “time spent to do job” or “results in similar product which those fools refuse to accept as the same.” (Not because folks aren’t often irrational, but because it’s way more commonly used as the handwave for making someone’s pet theory work.)

  12. I made the mistake of trying to calculate out D&D money.

    Holy crow did it fail on just history… and then I started considering what even slight magical changes would have on the value of stuff. For example, a bag of holding keeps stuff in it from going bad, right?

    BOOM– you now have a portable freezer. It doesn’t matter if there’s only one every three cities, this will change matters greatly.

    • Oh yes. The thing about D&D is that in reality, the magic they use would make A LOT MORE changes than they have.

      Also, the price list is intentionally inflated like the California gold rush era, so that our heroes aren’t the richest people in the world after they acquire bags of gold.

      • BobtheRegisterredFool

        What I’ve been reading about the implied original D&D setting makes a lot of sense of this.

        The markets are in an area that is experiencing a significant level of change. Treasure isn’t short, but population, labor and security may be. Compared to the time of the overall changes, the length of the game is not long. Things would behave as one would expect of a steady stable economy a long way in the past or the future.

    • BobtheRegisterredFool

      I had fun working out a couple of sets of gold/silver/copper coinage for an area. One for ancient treasures, one for the wandering monsters which will be mostly pokemon derived. There is no local market to dispose of loot, yet, so the main use for coins is XP.

    • Speaking of D&D, the start of the post made me think of an elf barbarian I played, who finally grasped the concept of coins as “barter markers” but never mastered the difference between gold, silver, and copper.

      And the dessert discussion reminded me of him dragging a moose carcass to a restaurant so the “wizard” in the back could turn it into chocolate.

      His “life” was so much simpler than mine…

  13. One quibble to your definition of money: you left out that it must be divisible. In other words, two half cakes must have the same value as a full cake. This is why gems do not make good money, A diamond cut in half looses half its value.

  14. I’ve read a sizeable number of people rail against fractional reserve banking, and this does a good job of pointing out how important that is. If Alice can’t lend out the cakes others have deposited with her – if she can’t keep only a fraction of her deposits on hand, she has no way of keeping the freezer running (and paying for her time) without charging the people who give her cakes a bun a week. Furthermore, if someone needs 6 cakes but can’t go to Alice they either have to find 6 people willing to invest a cake, or wait until they make 6 cakes themselves, which could be a while (if ever).

  15. The simplest explanation I’ve ever come up with for what is a complicated subject is this: A unit of currency is like a single share in the economy of the nation that issues it.

  16. The principal disadvantage of money vis a vis cake is that the Three Stooges look silly throwing Federal Reserve Notes at each other and you could put an eye out throwing coins…

  17. The problem with deflation is mostly psychological – but it is real. My grandfather, being a scientist and a nice guy, was kind enough to stand firm against his factory lowering wages for workers during the great depression…

    Problem with that is, if the price of goods is decreasing, the value of labor in dollars will often also decrease… So, employers need to cut wages to maintain employment. Most employees don’t understand economics, so having your boss come in and cut your wages by 15% is demotivational, so they really should be cutting by 30-40% to account for the fact you’ll likely be working less. Then, you tend to lose a lot of trained people. So, you end up finding out that cutting wages is hard and often don’t do it – which leads to being unable to hire. And end up with persistent unemployment and a lot of bankruptcies – which banks handle poorly because defaults hurt a lot relative to the benefits of getting interest…

    Realistically, money’s main worth is as a medium of exchange. Basically, as long as I can sell house X and buy house Y with some change left over before money changes by a bunch, it is still better than trying to sell house X for house Y (particularly given that the seller probably doesn’t want house X) and taking the remainder in horses.

    Money as a store of value isn’t really that important and can lead to people hoarding basically useless stuff, like gold, which generates fluctuations in value, which degrades money’s worth as a medium of exchange.

    I see money mainly as a promise. Wherein nation A promises to take all necessary steps to ensure sufficient stability of its currency’s value to undertake projects of reasonable duration. There’s another benefit level where stable trends enable predictable lending and improve efficiency. In practice, there’s no point to projects with projected return of less than 10% per year, so 10% inflation is a reasonable gauge of when inflation becomes a real problem.

    For most things, I’d bank on graphene having practical high value uses before nanotubes. Diamonds in particular are a lovely, lovely scam.