What is money, part two? The question of money, as I've already indicated, is a very important one.
There are three kinds of money that we use, fundamentally, or have used in the long
history of man's use of money. One is commodity money, one is credit money, and one is fiat money.
Now this business of fiat money is extremely interesting.
Banking. Fiat money is not a commodity, and also it is not credit money. Fiat money is
exclusively a type of government money. Government is the only agency that can create fiat money.
The marketplace will produce commodity money. It can also, and often does, create credit
Money.
But when we get into the area of the fiat, we get into the area of the usage of something
that is money because some leading politician says that it's money.
And that's all.
It makes it money.
In other words, there's simply somebody that stands up and says, this is money because
I say it's money and therefore you will use it as though it is money.
And at that point, if this man has that type of prestige, then it becomes money.
Now we've had a fascinating history in the area of fiat money. And by no means should
we accept the notion that fiat money is a modern invention. Although most modern governments
are using it, and most governments have always used it, it has originated in the horrid past.
A number of primitive tribes have pioneered in the use of fiat money. They have used whatever
The chief told them was money because the chief said so and he could wrap their knuckles pretty substantially if they didn't use it.
One of the common items of money among primitive peoples, for instance, is the cowrie shell.
You'll find the cowrie shell in wide usage in the Pacific archipelagos and in just about, well, in many place contact at an early date.
You'll find the native trading in cowrie shells. Now the cowrie shells are not a commodity.
A few natives may use it for decorative purposes, but most do not. They're simply a kind of money.
And they're used to facilitate exchanges. They have no other usage as such. You can't eat them.
You can't wear them. Mostly they don't even use them for decorative purposes. And there they are.
They're a kind of fiat money. They are used as money because the chief said they're money, and that's that.
Another typical example, and to me a vastly interesting one, is what goes on on the island of Yap, even today.
The Yapese use a kind of fiat money. What they have is a series of giant boulders, I think the smallest weighs two tons,
and they go up in size I guess to 8, 10, 12 tons a piece. These boulders are mined on another island and brought over to Yap in canoes and then they are placed outside and they stand up.
There's a hole bored through each one so you know it's not just a loose boulder, it's a piece of money because when it has that hole in it, that makes it money.
and of course the yappies say there's one tremendous advantage to this type of money.
It's never stolen and I can see why nobody could steal it but everybody knows who owns it and they
use this in exchange. What happens of course is that when a yappies wants to exchange something
with another yappies he identifies himself as the owner of a particular piece of money on the island
and then he transfers his ownership of the money to the party he's doing business with
and the party he's doing business with accepts the new ownership of the money and then it's his
and the money doesn't move oh it is only the ownership that moves and apparently the yappies
are perfectly happy with this obviously the money is not a commodity you couldn't use it for building
Banking Blocks, to have a utility as such. It is simply a case of fiat money. And it
seems to work. The yappies like it. They like it better than our money, for instance. They
think ours is subject to inflation. And they don't necessarily like it. But they don't
think theirs is. So they're happy with it. And that's fine.
I merely wanted to indicate that you can have a kind of fiat money even among people who
do not accept modern ideas and have modern governments and so on. Actually, of course,
the use of fiat money has only recently come to the United States. To begin with, in our
history, we thought we would prefer commodity money. Now, that's the safest kind. And we
We began to have pretty much that type of money. We used of course at the outset, back
in the colonial days, before we had the Constitution and got our own government, we used the money
of other countries. We used British pounds and the pound sterling and of course the shillings
and pence and we also used the French franc and the Dutch gilder and the German mark and
and the Spanish pieces of eight. We used all of those in this country, and most of these
were metallic coins that were in use. There was a little bit of paper money in existence,
but most was metallic, not necessarily gold. A lot of it was silver or alloy of one sort
or another, though there was quite a bit of gold in circulation. Money was very scarce,
We made worth a great deal, and the result was that we began with these foreign currencies,
these foreign monies, and then we gradually got into the business of providing our own.
And so we began pretty much in the commodity area and with direct barter.
Then we began to create banks of our own.
We had state banks and we had some private banks set up, and the banks began issuing
credit money.
That is to say, they got a supply of gold and silver on deposit, and then they issued
paper against it, and said that if you came in at the bank at such and such a time, you
could redeem your paper in terms of the gold or silver that they would theoretically at
least have on deposit for you. As long as they did, well, it worked fine. Sometimes
you find a bank that puts out things like this, but then they don't keep it on deposit,
And you've got an unfortunate situation when the party holding the paper comes in and wants
to convert it to gold or silver, then the bank doesn't have the gold or silver, and
you have a run on the bank.
And of course we've had a few of those in the history of this country.
But anyway, that's the way we began.
Then we got our Constitution.
It was ratified, as you know, in 1788 and 1789.
It was completely ratified by all of the then 13 states. And then we began and one of the
first things that happened was we got a national bank, the first bank of the United States.
It was founded by Alexander Hamilton. And we got into the area then of having the federal
government get into the banking business and into the creation of money. Now a very interesting
The thing happened here, we decided, you see, that having a commodity base was important.
So we wrote into the Constitution the idea that gold and silver, both of them, would
be what we call legal tender.
This means that the government approved and officially stated that gold and silver are
the base of our money supply.
Now that's never been changed.
Technically, gold and silver are really the only constitutionally approved money we have
in the country.
But of course, as long as a bank is merely issuing credit certificates against gold or
silver, they haven't created money, they have merely created credit and are dealing
with credit certificates and the base is still on the gold or silver in existence wherever
it may be.
Now, to understand what happened in this country, it would be important to understand one particular
law. It's called Gresham's Law. Actually, what it is, it's a law that helps to explain
a particular market phenomenon which I've already indicated and that is that we tend
to value most those things. We tend to value least those things that are in plentiful supply.
The way this law came into existence was this. It's a real interesting story.
It goes back to the time of Henry VIII in England. Henry VIII had an advisor whose name was Sir Thomas Gresham.
And what was going on at this time, as you may recall, was a war between King Henry
and the papal authorities in Rome.
Henry had broken with the Catholic Church over the question of succession.
He wanted to get a divorce.
He was married to Catherine and she had presented him with a girl.
He wanted a son and then it was discovered that Catherine could not have another child
and Henry had found a girl that he thought would make an excellent substitute for Catherine,
and so he wanted a divorce. The Pope refused to grant a special dispensation to Henry,
contending that Henry, even though King, was bound by the same rules that bound every other member
of Christendom, and the result was that Henry broke with the Church, a civil war ensued,
and I'm sure you are familiar with the outcome of that. In any case, in the process of waging a war,
A war is not an economic activity, it is dysfunctional, and Henry used up all the money that he had,
and he borrowed wherever he could.
Then he began confiscating church lands and church property, and he spent the proceeds
from that, and he still was going broke and not getting enough money to wage the war.
So he finally called in his advisors and he said he would need a sizable amount of money
and he would prefer some silver shillings, and would his advisors please get busy and
and give him a nice supply of silver shillings. I don't recall the precise amount, now it
isn't too important, but it was a substantial sum. Let me just hazard about £50,000 in
new silver coins, and let's have it right away if you don't mind. And of course the
advisor said, well, Your Majesty, this is a great idea, and we'd love to supply you
with the silver coins, but unfortunately you can't make silver coins if you don't have
the silver. There is a problem here and we don't have the silver so we can't get you
the silver coins. And Henry said, I can't take that kind of an answer. You're going
to have to get them. And they said, well, Your Majesty, to get the silver you have to
mine and you have to do all these various things and it would take quite a while to
get the kind of, the amount of silver that you're talking about. But if you'll give
us the time, we can get it. And he said, no, I've got to have it now. Well, they said,
it can't be done.
Well, Henry came back with the idea, well, if we can't make these coins out of silver,
let's make them out of some other kind of metal. We've got some other kind of metal, haven't we?
And they said, well, sure, you know, if it's just metal, we can get the metal.
Well, what kind of metal would you suggest? He says, let's have a scrap metal drive
and get everybody to donate whatever kind of metal they have, and this will be good for the realm.
and of course, here it says on its face, one silver shilling and here it says on its face
Here's the picture of Henry, the King of England, and you look at it, and obviously
it is not a silver shilling. It is something that looks like it's made out of something
a little less valuable than brass. It's just, and of course if you drop it, it goes thud,
it doesn't clink. It's just an unhappy-looking piece of metal.
So as these things began coming off the assembly line, Sir Thomas Gresham was there, and he
took a look at them and said, Your Majesty, you're not going to get away with this. The
The silliest, most ignorant oath that you have in the country will spot these.
These are not silver shillings, and he'll know it, and he won't accept it.
You're going to have a rebellion on your hands.
People aren't going to buy this.
And Henry was a little disappointed himself.
They looked worse than even he thought they would.
And he said, well, we've got to pass them somehow.
He says, don't we have some silver?
And he said, oh, yeah, we've got some.
And he says, how about melting that down?
We'll give all these coins a silver bath.
Well, that's what they did.
Incidentally, if you think that these sandwich quarters that we have now have been invented
currently, forget it.
This was done back in the days of Henry VIII.
That's where they began using a sandwich coin, you see.
Only in those days the bread was even thinner than it is now.
Anyway, they took these coins in England and they dipped them in a silver wash.
And when they first came out, they didn't look bad.
They looked like silver.
Of course, if you dropped one it still went thud.
But by this appearance they got a fairly respectable looking coin and Henry took these that were
made of old tea kettles and he passed them off as though they were silver. Now obviously
these are counterfeit coins but they are made by the government so that removes the onus
of counterfeit and curiously everybody accepted the coins. But Sir Thomas was sort of a prophet
of Bloom. He stood looking around at this terribly disapproving and he predicted the
worst. He said, the people one day will discover that you have defrauded them here and they'll
rise up and demand the real coins and you won't have them and you're going to be in
trouble. And Henry said, in effect, we'll cross that bridge when we come to it.
So the time passed and no rebellion appeared. And Sir Thomas began to be puzzled. And he
He went out into the market and ran a survey to find out what the people were doing with
the coins that were obviously spurious and which everybody now knew were spurious. And
he discovered an interesting thing. Exactly the opposite of his prediction was coming
true. People weren't rejecting these coins. They were avidly accepting them and using
them. And then he made another discovery. The real
All silver coins that were still in the market had virtually disappeared.
And he conducted a study to find out where they were and he discovered that people were
hoarding them.
They had taken the good silver, the good coins, which they could easily detect, and they put
them aside.
And they were dealing only with the bad coins and the worse they were, the quicker they
exchanged hands.
And that's Gresham's Law.
Gresham's law contends that when the king declares that two unlike substances are equal
in purchasing power, the bad metal driveth out the good.
And that's exactly what happened during the reign of Henry VIII.
Now coming back to the American experience, in a sense we had a similar experience.
You see, we set up a bi-metal system with gold and silver to be the base of our monetary
system.
And then, because they were different metals, Congress felt, and of course this is in the
Constitution, it says that the Congress has the power to mint coins and to regulate the
value of them.
And so, acting on this constitutional prerogative, Congress proceeded to pass a law declaring
and a ratio of purchasing power between gold and silver.
There was a very, very famous law that came out.
It's the 16 to 1 law.
It declared that 16 units of silver of such and such a kind and fineness would be the
equivalent in value to one unit of gold of such and such a weight and fineness.
Now that was the congressional decision.
What happened in the market?
Well, the people dealing with these coins apparently had an independent judgment on
it, and they began to hoard the gold coins and spend the silver. So the gold disappeared
and people weren't dealing with the gold. The result was there just didn't seem to
be enough coinage in circulation, and the government was very much disturbed about this
because people were complaining about a shortage of money, but they weren't using all the
money that was out because they were hoarding the gold. So the government became distressed
with this and they said if people feel this way about the gold, we'll do this. We'll
collect gold and we'll deposit it in the treasury and we'll issue paper certificates
against the gold. These will be credit certificates and then the people will have the paper gold
and the silver in coins and they'll trade with that. So what do you think happened?
This was done and the people began to hoard the silver and use the paper.
So again there was a shortage and so Congress acted again and well what they did, they began
changing the ratio.
They started at 16 to 1, then they went to I think 18 or 19, then 20, 21 to 1.
They kept trying to adjust that to come up with whatever the market said.
Well they never got it.
It didn't make any difference what the Congress said, the market said something else.
So they constantly had this apparent shortage and so then the next thing they did, they
collected some silver and put it in the treasury and they issued some silver certificates.
You know for a while we even did it with grain. I don't know if you've ever heard of that
but we used to have credit certificates in circulation that were redeemable in terms
of so many units of wheat. We had wheat certificates in circulation in the country. But the interesting
The interesting thing in the market was that when people had gold and silver certificates to deal with, well you've already guessed, they hoarded the gold certificates and dealt with the silver certificates because people make independent value judgments.
Judgments. Every human being does and there's always a tendency for you to deal to yourself
the best. So if you get coins or any kind of money that in your judgment is better than
something else, you hold on to the best for yourself and you deal with the worst as long
as anybody will accept it. And of course people will accept it as long as the government says
says you've got to accept it because we're declaring that it is official money and so
given a situation with the government intervening in the money area, the tendency will be, as
Sir Thomas Gresham pointed out, the bad money will drive out the good and the worse it is,
the more it will be used and if it's positively worthless, well, it'll be spent very rapidly.
I don't know if you've ever had this experience but have you ever gotten a questionable coin
Hand it to you in change.
You know what most people do?
That's the first coin they spend.
They want to get it out of their possession as fast as they can.
Of course, if they were probably being perfectly honest about it, they'd turn it in and take the loss.
But they don't want to take the loss, so they spend that one as fast as they can.
The spurious coins, counterfeit money, circulates with a rapidity you wouldn't believe.
And the better the money is, the less it tends to circulate.
We hold back on that which is the best according to our independent judgment and our independent
judgment as people will always differ from what the politicians say. So this is the kind of dichotomy
that you get in a situation where the government intervenes. Now we went through this kind of
process for quite a while on up into the 20s and you know in the 20s we got about as good a balance
in considering that government was intervening as we've ever had in the history of the country.
At that time, we had gold and silver in general circulation, and we had gold certificates
and silver certificates in general circulation, and you could exchange any item, paper or
metal, for any other item, paper or metal, anywhere in the country without discounting.
And that was a phenomenon. It was virtually unheard of. But we did attain that at that time.
Other factors of course appeared and presently the whole thing broke down and we were in
what we call the Great Depression. But just prior to that time we had an extremely satisfactory
money system, although of course the constant complaint was heard and always will be heard,
There just isn't enough money.
Nobody ever has enough money.
And let me get that point across.
It's an extremely important one.
Let me cue you in on a little secret.
If you ever had enough money, money would become worthless.
Just imagine a situation in this country where every human being in the country had all the
money that he wanted.
Now what would the result be?
And the result would be he wouldn't accept any more because he has all the money he wants.
Well if he wouldn't accept any, what good would your money be?
He wouldn't take any of your money for any reason because he has all the money that he
wants.
And if everybody had all the money he wanted, then nobody would accept anybody else's money
and the money would be worthless.
I know many people have been intrigued by the idea that if the government can issue
do money, and it obviously can and does, then why doesn't simply solve the problem of
poverty by giving everybody a million dollars and have done with it? The printing presses
will easily handle it. In fact, we could do it in a week. We could get a million dollars
in currency into the hands of every human being in the country, including babes in arms.
But you know what would happen if we did it? That money, so-called, wouldn't be worth
With waste paper, or it wouldn't be worth more than waste paper, it would simply not
purchase anything because the purchasing power of the money would have been debased by this
reckless increase in the amount of money in existence.
So that's of course why it isn't done.
In order for money to be valuable it has to be scarce.
And another curiosity about money is that it will never and cannot ever be equally distributed.
If you did it arbitrarily by the use of great force, if you equally distributed all the
money in the country or in the world, within a matter of a few minutes it would be disequally
distributed again, or it would again be worthless.
So your use of money is dependent upon general acceptance.
And people won't accept it if they don't want it.
So they only want it because it's relatively scarce.
And so there has to be less money around than you and I would probably like to experience
for ourselves.
And this means it will always be unequally distributed and that's the nature of the world
we live in.
It's too bad.
I am very unhappy to have to tell you that that's the way it is. It would be so nice
to be a Pollyanna and to tell you that everything is going to come up roses and all we need
is to just print more money and everybody gets a lot more of it and it would be one
of the greatest disasters that could overtake us. So I certainly can't recommend it. But
anyway, that is one of the natures of money. Now while we're thinking in terms of Gresham's
Law, we should also think in terms of Watt's law, which is the necessary corollary. You
see, Gresham's law is predicated upon the idea of the government intervening in the
field of money. Remember what he said, that when the king declares that two unlike metals
are of equal value, then the good metal being used as coin will be driven out by the bad
Now what does Watts say? Dr. Watts points out that if we didn't have the government
involved in the money market, the reverse condition would appear. In other words, given
a free market in money, the good money will drive out the bad. Why? Because given a free
If we market in money, none of us would be required by law to accept any particular kind
of money.
And that means that if I were to go to work for you and you said, I'm going to pay you
in terms of Smithsonian relics, I would say I don't want that payment.
I would like to be paid in terms of silver or gold, and I won't work for you until
I get a kind of money that is satisfactory to me.
All of us would like to make our own money, you know, print it and buy things with it.
That would be a delight.
I'd love to do that myself, but you wouldn't accept it.
So it would be useless.
The only kind of money that would be any good given a free market would be the kind of money
that has intrinsic characteristics that make it valuable.
And so I couldn't produce money.
I would have to go to somebody that was in the business of doing this and this of course
can be done and often has been done in the marketplace.
So keep in mind that if you have a free market in money, the better money will tend to drive
out the bad and if you have government intervention in the money market, the bad money tends to
drive out the good and of course that's been the history in this country.
Again, this is an extremely important area and we'll have to talk more about it later,
but keep in mind some of the things that I've said and thanks very much.