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The evolution of money: the rules of money state that for money to have worth, it must be relatively scarce, which explains why today's dollar is so unstable.

If correcting the problem of the nearly free-falling dollar is to be accomplished, there has to be a basic understanding of what money both is, and is not. There also has to be a realization that creating gobs of new money-unbacked by a valuable commodity such as gold--will destroy its value.

Understanding Money

Barter is direct exchange. For indirect exchange, civilizations throughout history have used money. Whatever medium was chosen to transact business was up to the buyer and the seller. As history has shown, cattle, tobacco, shells, even salt have filled the need at different times during mankind's time on Earth. It's clear, however, that whatever had been chosen to act as money bad to be a commodity possessing a tangible value recognized by all.

In order for a commodity to retain value and usefulness as money, it should possess several inherent characteristics. Experience showed that it should be divisible (out went cattle), transportable (out went fragile shells), durable (out went tobacco), and relatively scarce (out went most other commodities including small pieces of paper). After millennia of experimentation, the accumulated wisdom of mankind turned to gold as the best commodity to employ as a medium for exchange. It was divisible (coins, bars, dust), transportable (not large and cumbersome), durable (won't die, rust, or crumble), and relatively scarce (hard to find, hard to extract, etc.). Silver and platinum could also fill this role, but not as well as gold.

America's Founders knew all of this. The government they established wasn't given power to issue fiat (unbacked) money, only the authority to set uniform standards for the size, purity, and weight of coinage. It was also granted power to "coin money," which meant only that it could establish a mint where a fixed size, purity, and weight of coinage could be manufactured. There was to be no national bank and no political meddling in money matters.

During the period when competition in the banking industry prevailed, the government's involvement in money matters stayed relatively honorable. But after some small banks defrauded their customers, a demand arose for government dominance in the banking business. And an opportunity to gain control of the people and seize their wealth through money manipulation by government presented itself to the unscrupulous.

Leaving the Gold Standard

For about 150 years, Americans were blessed with gold as the basis of our money system. Over the years, honorable men simplified the use of gold as a medium of exchange by having the U.S. Treasury Department issue paper certificates fully redeemable for a stated amount of the precious metal. Then, the idea that a monopolistic national bank should issue the nation's money arose. Once accepted, that plan grew into the Federal Reserve, which was given the power to control, and corrupt, the monetary system.

Before and during the transition from Treasury notes to Federal Reserve notes, U.S. currency had earned the reputation "good as gold." And it surely was that good until President Franklin Roosevelt took the nation off the gold standard and even made it illegal for Americans to possess the metal. During the 1970s, Treasury's silver certificates (redeemable in silver) disappeared just as their gold-backed predecessors had become extinct in the 1930s. Consequently, the nation no longer has commodity money (redeemable in gold or silver) but fiat money (redeemable in nothing).

We are left today with completely irredeemable paper money whose value is set by political forces that work diligently to keep the people in the dark about these basic concepts. If this elementary understanding of what money is supposed to be were widely appreciated, the people would demand monetary stability. With sufficient understanding, the Federal Reserve would be abolished, the Fed would no longer be able to create booms and busts by expanding or contracting the money supply, the value of money would be tied to gold, and significant inflation would be impossible.
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Title Annotation:ECONOMY
Author:McManus, John F.
Publication:The New American
Article Type:Cover Story
Geographic Code:1USA
Date:Apr 18, 2005
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