Friday, July 5, 2013

Currency

Up until a few weeks  months ago I had a few misconceptions about the state of the financial world that is the United States. Some of those misconceptions have made me blind to very serious problems that have been growing for as long as I have been around and before. It has really come to bear this past decade but mostly since the financial crisis of 2007. Namely, the fact that the US Dollar is effectively worthless.

The purpose of money is to give a medium of exchange for people. This makes transactions more simple as people don't always need or want things at the same time nor should they be expected to. For example, a dairy farmer needs milking equipment to help milk his cows more effectively. The dairy farmer cannot pay the manufacturer of milking equipment in milk as he would likely be all set with milk from previous transactions (if he accepted milk in payment) but would prefer to have clothing for his children or theater tickets to take his wife out with. By having a common payment method, the milk farmer can pay in cash which the manufacturer of his dairy equipment can then exchange for the things he needs or wants. Cash makes this possible.

There are some elements that make a monetary system effective. The most important of these is the common acceptance of a currency. Since the US Dollar is the standard currency by law in the United States, it is "encouraged" for everyone to accept it. This has been the number one issue regarding the widespread acceptance of alternative currencies in the United States. People use money that people accept. Everyone accepts the money that people use. It is a cycle that has been perpetuated by the fact that our money has not been overprinted. This leads to the second thing a monetary system needs, finititude. For something to work as a currency, it cannot exist in excess. Imagine a world where people could pay for things in dirt. Everyone would go outside and dig up their yards. Eventually it would require dump trucks of dirt to pay for a roll of toilet paper as everyone would have access to a seemingly infinite supply of wealth and the only way to limit this wealth is by making the medium of transaction worth very little for a volume of it.

The solution is, of course, to have value associated with things that are rare in terms of volume and mass and cannot be brought into the monetary population easily. Colored stones, gems, and of course, precious metals. Gold has often been the medium of exchange in the world as it takes a good deal of effort to extract from the earth (which limits its rate of quantity increasing). Everything else about gold (its chemical properties and beauty) are secondary to this first property of finititude. A person walking up to your business with a sack of gold, you can reasonably expect that a massive quantity of gold didn't suddenly flood the market making the small amount you are about to accept is worthless. This is the reason many people invest in gold and silver today as well.

Gold isn't worth anything on its own. Think about the things you will need in the next week to survive. Oxygen, water, food, shelter. These are things that "cost money" and what we typically mean is that they do not simply exist within yourself, nor in such a way that they come to you without you "paying" for that. This payment can be that you have to forage the woods for these things (obviously we are fortunate to have oxygen in a relatively 'free' supply [of course I say relatively as an engineer because nothing last forever, damn you heat death of the universe]). We pay others to break down the process of creating all of the things we need and want. Gold isn't edible, it is simply a rare material in which things can be 'traded' (see: bought) for. There was a story I recall about the Spanish returning from the new world with large stores of gold expecting to be rich and be able to buy all they wanted. They in turn devalued gold and made things cost more as the quantity of gold increased but the production of things people actually used did not change. This was due to the fact that just because the quantity of gold went from x to (x+y) this didn't change that the entire value of the market was x = z where z is the products to be sold. The value of gold decreased by y due to the same quantity of z being spread out over more material.

The US dollar is worthless in the same regard as gold except for the detail that there isn't a single entity controlling the creation of gold like their is with the US dollar. Ultimately, money is what it is and it isn't the important part. The things that are important are the things we buy. Even if something did happen to our financial system like in the 1930s, there will always be a need for food, clean water, shelter, and clothing. As long as we maintain this belief, our currency system is an arbitrary means to and end.