Money: What Exactly is It?


Money; it appears to be a rather important thing these days.  Everybody wants it, or perhaps they need it.  Those who have it, apparently are never satisfied and are always looking for more (there’s that word again) of it. If you read the news you realize most people are actually willing to kill for it! This “money” must be a very important thing. So what exactly is money?

The nerd in me goes straight to the dictionary and looks up the word “money.”  According to the Oxford English Dictionary (OED) money is “a current medium of exchange in the form of coins and banknotes.”

Hmmm… coins and banknotes.  I like being thorough so let’s look those up too.

Coin (OED): “A disc or piece of metal with an official stamp that is used as money.”

Banknote (OED): “A piece of paper money (image of monopoly bill flashes into mind) consisting of a central bank’s promissory note to pay a stated sum to the bearer on demand.”

Yes! I was laughing after “a piece of paper.” The laughter went hysterical after “bank’s promissory note to pay,” and then went dead silent when I started wondering: promise to pay what? The stated sum. With what? If I go to the “central bank” and “demand” the stated sum,” what are they going to give me? (Tan tan taaaaan… insert suspenseful sounds here.)

Well, up until 1971 the Federal Reserve Bank of the United States of America (a. k. a. “the Central Bank”), “promised to pay” your money’s worth in silver or gold.

Actual silver certificate

This is what’s known as representative money.  It means the “piece of paper” represents a specific something; in this case a certain amount of silver. In most cases, it was gold. 

Hmmm…. If the paper represented the gold; where was all this gold? (Cue more suspenseful sounds.)

Yes people! At some point in history there was a big vault somewhere full of gold and silver and you could go and demand your “paper” be traded for loot. (Woo Hoo!) That big vault is called the “treasury.” (Sound of things clicking inside your head. Suddenly you remember that movie “National Treasure.” Oh my God! It’s all true!!!! Not.)

From 1944 to 1971 the global economy adhered to the Bretton Woods system in which the U. S. Treasury promised to pay or exchange U. S.Federal notes for gold at a rate of $35 us dollars for 1 troy ounce of gold (1 troy ounce = 31.1030768g). Practically the whole world was basing the value of their money on the treasure loot of the US.  Interesting… That vault must be huge!!!!

 Yeah right! By 1970 the vault held approximately .5% of the gold emitted in notes. In other words, the certificates “certified” absolutely nothing.  It was all a bunch of BS! And the European countries knew it so they started “demanding” the gold exchange.

In May 1971,West Germany was the first nation to officially leave from the Bretton Woods system. In July of that same year Switzerland retired 50 million in gold and France retired 191 million. (Hehehe… They “cashed in” while they were ahead.)

In August 5, 1971 Switzerland retired the Swiss franc from the system and 10 days later… (tan tan taaaaaaan) President Nixon cancels the “convertibility of US notes into gold,” turning the Federal Reserve Note, and consequently most of the international currency of the time, into “fiat money.” (Of course, the treasury was almost empty!!!!) This is known as the “Nixon Shock.” 

Current "fiat money"

I’m sure some of you must be wondering what the f*%k is “fiat money.” (I did.)

Fiat Money (OED): (from latin fiat meaning “let it me done”). “Inconvertible paper money made legal tender by a government decree.”

Hmmmm… “Paper money” ( I keep seeing monopoly bills in my head!), legal tender…

Legal tender (OED): “coins or banknotes that must be accepted if offered in payment of a debt.”

 (Cue image of firing neurons)

So, basically the “pieces of paper” or “monies” were no longer backed up by a precious shiny metal sitting in a vault somewhere. Now the money had value because the government said so. (Cue roaring crowd sounds). Of course, since there was never enough gold in the vault to back it up in the first place, the notes were always worthless and only valuable because “they said so.” (Crowd turns to adulation.)

In sum, modern money is only valuable because the government tells me it is so and I must accept the paper as payment even if I don’t like it. Interesting… (Insert scheming emoticon here.) If I had my own little world, (let’s call it Marynopolis), I could take all the monopoly money I have and “decree” that it is “legal tender,” decide how much it is worth, and make myself an instant millionaire! Double Woo hoo!

Actual Marynopolis Money

 

If only… the cashier at Walmart would accept it.

So, if money is only paper, why is it so important? There has to be more to it than that. The dictionary no longer seems sufficient to answer my questions. I now turn to the “economists.” (Oh! God! What have I done?). The first Google search turns up 528 million results! You see? Money is VERY important.

I read about inherent value and everything I just wrote about.  I read about international exchange rates, inflation, supply and demand, etc. The letters have turned to illegible black scribbles and I have a headache. Apparently everybody thought the same thing I did and all the countries made their own versions of monopoly money and not all the 1’s are worth 1. It depends on what version of monopoly it comes from. It seems Marynopolis wasn’t such a good idea after all.

I decide to set aside the academia of the issue and concentrate on the practical aspect of it. So I ask myself: Why do I need money? I need money for food, the house, the car, the electricity, etc… I notice a pattern: The more (again with the word) I have, the more money I need.

Hmmmm…

It seems the reason the “piece of paper” has value is because it can be transformed into other things that actually do have value, like a house or some food, etc. The choices are almost endless. Money is magical! No wonder everybody wants it.

However, the levels of magic power in money change on a daily basis, with geographical location and current historical events. In fact, it changes so much that people dedicate their entire lives  speculating on how magical money is now and will be in the future.  They even go to college to study it.  Yet, nobody is able to control it. It’s like it has a life if its own! (“Feed me Seymore! Feed me!” –voice of disgruntled dollar bill)

Why? Why does the value change? Why don’t they just cut up some more paper? The experts start to go on about inflation… The truth is that it IS only paper and the real valuables obtainable through money are not suddenly materialized because the government says so. In other words, should the government suddenly produce an extra billion dollars and spread it about, it doesn’t mean there are an extra billion plates of food to eat.

So what is money? IT’S JUST PAPER! If I want more of it perhaps I should go plant a tree. Either I chop it up and make more paper or I go and sell the apples. Funny! It seems money DOES grow on trees!

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