Got Money?
tzo

(Editor's Note: In 1792 the U. S. Coinage Act was passed by Congress. It invoked the death penalty for anyone debasing money and provided for a U.S. Mint where silver dollars were coined along with gold coins beginning in 1794. The text of Coinage Act of 1792 states: “The Dollar or Unit shall be of the value of a Spanish milled dollar as the same is now current,” that is, running in the market, “to wit, three hundred and seventy-one and one-quarter grains of silver.” To repeat, A “dollar” is a silver coin containing three hundred and seventy-one and one-quarter grains of silver — and it cannot be changed by constitutional amendment, definitionally, any more than the term “year” or "gallon" can.)

So you're at the store to pick up a gallon of milk. You stand in front of the dairy display case, eyes scanning past the quarts and half-gallons and over to the largest-denomination milk containers. You think to yourself "Hmmm, I have a pretty good idea what a gallon is, but what exactly is a gallon?"

Well, you recall that the U.S. liquid gallon is a unit of volume and is defined as 231 cubic inches. But this definition introduces a new term to be defined:

What's an inch?

Ah yes, the inch is a unit of length and is defined to be exactly 25.4 millimeters.

And a millimeter is...?

A millimeter is 1/1,000 of a meter, of course.

And what's a meter?

The meter is the length of the path traveled by light in vacuum during a time interval of 1/299,792,458 of a second.

And a second?

A second is a unit of time that is currently defined as the duration of 9,192,631,770 periods of the radiation corresponding to the transition between the two hyperfine levels of the ground state of the caesium-133 atom.

And so you come to understand and appreciate, right there in front of the refrigerated display, that the unit of volume called gallon is a precisely defined measure. Satisfied, you purchase the gallon of milk and receive a dollar bill in change. And you think to yourself "Hmmm, I have a pretty good idea what a dollar is, but what exactly is a dollar?"

And so upon returning home, you consult your Black's Law Dictionary, (6th Edition), that revered, definitive legal resource, which informs you thusly:

Dollar: The money unit of the United States of the value of 100 cents, or any combination of coins totaling 100 cents.

"But what's a cent?" you ask yourself aloud, paging back through the C's. And you find:

Cent: A coin of the United States, the least in value of those now minted. It is the hundredth part of a dollar.

Ah-hah. The trail has apparently ended but you don't feel especially enlightened. What gives? You reread the definitions until the words "money unit" in the definition of the dollar inspire you to return to the store.

"I would like to buy one gallon," you state matter-of-factly to the store clerk, "how much is one gallon?"

"A gallon of what?" is the reply.

"You, know, a gallon. 231 cubic inches of liquid. How much?"

The clerk decides to play it safe in case you turn out to be a dangerous person, and politely gives you the straight answer. "Well, the price depends on which liquid you would like a gallon of, sir or madam. A gallon of milk, a gallon of wine, and a gallon of water all have different prices."

"I see. Well, then, how much is a gallon of milk?"

"Three dollars."

"Three dollars of what?"

"Excuse me?"

"You said the price was three dollars, and so I was asking you to be more specific. Three dollars of what?"

"I'm afraid I don't follow. Three dollars are three dollars."

"Look...you didn't go for the 'liquid is a liquid' idea, and now you want me to make sense out of 'dollars are dollars'?

You continue: "It's really quite simple. A gallon is a unit of measure, specifically of volume. When I asked you for a gallon, you made me specify what type of liquid that gallon should consist. Well, a dollar is a unit of measure, specifically of money. Now I am asking you to specify what type of money that dollar should consist. That's only fair, isn't it?"

At which point the manager is summoned, and you are asked to please leave the store. Sheesh.

On your way home, you run into a group of your friends, and you decide to strike up a conversation with them on what they think is a dollar, and you receive various similar responses based on the same vague premises. A dollar measures value, but value is subjective, so the measure is itself subjective (try convincing the IRS of that)... A dollar is money, and money is just some arbitrary substance that is based on the faith placed in that selected monetary unit... Money is an abstraction...

And so on.

You remain unsatisfied with all the answers you have thus far encountered, and so you decide that more formal research is required. Luckily, the library is located on your way home, so you stop in to see what you can find.

And lo and behold! The Grail! You find that there actually does exist an official definition of the dollar! You discover that with the Coinage Act of 1792, the dollar was formally defined for the first time as 371.25 grains of pure silver.

What's a grain?

A grain is a unit of mass equal to 64.79891 milligrams.

What's a milligram?

There are one million milligrams in a kilogram, and a kilogram is defined as being equal to the mass of the International Prototype Kilogram (IPK).

And silver?

Silver is a chemical element with the symbol Ag and atomic number 47.

Therefore the dollar, by it's original legal definition, is a unit of mass describing a fixed quantity of pure silver. Those old-timers didn't seem to think a dollar was some vague idea subject to interpretation. It had every bit the precise definition as does, say, a gallon.

Further research determines that the last legal definition of the dollar exists in an amendment to the Par Value Modification Act from 1973, which defines the dollar as 9/380 of a fine troy ounce of gold.

What is a "fine troy ounce" of gold?

A fine troy ounce is a troy ounce of 99.5% pure gold. One troy ounce is 480 grains.

And what is gold?

Gold is a chemical element with the symbol Au and atomic number 79.

Now that's more like it! The dollar, as last legally defined, is a unit of mass describing a fixed quantity of gold. A dollar is 9/380 of a fine troy ounce of gold! And look, all the terms in the definition are precisely defined! Hallelujah!

So you head back to the store to purchase another gallon of milk. The register clerk (not the same one as before, or course) asks you for three dollars. Knowing full well from your previous mathematics education that if two terms are equivalent, then they are interchangeable, you hand her a one-ounce gold coin for the 27/380 ounce of gold you owe her (taking note as an aside that in the current gold market, people are exchanging sets of Federal Reserve Notes with numbers that total 65 in exchange for 27/380 of an ounce of gold) and you await your 353/380 ounces of gold in change.

The manager is called, and he informs you that he can only accept legal tender, and that the gold coin does not enjoy that particular status and so is an unacceptable form of payment. You argue that all the store prices are clearly quoted in dollars, and that a dollar by definition is a fixed amount of gold, and so you are only making payment in the denomination asked for, but all this is to no avail. The manager now realizes that you are the very same annoying customer who he had to previously escort from the premises, and now the procedure is repeated, this time with the polite but firm stipulation that you not enter the store again. Ever. Have a nice day!

Down but not defeated, you sit at your dining room table later that evening contemplating a scrap of greenish paper that everyone refers to as a dollar. Supposedly this cottony pulp is money. Black's Law Dictionary says that the term 'money' refers to coins and paper currency used as circulating medium of exchange, and does not embrace notes, bonds, evidences of debt, or other personal or real estate. You notice that the words at the top of the scrap of paper you are contemplating read FEDERAL RESERVE NOTE. Since it is a note, it cannot be money.

And what does Black's have to say about Federal Reserve Notes (FRNs)? It says they are a form of currency issued by Federal Reserve Banks in the likeness of noninterest bearing promissory note payable to bearer on demand. The federal reserve note (e.g. one, five, ten, etc. dollar bill) is the most widely used paper currency. Such have replaced silver and gold certificates which were backed by silver and gold. Such reserve notes are direct obligations of the Unites States.

So they are only a likeness of a noninterest bearing promissory note payable to bearer on demand. Sure enough, in order to be a real promissory note, it has to be redeemable for something to someone, and the FRN certainly doesn't promise anything to anyone in that it has no redemption clause. So although it says it is a note, perhaps it isn't.

But then you recall from your library research that current law as stated in the United States Code, Title 12, Chapter 3, Subchapter XII, Section 411 declares that federal reserve notes are redeemable in lawful money at any federal reserve bank. So perhaps they are indeed promissory notes. But it turns out that in the real world federal reserve notes are only redeemable in more federal reserve notes, contrary to the printed law. If they are in fact "redeemable" only in more federal reserve notes, then they are by definition non-redeemable.

Imagine having saved hundreds of cereal box tops in the hopes of redeeming them for a microwave oven or some other product the cereal company promises. If that company later declares that they would only "redeem" your collected box tops with an equal amount of the same type of box tops, how redeemable would you consider those little pieces of cardboard?

So FRNs cannot be notes after all, because they are not redeemable in anything other than more FRNs. So perhaps they are money after all?

Well, if they are said to be redeemable in lawful money, this implies that they are not lawful money themselves. Are they then unlawful money? Is there such a thing? Or are FRNs simply not money at all?

Referring back to the Black's definition of money, we see that FRNs are stated to be direct obligations of the United States. Since an obligation is a debt, and money cannot embrace evidences of debt, we can state quite definitively that FRNs are not money. They in fact represent United States debt. They can be referred to as currency, or legal tender, but not money.

You remember that the dollar was originally defined as a weight of gold. Are gold coins money according to Black's? They certainly do seem to qualify by the given definition.

So let's sort all this out: Gold is money, and a dollar is, by definition, gold, and the FRN claims to be a dollar, and thus also money, but we saw that FRNs cannot be money. Every FRN also claims to be a note, but it isn't since it is non-redeemable. How can there be so many conflicting statements and ideas swirling around what should be a simple, straightforward concept? Why all the contradiction and confusion?

Well, as your day of philosophical thinking winds on down, you decide to pursue one final logical thread: People began exchanging goods and services long ago. If a person gave up a good or service, he certainly expected something in return. Who would want to give up something for nothing...one would justifiably feel cheated in such a transaction.

Money developed as a way to get around a direct barter economy, and money simply was a commodity that was so universally accepted that one could be sure that if he accepted it in exchange for goods and services, then he could later exchange it for other goods and services of equal value. The money commodity had to be...besides universally desired...durable (not easily destroyed and stores value over long periods of time), fungible (does not lose its value when divided into small pieces), portable (high value in relation to weight), and relatively scarce. If the money commodity was so composed, then one could be sure that goods and services exchanged for money would eventually bring in goods and services of equal value when the money was later exchanged with another person.

Interesting. You pull Murray Rothbard's What Has Government Done to Our Money? out of your bookcase and read:

"...the cumulative development of a medium of exchange on the free market...is the only way money can become established. Money cannot originate in any other way, neither by everyone suddenly deciding to create money out of useless material, nor by government calling bits of paper "money." For embedded in the demand for money is knowledge of the money-prices of the immediate past; in contrast to directly-used consumers' or producers' goods, money must have pre-existing prices on which to ground a demand. But the only way this can happen is by beginning with a useful commodity under barter, and then adding demand for a medium for exchange to the previous demand for direct use... Thus, government is powerless to create money for the economy; it can only be developed by the processes of the free market..."

"Money is not an abstract unit of account, divorceable from a concrete good; it is not a useless token only good for exchanging; it is not a "claim on society"; it is not a guarantee of a fixed price level. It is simply a commodity. It differs from other commodities in being demanded mainly as a medium of exchange. But aside from this, it is a commodity...and, like all commodities, it has an existing stock, it faces demands by people to buy and hold it, etc. Like all commodities, its "price"...in terms of other goods...is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. (People "buy" money by selling their goods and services for it, just as they "sell" money when they buy goods and services.)"

Salt, tobacco, cattle, shells, and rocks have all served as money. But the free markets of the planet Earth have selected...over a span of thousands of years...the precious metals gold and silver as the most widely accepted and enduring monetary commodity.

When our nation was young, the government didn't invent the dollar and then declare it to be the national monetary unit. The dollar was the coin that was circulating in the market at the time, and so the government was simply defining the exact amount of silver that should always be present in the coin. Beyond that, their only other role in the matter was to create dollar coins of uniform silver content. This was a service for the people so they would not have to weigh and chemically test coins whenever a transaction took place.

But over time, people began to associate the word dollar with the coin itself, or with the paper surrogate that served as a warehouse receipt for actual silver or gold coin on deposit at the United States Treasury. When the word 'dollar' became synonymous with any base metal token or scrap of paper that had government-endorsed words and pictures on it, when the people forgot that a dollar was a fixed amount of silver or gold in the same way that a gallon is a fixed volume of liquid, then the point was reached where the government could debase and eventually take away the money from the people and substitute it with fiat (imposed by decree) coin and currency.

And the people would have no idea that anything at all had happened. Amazing.

And so here we find ourselves, embarrassingly, without any money. But if not money, then just what do we have? Unfortunately, the answer to that question is debt. Our system "monetizes" its debt into pieces of paper, which include those fancy little green exchange tickets that we pass around. Every FRN in circulation is in reality a tiny little portion of the mounting $9 trillion national debt floating from wallet to wallet. We give our goods and services to others in exchange for scraps of paper that represent debt owed by our government. We are thus cheated in that we give value but do not receive value in return. We accept an irredeemable IOU instead of actual payment. Why do we tolerate such a state of affairs?

Perhaps only because we know that we can cheat the next guy in line when we give him those same scraps of paper for the goods or services he gives to us in exchange. Nice.

You further realize that debts therefore are not paid when FRNs exchange hands...they are discharged. There is a difference. When you give someone an FRN you are discharging a small piece of the national debt that you were holding to the person who receives it. Nothing has been paid. No debt has been extinguished. It has been discharged...transferred from you to someone else.

If each and every American sent in all his FRNs to the Federal Reserve in an attempt to pay off the national debt, the entire supply of FRNs in the United States would disappear and there would still be debt remaining. Of course at that point there would be no "money" left to circulate and so the entire economy would immediately collapse.

But so what? Congratulations, Einstein, you discovered that the United States has no monetary system, just a debt system. As long as it works, what's the difference? Quit worrying already.

Well alright, you think to yourself, let me count the ways it makes a difference.

It makes a difference in that the current debt system cannot last indefinitely. Any economic system dependent upon perpetually-increasing debt is unsustainable. When people try this at home, the end of the line is when they can no longer acquire more credit, and things usually do not end well. Why should the process end differently if we consider the case of nations behaving in such an irresponsible manner instead of individuals?

It makes a difference in that the current debt system deceptively substitutes fiat currency for real money. This is not the first time that government has imposed fiat currency on its citizens, and if history is any guide, it won't be the last. History also teaches us that each and every time that a government has debased its currency and followed that inevitable slippery slope on down to to pure fiat currency, the end result has always, invariably been exactly, precisely the same...the fiat currency becomes worthless.

It makes a difference in that the current debt system, based on credit expansion, has a "money supply" based on that debt that expands faster than the economy grows. This is called inflation. FRNs put aside as "savings" devalue over time due to inflation, and so people are unable to use savings to reliably provide for their futures. Work done thirty years ago that was put aside as savings has lost over 70% of its value due to this hidden tax. People are not free to provide for themselves with savings accrued from their own labor.

It makes a difference in that the current debt system is based directly on the fifth plank of the Communist Manifesto, which demands centralization of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly. Why is our entire Capitalist economy based entirely upon one of the basic tenets of Communism? The State must control the capital, not the people? Guess you must have missed that particular day at school.

It makes a difference in that the current debt system encourages war. Wars are expensive, and without unlimited credit a government must tax its citizenry to raise funds for war. Unless the situation is extremely dire for the nation, the people usually are not supportive of such funding. When funds can be raised by government simply asking for more credit, then entering into wars that are less than direct self-defense becomes much easier. Our country currently is involved in a war that has surpassed the $2 trillion mark. Were taxes increased to fund this war? Where did the money come from? Just add it to the tab, please.

It makes a difference in that the current debt system is morally repugnant. When a person realizes that he has been deceived in order to participate in an unethical system that is bound to fail...a system wherein he believes he has money but actually has none....a system that demands that he be cheated and only by cheating others can he be recompensed...what is that person to do if he would rather not participate in such a dishonorable system?

And so now you've finally come to the heart of the matter. You have defined and analyzed the problem at length. You have griped and complained. Now, what can you do about it?

Can you single-handedly change the system? No. Can you convince a large number of people to become involved in changing the system? Probably not. Can you write a letter to your representative in Washington so he can get the ball rolling on fixing the system? (insert sarcastic remark here)

You decide that the best course of action is to take care of yourself and don't assume that someone else is going to fix things for you. Now that you understand what money is and what it is not, you see a fairly simple and obvious first step to take.

Get money.

You pour yourself a glass of milk from the refrigerator, turn off the dining room light, and go to bed.

tzo has absolutely no credentials whatsoever in any economic discipline and strongly recommends that no one believe anything he says without doing their own fact checking. Correspondence is welcome at tdzo@juno.com.