This system of indirect exchange, writes Murray Rothbard (see “What Has the Government Done with Our Money?“) is “at first glance… a clumsy and round-about operation. But it is actually the marvelous instrument that permits civilization to develop.” As long as Joey can find a market for his eggs, he can exchange them for money before the eggs spoil and then exchange the money later at a time of his choosing for any other good he wants. Bob does not need to barter his wrench for food, he merely has to find a market to sell his wrenches for money and wha-lah! specialization and quality are born, and Bob can feed himself. Money hence serves as a medium of exchange, and Rothbard comments its other attributes, like serving as a store of value, are merely corollaries of this.

So over time, people developed different types of money. Colonial Virginia used tobacco, ancient Greeks used cattle, Egyptians used copper, Tibetans used dried yak dung, etc. Europe’s kings for instance, used these wooden royal tally sticks as money for the better part of a millennium and well into the 20th century. It may seem a little silly, but the British Empire and Navy arose by a people using these twigs as money for over 700 years! Tally sticks were highly successful since they had a limited supply and were virtually impossible to counterfeit. It is my bet that future Americans will one day look back and break into outright laughter at today’s use of the Federal Reserve Note (see Part 2) as just plain absurd. A return to Austrian economics’ principles is starting to beckon, more on this later as the series continues.

Now what are the Ron Paul Requirements for good money? What makes money money?

• Durable – money should not wear out easily. For instance, food would make a poor currency as it spoils.
• Easily Divisible – money should be available in denominations large and small enough for different ranges of purchases
• Portable ­– money should be easy to transport. Carrying around iron barbells that equal the worth for a house, for instance, would be quite difficult, or marble blocks.
• Recognizable and Uniform – every unit of money for a given denomination should be the same. If gold jewelry is used as money, how will the parties know exactly how much gold is in the jewelry as opposed to a standard coin? Diamonds would also not work well as the quality levels differ from diamond to diamond.
• Stable Purchasing Power – if the purchasing power fluctuates wildly, people would not want to use it. Cocoa beans or jelly beans might be a fairly uniform commodity by weight, but what if people in the society frequently change their valuation of its purchasing power over time, for whatever reason?
• Scarcity – money must be scarce in the economic sense – if everyone has all of the dollar bills they could ever possibly need, what would be the point? Same thing if one decides to use dirt as a currency, everyone would have as much as they could scoop up.
• Reproducible – money needs to be reproducible so that enough units can be created to satisfy the needs of exchange. Using meterorite remains or some rare earth metal would restrict the ability of the money supply to meet this need.

Can you think of any other requirements for good money? Disagreements?

Coming up next – what are the different types of money? What is the “best” currency and why?

This article was originally written August 3, 2009 here. The below video by Dr. Thomas Woods of the Mises Institute goes into much more detail in his October 2009 lecture “Smashing Myths and Restoring Sound Money.”

Jake Towne is running for U.S. Congress in eastern Pennsylvania’s 15th district in 2010. Prior to returning home, he had been living in Shanghai as an engineer in the semiconductor industry for over 3 years. As part of defending liberty and championing the Constitution, Towne is offering the citizens in his area a novel form of accountable government called “Our Open Office.”

Money is an invention of mankind. Our society refers to the irredeemable scraps of linen and ink as “money,” but in truth the dollar is no such thing. It is merely a currency, a medium of exchange, created by fiat - by government decree and force. The dollar is a phantom I.O.U. note. It is a Ponzi scheme and the central banking system issues new dollar currency whenever it wishes.

Dollars are toxic waste in the literal and fiscal sense. Literally, each dollar bill contains arsenic, cadmium, mercury, thallium, and cyanide and generates dumpster upon dumpster of hazardous waste every day.  Fiscally, the dollar has lost 98.3% of its value as of January 1, 2010 since the creation of the central bank known as the Federal Reserve in 1913. (Note 1) Many Americans are unaware that the electrons and scraps of linen we trade around as currency are mere shadows of sound money.

To see the shadows in our money, we have only to look at it. Look at this old quarter. The one I have is a little worn but it still has a silvery glisten to it and rings when you drop it. Now look at the rim of any current quarter – it is a cheap copper sandwich with a thin plating of nickel on top to make it appear like silver. It makes an annoying tinny sound when you drop it. The quarter was exchangeable in 1916 for about 0.012 troy ounces of gold, or over $13 modern-day dollars. Today it is still exchangeable for over $3 just for its silver content. The modern quarter? The “melt” value of its copper and nickel is worth less than 5 cents.

Golden shadows? Look at a new $1 Sacajawea or presidential series coin. It’s copper with a manganese brass cladding to give it a nice, fake golden shine. The melt value of the metal is about 5 cents. Desperate to introduce them into circulation, the United States Mint accepts credit cards and ships direct for free (well, at taxpayer cost) to your home. [The Mint is trying to replace $1 bills, which costs around 5 cents each to print as they wear out very easily over several years, after which it is shredded and treated as toxic waste.]

When originally introduced as a super-cheap placeholder coin for silver and gold redemptions in 1866, the nickel was made of 3.75 grams of copper and 1.25 grams of nickel. The dollar’s debasement is so horrendous that nickel’s melt value is now higher than its face value of 5 cents.

Not all that long ago, a single penny actually had purchasing power, unlike today. The melt value of pre-1982 pure copper penny is 2.2 cents.  The modern penny, debased with a zinc core covered with a thin copper cladding, has a melt value of 0.6 cents. The cost of minting a penny puts its cost at over a cent.

Money gradually evolved from societies from barter (or direct exchange) economies to economies based on indirect exchange. Under indirect exchange, Joey sells his chickens’ eggs for money and then either buys, say, a wrench from Bob or saves the money for future use. If one looks at this with an economist’s eye, Joey exchanged his commodity (eggs) for another commodity (money) and then either saved the commodity or exchanged it yet again for another commodity (Bob’s wrench). Hence money is actually a commodity just like corn, copper, or even an Ipod. Sound money is the hallmark of prosperous societies. Fraudulent money impoverishes and enslaves societies and commonly rips them apart in blood-soaked wars.

For money to be sound, it must have the following characteristics. Money must be durable and not easily destroyed. Money must be portable for convenience. Money must be easily divisible into smaller units. Money must be recognizable and uniform. Money must be reproducible. Money must be scarce, and it must also have a relatively stable purchasing power.

Fiat currencies – like the dollar and all other national currencies – can never truly fulfill the scarcity and purchasing power requirements. For example, let’s use our own currency again. In 1964, all dimes, quarters and halves were 90% silver by mass. Four silver dimes in 1964 would buy a good loaf of bread. In 2010, the dimes would certainly not be enough at a bakery, but exchanging at a jeweler or coin shop for its worth in silver would yield $4.85 today – quite sufficient to make the exchange.

For nine straight years from 2001 to 2009, the gold has climbed in price against the dollar with an average annual gain of 17%. Silver gains have also been 17%, but with far more volatility. Most importantly, gold is strengthening against all other national currencies which indicates the entire fiat monetary system is falling apart.

Central banks suppress the price of gold to make their own fiat paper currencies look stronger. While this may seem at first to be a wild-eyed claim, there is plenty of historical precedence and modern-day evidence collected by GATA. Per facts collected from Federal Reserve’s very own archives, the United States government schemed with other central banks to secretly manipulate the gold price from the creation of the London Gold Pool in 1961 until its utter collapse in 1968. Sources for the modern-day suppression of the gold price can be reviewed in my article “The Summers Gold Price Suppression Scheme.”

If you live in Pennsylvania’s 15th congressional district, it is now easy to understand why there are so many full-page newspaper ads asking to buy your gold and silver, and few willing to sell metal. Not only is gold and silver money, but it is the only lawful form of money authorized by the Constitution of the United States, as I reviewed in the below talk.

In his ground-breaking Principles of Economics, Carl Menger noted the Germanic word “Geld” was applied to any goods that assumed the role of money in the marketplace. This word was derived from the verb “gelten” which meant to compensate or pay. (Page 260/328) As society evolved from ‘cattle standards’ and ‘buckskin standards’ to ‘copper standards,’ the ultimate form of “Geld” became – and remains – gold.

Unknown to most Americans, the annual turnover at London gold market alone exceeds $20 trillion dollars – a sum that is far larger then the figures used for US GDP.  As the insane Ponzi scheme of fiat dollars designed by crackpot Keynesian economists spirals into oblivion, dollar holders chase “gelten” shadows as central bankers’ schemes to support the reckless welfare and warfare spending of Congress becomes apparent to all.

Note 1: Under the Gold Standard Act of 1900, the dollar was roughly convertible to 0.048 troy ounces of gold.  The NMA calculates the dollar value of a troy ounce of gold to be $18.92 in 1913.  The London gold fix to finish 2009 was $1104.

Jake Towne is running for U.S. Congress in eastern Pennsylvania’s 15th district in 2010. Prior to returning home, he had been living in Shanghai as an engineer in the semiconductor industry for over 3 years. As part of defending liberty and championing the Constitution, Towne is offering the citizens in his area a novel form of accountable government called “Our Open Office.”

Picture a new village, untouched by current monetary laws. People begin exchanging goods through the process of bartering. This makes it difficult to know what you can buy, because the milkman will only need so many of the pouches that you manufacture. Because bartering can be inefficient, unpredictable, and unreliable, the people decide to represent their goods with something of value. They find copper, silver, and gold nearby, all unique, relatively limited (therefore they hold more value than, say, granite), and quite durable. Thus, they can represent their goods with these valuable metals (and to make it more convenient, paper guarantees to those metals).

Money does not get its value through “force” as some believe. When the people in the village were looking for a more effective way to exchange goods, they were not trying to represent force. They were aiming to represent value through metals that were limited enough to have value, had durability, and could not easily be counterfeit (or inflated).  Currency is never originally brought about by force or through government.

Historically government has gotten involved in currency for one reason: greed. Kings would debase the metals that the market freely used and valued. Kings would inflate and devalue the currency that was once stable when the market was in control. Government could not debase metals, clip coins, and print unsound paper money and expect people to voluntarily accept it, thus force was necessary to make it happen. Legal tender laws forced devalued government money on the people and markets.

It is difficult for government to grow when people demand the money to be backed by hard goods (such as metals). It is difficult for government to expand its presence when the money supply is stable and in the hands of the people. History clearly shows us that when government wants to expand its state or military presence beyond its usual bounds, it cannot do so without control over the nation’s money supply. Without the control of money, government would have to take every cent it needed directly from the people and businesses, an approach that would become very unpopular in a very short amount of time.

This is why governments have always tried to take control and monopolize money. If people are forced to use government money and cannot create a competing currency, they must use the money the government gives them. Government can then indirectly “tax” the people through inflation and devaluation of the currency. This allows government to grow its boundaries and influence without directly feeling the repercussions of a people who see their property forcefully go out the door to the government in the form of taxes. Monetary inflation is a very indirect and gradual process for government to take money from the people. And it can only work if people are forced to accept the debased and often worthless money. As the money supply grows without solid commodity backing, prices begin to rise, impacting poorer citizens the most.

This brings us to the U.S. Some have argued that the Constitution allows the government to pass legal tender laws and control many aspects of monetary policy. However, on close inspection, this power has been greatly abused and misinterpreted. The Constitution states:

Article I, Section 8: The Congress shall have Power…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.

Article I, Section 10: No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.

Congress has the power to coin money, regulate its value, but nowhere does it have the authority to force people to accept that money. Congress can create and regulate its money, but it cannot mandate that people use it through legal tender laws. The states are prohibited from coining money and are required to make only “gold and silver Coin a Tender in Payment of Debt.”

Neither the powers delegated to Congress nor the states give them the authority to shove a currency onto the people. “Legal tender” means tender in the payment of debt. The states are given the duty to be sure that only gold and silver can be legal tender. For legal and juristic purposes, only gold and silver are acceptable in the payments of debt. But this does not give the state the power to dictate the forms of other monetary commodities or economic exchanges that the people and market might come up with. In other words, the state controls the legal use of money in the payment of debt, but neither the state nor Congress has authority over the economic exchanges of money in the marketplace.

The Founders did not give the federal government the ability to monopolize currency and force it on the people. There is no power in the Constitution given to the government to restrict currency production and choice of the people and marketplace. In fact, many competing and private currencies functioned efficiently for a good part of the 1800s. Today, however, we accept legal tender laws as a legitimate role of Congress, when in reality they do nothing but unconstitutionally force a worthless currency on the people.

Consider the basic principles of modern legal tender laws. No government force or mandates would be necessary to encourage people to use a widespread, valuable, and sustainable currency. Legal tender laws and government coercion over money are always used to force a currency that would otherwise be worthless onto the people and marketplace. Imagine if the legal tender laws enacted in the 1960s, forcing people to accept Federal Reserve Notes, were repealed today. Who in their right minds would continue using a currency whose value consistently decreases, is in the control of seven central bankers, and in reality is worth nothing more than the paper on which it is printed?

People will often reply that repealing legal tender laws would lead to the creation of hundreds of private currencies and economic chaos. But remember something. Especially in today’s digital, national, and even global economy, a currency would have to be simple, recognizable, valuable, and widespread to have a chance of surviving in the market. People will naturally encourage and use the currency that holds the most value and brings the greatest amount of ease to transactions. If that is the currency produced by Congress, so be it.

Monetary freedom simply gives people the option of throwing off the restrictive chains of a centrally manipulated, inflated, and drastically devalued currency, the symptoms of a government out of control. Competition in money would force government to stay in line, live within its means (both domestically and overseas), and maintain high levels of sensibility and responsibility. History has visibly painted the picture that without control over money, government’s long-term abilities are only as able as those that the people directly delegate to it. Freedom of money plays a major role in ensuring freedom and representation in government.

“With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.” — F.A. Hayek

“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.” — George Washington

“All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.” — John Adams

“Whoever controls the volume of money in any country is absolute master of all industry and commerce.” — James A. Garfield

“We are in danger of being overwhelmed with irredeemable paper, mere paper, representing not gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people.” — Daniel Webster