In our journey to understand money, we must outline what properties can be observed in good monies, versus bad ones. I’ll be borrowing these criteria from a list put together by my friend Andy Edstrom who wrote a book to help his friends and clients better understand the properties money. I sympathize many of you reading this might already be familiar with these concepts, but basics are always crucial to our understanding.
The 14 characteristics of money are as follows:
- Short term stable value
- Long term stable value
- Censorship resistance
- Required for some important purpose
- Backing by a powerful agent
Each of these characteristics could certainly be a write up in and of itself, however I think looking at these in totality can help us better understand why gold has been such a dominant money for centuries and why paper is a poor alternative.
We know that gold is quite scarce, and historically always has functioned as an excellent store of value. Glancing through this list you will find gold performs quite well in a good majority of the categories.
To be objective about reality, however, it is important that we identify gold has both weaknesses and strengths as money. That is, it is not easily divisible and can be difficult to transport, and even has issues being identifiable. In fact, it was these two properties which specifically led to the use of paper as currency in the first place.
Long before our fiat monies (the difference between a money and a currency is largely semantic, more importantly is a bearer instrument vs credit money) of today lost touch with their peg to reality, gold, they were gold certificates typically issued by banks which could be redeemed for a coupon value of metal upon demand.
In order for commerce to scale effectively, this was a necessary evolution for gold. Silver and copper, originally aided in the issues around the divisibility of gold, however these metals are less scarce than their yellow counterpart and thus less ideal. Paper IOU’s was the next logical progression for the dominant monetary metal in economic exchange.
These paper notes made day to day commerce far easier for obvious reasons. In this way, only large institutions and nation states needed settle in the underlying, cumbersome gold bullion.
For a time this worked quite well, but was subject to what are now obvious problems. In future posts, its likely I will cover each of the properties of money from the list above in more detail, as well as expand upon how exactly we ended up where we are today. A vital lesson for the future should we wish to ensure we are not doomed to repeat history.
Book of the Month:
“Credit money is only a derived kind of money. It receives its value from an expected future redemption into some commodity. In this respect it crucially differs from paper money, which is valued for its own sake”
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