Monday, June 16, 2008

Money, Money, Money and Money

I used to think that I understood money. Well, I've decided that I really don't.

If you want to get a headache, try reading the Wikipedia article on money. It's pretty darn confusing. Did you know that there are four different types of money? There's commodity money, representative money, credit money and fiat money. I'm sure that there's an economist somewhere that's defined a few more versions of money.

The type that really confuses me is fiat money. This is the paper stuff that we carry around in our wallets. In the case of the US, it used to be that you could turn it in to the Federal Reserve Bank and get a fixed amount of gold in return. Well, actually, that was true for foreigners only, since the government made it illegal for US residents to own any gold, except in jewelery. They relaxed that restriction when they canceled their promise to redeem dollars for gold, so it's OK for everyone to own gold now.

If you want to turn your paper money into the Feds today, the only thing they promise in return is to give you more of the same paper money.

How is it possible that we accept these (admittedly attractive) pieces of colored paper as having value? If the government wants to create more money, one simple thing they can do is just print more of it. They have other ways as well, but that would just get us more confused. Nevertheless, I can walk into the grocery store and trade some of this paper for a loaf of bread, no questions asked. I can get a car, or convince a girl to marry me, if I have enough of this stuff. Pretty amazing!

To make things even worse, each government around the world has it's own version of money. Conveniently, they trade against each other in the International Money Market. So anytime the mood strikes you, you can trade your U.S. Dollars for European Euros, for example, if you like. By the way, you don't have to swap your US Dollars for Lira, Francs, Marks, Shilling or a bunch of other obsolete European currencies, like in the pre-Euro days. And, of course, in case you ever worry about their intrinsic value, you guessed it, the Euros can always be redeemed for more Euros.

I think this fiat money is pretty cool. I just don't understand why the government won't let me print up some of my own money. They let the casinos in Las Vegas do it. They manufacture chips and put numbers on the chips and you can buy stuff with it. You can even get some very attractive women to spend time with you if you give them enough of the right color chips.


blythjs said...

You haven't made so much as a peep about money lately. I thought this article might be up your alley.

blythjs said...

Here's the link.

Incontrovertible said...

This article says that money did not evolve from barter systems. It doesn't say where it does come from.

My understanding is that money evolved from the practice of what we now call "banks" loaning out valuables that "depositors" had left for safekeeping. Instead of loaning out the exact deposit, they gave borrowers "IOUs", which took the form of "coins" or pieces of paper. So, instead of swapping the actual "deposits", borrowers swapped the "IOUs".

However, I could be totally wrong.