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Chapter 1

What Is Money . . . Really?

Permit me to issue and control the money of a nation, and I care not who makes its laws.1

— Mayer Anselm Rothschild of the Rothschild banking family

All the perplexities, confusion, and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit, and circulation.2

— John Adams

OVERVIEW: Money has taken many different forms throughout history: shells, feathers, salt, gold, silver, and paper currency. This chapter lays the groundwork for understanding the current crisis confronting the U.S. dollar by examining the underlying concepts of money. What exactly is money? How is it measured? What gives it value? In addition to answering these questions, this chapter will also explain the three types of money that have been used throughout history: commodity money, receipt money, and fiat money.

There is an old joke about money that goes something like this: “Money may not buy happiness, it sure does buy everything else.” Benjamin Franklin referred to man’s obsession with money this way: “He that is of the opinion money will do everything may well be suspected of doing everything for money.”3 Regardless of our own view of money, one thing is certain: Money is a necessity for life in this world.

Before attempting to answer the essential question of what money really is, let us first consider how the American culture, and our own upbringing, has affected our view of money. From my own research, I have discovered that an individual’s view of money is determined by at least three fundamental factors.

Economic System. The first and perhaps most influential factor that affects a person’s view or conception of money is the economic system into which the person is born. For example, a person born and raised in the United States is introduced to a capitalistic economic system from birth. The virtues espoused under capitalism include the right to private property, the division of labor, and individual rights.

In contrast, those who are born in China are taught to view money through the lens of a communistic economic system. Under communism, individuals have fewer rights and the government plays a much greater role in every aspect of life.4

Family Financial Philosophy. The second factor that shapes a person’s view of money is the financial philosophy espoused by his family. Whether they realize it or not, parents are teaching their children by their words, and more importantly by their actions, about what is important in life. For example, a mother who spends excessive amounts of money teaches a different set of financial values to her children than a mother who is an avid saver or astute investor. The spendthrift mother is silently teaching her children that overconsumption is a desirable and perhaps even a virtuous act. Meanwhile, the mother who gains joy from saving and investing is teaching her children that preserving and growing money is far more important than spending it.

To use another example, a father who exemplifies a strong work ethic to his children is teaching them that money is best earned through hard labor. In contrast, a father who runs his own successful business is silently teaching his children that money is best earned through a combination of personal hard work and by employing the efforts of others.

Finally, some families treat the topic of money as taboo and rarely discuss it around their children. Inevitably, these families are teaching their children that silence about financial matters is preferable to openly discussing the topic.

Spiritual Values. The third factor that ultimately determines a person’s view on money is rooted in their religious and moral understanding of life itself. For example, it is common for a person who has had a strict religious upbringing to view money as inherently evil.

To illustrate this point, allow me to tell you about a Christian woman I once counseled named “Margaret.” Like many Christians, Margaret was taught from a young age that that money was unspiritual and dirty. Once, during a conversation with her, I asked her why she considered money to be evil. Apparently, this question was appalling to Margaret. She quickly retorted, “You are a minister! Don’t you read your Bible? The Bible clearly states that money is the root of all evil.”

Margaret was feisty, to say the least. I decided to respond with a question of my own. (I’ll admit that I am a bit Socratic in my discussions on Christianity. By Socratic, I mean that when someone asks me a question, I will often reply with a question of my own. This is a method that Jesus used quite extensively. And if it was good enough for Him, it is good enough for me.)

I politely replied, “Well, I feel rather embarrassed. I was not aware that the Bible said such a thing. Here, Margaret, here’s a Bible. Would you please show me where it says this so I can help others understand this, too?”

“I do not know. But it is in there,” she replied with a tone of disgust.

Knowing exactly the verse that she was taking out of context, I quickly turned my Bible to 1 Timothy 6:10 and read it aloud: “For the love of money is a root of all kinds of evil, for which some have strayed from the faith in their greediness, and pierced themselves through with many sorrows.”

With her face aglow with a deep pride, she quickly chimed in, “That’s it. That’s the verse that I was talking about. Haven’t you ever read that before?”

My Socratic tendencies would not allow me to give her a straight answer yet. It was too important for her to clearly see the folly of her logic. I responded, “Margaret, if this is true, do you realize how this changes everything that I have ever known and taught about money? In fact, I am thinking of another verse right now that I feel we should read, too. Can I read it to you?”

With a smug assurance, Margaret nodded.

I continued, “Well, if money is evil, then we better pay extremely close attention to this next verse. It is found in 1 Thessalonians 5:22. It says, ‘Abstain from every form of evil.’ Margaret, if this is true, and if money really is evil, then this means that you and I need to get rid of all of our money as quickly as possible!”

Margaret laughed nervously and asked what I meant.

With a more compassionate tone, I re-read 1 Timothy 6:10 to her and said, “Margaret, the Bible never says that money is evil. What this verse is saying is that the love of money is the root of all evil. If money itself was evil, then we would both be in violation of God’s Word simply by possessing it. Do you understand why this is an important difference?”

Margaret took the Bible and read the verse again, as if for the first time. Then, the moment that I had been hoping for occurred as she gently said: “My father always told me that money was evil and those who had lots of money were not godly. But this verse does not say that, does it?” As she asked this question, her tone became much more accepting and friendly.

“That’s right, Margaret. The Bible is extremely balanced in its view on money. In fact, the Bible never says that money is good or evil. You see, money is just an object. It is we humans who take money and perform good or evil works with it,” I said with even more compassion.

Due to Margaret’s religiously dogmatic views on money, she had spent her entire life downplaying its importance in her life. She even avoided the topic out of perhaps an irrational fear that it was displeasing to God. This is just one example of how a person’s view of money can be shaped and influenced by their spiritual values. I believe money to be completely amoral. Money is not capable of being moral or immoral. It is merely an object. Instead, money can be used for good purposes or for bad purposes. Those who are searching for the morality of money do well to consider the intentions of its possessor, not the money itself.

To summarize, everyone’s view of money has been shaped by a combination of the three factors stated above. Why is understanding this important? Because our particular view of money greatly influences our financial decisions. Often, the influences upon our own view of money become so powerful that they can create false ideas and ultimately destructive mindsets, as in the case of Margaret.

The fact that you are holding this book is proof that you have a desire to improve your own understanding of money. It is also likely that you are deeply concerned about America’s uncertain economy and how you can protect your family and yourself. If so, then this book is exactly what you have been looking for.

In order to understand the true impact of the global financial crisis, and how you can prepare yourself and even profit from it, we will now confront several foundational questions that deserve to be answered. These questions include:

• What is money?

• How is money measured?

• What gives money its value?

• And finally, if money can be printed to prevent a financial crisis, why not just print more?

In this chapter, I will answer each of these important questions. My goal, however, is not to bore you with tedious details and lots of financial jargon. Instead, my desire is to inspire you over the next few chapters by helping you gain a basic understanding of the current monetary and banking systems and why this knowledge is vital to your financial security. While these questions may seem completely irrelevant to you right now, I hope to demonstrate in the chapters ahead how understanding the answers will empower you with the financial knowledge you will need to profit in the uncertain days ahead. Believe it or not, your ability to protect yourself and your family financially is greatly connected to your understanding of the four basic questions above. I believe that the answers will surprise you.

Now that I have your attention, let us proceed.

So . . . What Is Money?

That is a great question — what exactly is money?

If asked to give a definition of money to someone, how would you define it?

If you answered that money is the paycheck that you receive at the end of every week from your employer, you would be only partially correct. Economists have grappled with this question and have come up with three basic answers. The three definitions of money are as follows:

• Money is . . . a medium of exchange

• Money is . . . a store of value

• Money is . . . a unit of account

Let’s briefly define each of these.

Money is a . . . Medium of Exchange

One way to define money is to say that it is something universally accepted as payment for goods and services or for the repayment of debts. In America, for example, a U.S. dollar is recognized by everyone as money. Therefore, it is acceptable as payment for any and all goods and services within the nation’s borders. U.S. businesses who sell a good or a service do not accept U.S. dollars because they like the way the dollar looks or how they smell. That would be ridiculous! Instead, the reason that a merchant is willing to accept payment in U.S. dollars is because they know that the dollar is an acceptable means of payment for their needs. Put simply, they will accept dollars for payment because they know they can immediately turn around and use those same dollars to purchase something for themselves. However, if you walked into a store and attempted to pay with a handful of bananas instead of dollars, then you would be out of luck. Why? It is nothing personal against bananas. It is only because bananas are not currently a recognizable and universal means of payment for goods and services. So for something to be considered money, it must serve as a medium of exchange.

Money Is a . . . Store of Value

Economists also define money as a store of value. By this, they mean that money must be able to be stored away and used later. For example, if the U.S. dollar was perishable, or had an expiration date, then it could not serve as an effective store of value. This can be applied to our earlier example of bananas. Within a week or less, a banana can rot. Bananas would not make a very stable form of money as they would lose their value very quickly. Money should be nonperishable and must hold its value for future needs and wants over time.

Money is a . . . Unit of Account

Finally, money must be a unit of account. What does that mean? It means that the prices within an economy should be expressed in a universally accepted monetary unit. For example, without a single universally accepted form of money, how could storeowners price their items? The prices of goods and services would be very difficult to determine without a unit of account. What if you wanted to pay for your goods with your bananas and another customer wanted to pay with pineapples? How could the store owner possibly know how to price his goods under such a complex system? Today’s economic environment has become far too complex and interdependent to rely upon such an antiquated system of barter. People no longer have to produce everything they consume. Instead, they can simply trade money for the goods or services that they do not, or cannot, produce. Our modern economy requires a cohesive and universal monetary system that can serve as a unit of account.

The Brief Evolution of Money

The history and evolution of money is a story that spans thousands of years. And while money and trade have become more sophisticated over time, we have evidence that several early civilizations had forms of advanced monetary systems. One of the first civilizations to develop a system of trade with a form of money was ancient Sumer. The Sumerians were highly advanced in many areas, including their system of economy and trade.

From the days of ancient Sumer to our present day, money and trade have taken many different forms. The most primitive type, and earliest form, of money is commodity money. Commodity money is a unique form of money that serves a dual purpose. It can be used for trade or it can be consumed by the owner. Early civilizations, for example, used common items as commodity money, including spearheads, shells, feathers, and salt. In ancient times, for example, salt could be used for trading purposes. But the owner always had the option of consuming the salt himself. Salt could also be used for antiseptic purposes and for preserving food, among other uses. This is unlike our current paper money system that serves only one purpose, that is, trade. Paper money has no other use if it is not backed by a commodity. Because commodity money has a dual purpose, it is said to have an intrinsic value.

Over time, the portability and durability of money became important to merchants and traders as societies became more interconnected. As the old saying goes, “Necessity is the mother of invention.” This need for more versatility in financial transactions led to the rise of gold and silver as money. Unlike crops, gold and silver were scarce, durable, and non-perishable. In addition, gold and silver were far superior to livestock in that they 1) were much easier to transport, 2) required little maintenance costs, and 3) had the unique capability of being divided for exact payment. Soon, gold and silver were made into the form of coins with their values stamped on them. This simple but revolutionary act made financial transactions more convenient and represented man’s first real attempts at coined currency.

It did not take long, however, for those in search of dishonest gain to exploit the gold and silver monetary system. How? Those who wanted to cheat the system did so by placing gold or silver plating over cheaper metal discs to imitate the appearance of solid gold and silver coins. Local governments would often step into the “money-making business” to prevent such counterfeiting efforts. Despite these efforts, counterfeiting remained a constant challenge to most forms of money. This is true even to this day.

The superior aspects of gold and silver meant that they soon became the money of choice for many people. But as people began to accumulate large sums of gold or silver coins in their homes, concerns over keeping them safe from theft or loss became a major concern. This demand for safety led to the creation of one of the earliest forms of modern banking, known as goldsmith banking.

Under the goldsmith banking system, which became popular in 17th-century England, a person would simply deposit his gold with his local goldsmith. Much like modern banking, the goldsmith would provide the depositor with a paper receipt stating the amount of gold on deposit. If the person wanted to redeem his gold, he simply returned his paper receipt to the goldsmith. (In exchange for this convenience of keeping the gold in a safe place, the town’s goldsmith would charge a small monthly maintenance fee.) Because these paper receipts were viewed as “good as gold” they became extremely valuable. As communities grew and trade activity increased, these paper receipts began to be accepted as payment for simple financial transactions.

Eventually, traders and merchants in need of capital began seeking out loans from the goldsmiths. Most goldsmiths embraced the new income opportunity and were willing lenders. Despite the novelty of this financial system, the lending process was fairly simple. The goldsmith created and issued a paper receipt to the borrower which gave the appearance that the borrower had gold in the goldsmith’s vaults. But in reality, no new gold reserves were backing this loaned paper receipt. The goldsmith knew that the only way this scheme would be discovered was if many of his depositors were to demand all of their gold at the same time. Because the goldsmith considered this highly unlikely, he could continue to profit from his newfound lending power with little fear of a default risk. (This idea of lending money not currently on deposit has become a highly profitable venture for bankers. It is known as fractional-reserve banking and is discussed at length in chapter 7, “Modern Money Mechanics: What the Banksters Do Not Want You to Know.”)

As the Industrial Revolution began, the demand for loans grew dramatically. The large profit potential through this new sleight-of-hand lending process led to a rise in competition. Small regional banks began issuing their own forms of paper currency, similar to the paper receipts created by goldsmiths, in order to compete. As nations grew in population and in commercial activity, the various forms of issued currency became overwhelming, often stifling the flow of commerce. When nations faced such pressures, the largest banks would seek a monopoly on national lending by recommending a unified paper currency system to the governing authorities. These new paper currency systems were often backed by some form of commodity, usually gold or silver. Of course, implementing and regulating a national paper currency system was a monumental task requiring vigilant oversight. Western governments, in particular, often capitulated to the banking interests by permitting the creation of one national central bank. The central bank’s role often included issuing the national currency of choice (almost exclusively paper money), regulating the money supply, and controlling interest rates. In addition, the central bank would often be responsible for monitoring the nation’s banking activity, and serving as the lender of last resort, due to its unique capability of creating the national currency.

Despite the sophistication of the new central banking arrangement, discrepancies between the government’s fiscal policies and the central bank’s monetary policies often led to economic upheaval. The result of these conflicting policies, coupled with the unpredictable economic growth patterns of an emerging nation, often led to financial imbalances. These imbalances proved extremely difficult for central banks. Maintaining a commodity backing for every piece of paper money in circulation soon became a laborious process and served to limit the growth potential of the economy. After all, if the government required the nation’s money supply to be restricted to the available amount of a particular commodity, such as gold, then economic growth would suffer.

The initial solution to these early liquidity crises required a strong trade policy and often a mighty military. Governments knew that to maintain the growth of their gold-backed currencies required a growing supply of gold. For example, 16th-century England had few, if any, gold mines. And yet the British Empire boasted one of the world’s largest gold reserves. How was that possible? Through conquest. While trade restrictions, such as banning gold exports and export subsidies, were also common in this age of mercantilism, clever trade policies were rarely enough for the largest of nations. Military conquest of other nations in search of gold was virtually required to maintain a growing empire. Colonization efforts, often implemented under the auspices of Christian missionary activity, served at least two purposes: 1) to provide a fresh source of gold for the colonizing nation and 2) to create a new market for export purposes.

Empires, however, are notorious for having voracious spending appetites. Despite multiple conquests, the monetary constraints would soon become severe enough to force a new solution. The temptation for spendthrift governments was obvious: cut the commodity backing of currency and turn on the printing presses. (History is replete with warnings for those nations who dared to remove the commodity backing from their currency. For a history of national economies that have been severely damaged or completely destroyed through the overproduction of paper money, see chapter 3.)

Throughout history, all governments have come to the same conclusion: remove the commodity backing from its own national currency, thereby creating more flexibility. When a nation detaches its paper currency system from any and all commodity backing, its currency is then considered by economists to be a fiat currency. When a currency is issued by fiat, it is backed only by government guarantees, not a commodity. Fiat money has no intrinsic value. Its value is derived strictly by government law, and unlike the first two types of money (commodity and receipt) there is no natural limit to the quantity of fiat money that can be produced. The benefits of such a system to a government should be obvious. Without the economic constraints imposed by gold, the money creation process available to governments with fiat currencies is virtually unlimited.

How Is Money Measured?

Regardless of the type of money a nation uses, one important quality that it must possess is an ability to be measured. This is especially true in the case of fiat currency. In response to our modern fiat dollar system, U.S. economists have devised four categories to measure the nation’s money supply. These four measurements are known simply as M0, M1, M2, and M3.

M0 Money Supply: This measurement includes all coin and paper currency in circulation, as well as accounts at the central bank that can be exchanged for physical currency. This is the narrowest measure of the U.S. money supply and only measures the amount of liquid money in the hands of the public and certain deposits with the Federal Reserve.

M1 Money Supply: This measurement includes everything in M0 as well as currency held in demand deposits (such as checking accounts and NOW accounts) and traveler’s checks (which can be liquidated into physical currency.)

M2 Money Supply: This category includes everything in M1, plus all of the currency held in saving accounts, money market accounts, and certificates of deposit with balances of $100,000 or less.

M3 Money Supply: As the broadest measure of the U.S. money supply, this category combines all of M2 (which includes M1) plus all currency held in certificates of deposit with balances over $100,000, institutional money market funds, short-term repurchase agreements, and eurodollars (U.S. dollars held in foreign bank accounts).

What Gives Fiat Money Its Value?

If you have a U.S. dollar bill nearby, pick it up. Examine it closely. Notice its many symbols and its colors.

Now ask yourself: What exactly is it that gives the U.S. dollar its value? And why are so many people willing to exchange their valuable goods and services, or work long hours at jobs they may or may not enjoy, for these small pieces of green paper?

Answer: Faith in the scarcity of the dollar.

Allow me to elaborate on this answer.

Since fiat currencies are not physically backed up by a particular commodity such as gold, they have no intrinsic value. (By intrinsic value, I am referring to the actual value of the physical piece of paper itself.) Using this definition, fiat currencies are technically worthless. Governments and central banks are fully aware of this and some even understand the inherent danger of fiat monetary systems. To overcome the potential hurdles faced by an intrinsically worthless currency, the U.S. government required acceptance of the U.S. dollar in nearly all domestic financial transactions through the passage of legal tender laws. Due to this legal binding, Americans willingly accept the fiat U.S. dollar because they believe it has value. It is true that the dollar has value, but this value is not of an intrinsic nature. Instead, the dollar’s “value” is derived from a carefully managed perception by the nation’s monetary authorities. This belief, or faith, in the dollar’s value, despite having no real intrinsic value, is a common trait shared by all fiat currencies. Interestingly, if the public were ever to lose faith in the value of the currency, the entire house of cards would fall.

Through the use of constitutional contortion, the United States has created a national demand for a fiat currency. Maintaining the illusion of the dollar’s value requires that the monetary authorities avoid a reckless increase of the U.S. money supply. Historically speaking, such increases have had disastrous effects upon the purchasing power of the underlying currency. Avoiding a dollar collapse requires a perpetual faith among the American public in the Fed’s willingness and ability to keep the currency in a limited supply.

Understanding Intrinsic Value

Many different commodities have been used as money throughout history. Take silver, for example. In addition to being used as money for centuries, the shiny metal also has many industrial uses such as photography, dentistry, jewelry, mirrors, optics, and medicine. With so many varied uses, it is no wonder that silver was widely adopted as money throughout history. Silver, and other similar types of commodity money, has intrinsic value. That is, it has value outside of its role as money.

Compare this to the U.S. dollar. How many uses does a dollar have? Paper money is different from commodity money in that it has no intrinsic value, although some have argued that in enough quantities, the dollar bill could be used as firewood, thereby giving it some intrinsic value. In fact, that is exactly what happened to paper money in Germany during the 1920s! You can read more about that monetary nightmare in chapter 3.

Conclusion

Today, all global currencies are issued by fiat and are controlled by an arrangement between governments and their central banks. For the first time in history, no currency on the planet is backed up by a physical commodity. And why have individuals been willing to accept these fiat paper currencies in exchange for goods produced and services rendered? Ironically, the answer is rooted in the public’s faith and trust in their respective government. The reason that the American public, or any society for that matter, is willing to accept a fiat currency in exchange for goods produced and services rendered is due to the belief that the government will maintain the currency’s value by keeping it in limited supply.

At this point, some readers may wonder why governments should strive to keep their fiat currency in limited supply. After all, couldn’t we eradicate global poverty by printing excessive amounts of currency and giving it to the world’s poorest citizens? If it were only that easy!

While some readers may understand why this is impossible, it is nevertheless a very important question because we have several examples of economically ignorant leaders throughout recent history who have attempted this very thing. Other leaders have attempted to grow their economies out of tough situations by printing excessive amounts of currency.

What happens when a government decides to unleash the printing presses and overproduce its fiat currency? Does everyone suddenly become wildly rich due to all of the newly printed currency? Does printing fiat currency solve problems or just create more problems? In our next chapter I will answer these questions with a historical examination of fiat currencies. Sadly, fiat currencies, like the U.S. dollar, have led every nation that has abused them to the brink of economic disaster.

Quick Summary

 Our own personal view of money is shaped and influenced by three factors: 1) the economic system we are born into, 2) our family’s financial philosophy, and 3) our instilled spiritual and moral values.

 Money is morally neutral. It can be used for positive or negative reasons. Financial morality is found in the intentions of the user, not in the money itself.

 Three forms of money have been used throughout history: 1) commodity money, 2) receipt money, 3) fiat money

 Commodity money took the form of exchangeable commodities often with intrinsic value such as salt, livestock, and crops.

 Along with the advance of civilizations came the need for a form of money that was relatively scarce, portable, easily divisible, and durable.

 Precious metals, such as gold and silver, fit all of these requirements, making them the obvious choice.

 Over time, goldsmith banking allowed individuals a safe place to store their gold in exchange for a paper receipt that was considered as “good as gold.”

 These paper receipts, or receipt money, were extremely popular due to their ease of use.

 The governing authorities eventually saw a need to monopolize the money creation process in order to ensure economic stability.

 This government intervention led to the rise of central banks and fiat monetary systems that have ultimately proven to be disastrous, as we shall see in upcoming chapters.

 Fiat money has no intrinsic value. Instead, its value is derived from legal tender laws and a public perception that the monetary authorities will keep it in a limited supply.

 Today, every currency on the planet is considered to be fiat.

Endnotes

1. Dallas D. Johnson, Consume! The Monetary Radical’s Defense of Capitalism (New York: Dynamic American Press, 1940), p. 89.

2. Charles Francis Adams, The Works of John Adams, Second President of the United States (New York: Little, Brown & Co., 1853), p. 447.

3. Nathan G. Goodman, editor, A Benjamin Franklin Reader (New York: Thomas Y. Crowell Co., 1945), p. 288.

4. More in-depth explanations of the various types of political and economic systems can be found outside of this book. My purpose here is simply to point out that a person’s view on money is often directly tied to how his government teaches him to view money.