Anyone who attends
a quality class in basic economics will know the following book definition
of money: A measure of value, a store of value, and a standard of deferred
payment. They may also know the practical definition: Money is
whatever the government says is money.
This second definition is valid, only to the extent that the people have
confidence in whatever the government has mandated. If no one is willing
to accept government issued money then they will move on to something else
in short order. This was a common practice at the time of the American
Revolution when the public lost confidence in paper issued by the Continental
Congress and demanded specie instead. In societies where “real” money
is not available, money substitutes come into effect. An excellent
example occurred in POW camps during World War II where cigarettes became
the accepted medium of exchange. Another happened on the early American
frontier where whisky became an accepted form of payment, indirectly resulting
in what became known as the Whisky Rebellion, when the federal government
began taxing alcoholic beverages.
There is really only one thing necessary for something to act as money, and
that is essentially universal acceptance within the society using it.
This is possible because the use of money is really only an extension of
the barter economy using what might be called a “universal intermediate good.”
In this way money makes an economy more efficient by allowing people to use
intermediate goods instead of having to trade exactly what they have for
exactly what they want. But in the end, it all amounts to the same
thing: simply an extension of barter.
Today we are seeing renewed calls for a return to a gold standard for American
currency. Part of this is fueled by fears of inflation, and part by
the budget deficits requested by the current administration primarily due
to the war and related expenses in Iraq. Having some hard standard
in place is desirable, and is certainly better for all concerned than a paper
standard, which relies on the “full faith and credit of the United States
Government,” whatever that may be. Still, in the end, a gold standard
is not a panacea. Inflation has happened in specie-based economies
before. In Europe, when large amounts of gold and silver were brought
back from the New World, inflation was a major problem. Even more illustrative
is the experience of the California gold camps, where prices rose to absorb
the increased amount of gold available in the local economies. Of course,
the effect was strictly local. Outside of the area prices were essentially
In a government-controlled system where certificates are issued with purported
specie backing, it is always possible for the government to print paper in
excess of the amount of available gold. When private banks use fractional
reserve banking it multiplies the problem by increasing the amount in circulation
further. Recall that money is an economic commodity, and its value
reflects supply and demand. Its value rises and falls as its relationship
to other commodities in the economy changes. That is why we occasionally
hear that counterfeiting destroys the value of currency. If the value
of money was not tied to the amount is circulation this would not be true.
So what is the real answer? In the end the most important factors are
whether or not government can control its ability to spend and its concurrent
desire to grow. During the Middle Ages in Europe the Catholic Church
was the dominant entity. It controlled virtually all aspects of society
and exercised a strong hand in the political activity of the time.
As human nature and normal political behavior came into play the Church spent
more and more money and needed to raise ever greater amounts of revenue.
The same effects have shown up in the democratically governed nations of
today. As demands for government services have increased, as legislators
seek ever-greater power, and government regulation spreads its web over virtually
everything, the combination begins to have a destructive effect. Inflation
may occur, or may not, depending on how government chooses to fund its activities.
Deficits may be a problem, but they are not the only problem.
What most, if not all governments never come to understand is that if they
want a free market then they must allow the market to be free. Strong economies
and strong governments don’t mix well because influential people use the
system to gain personal advantages. Only a limited government will
be unable to provide those advantages and it is in the best interests of
all citizens to prevent others from using government for personal advantage.
The “gold bugs” may be right and the price of gold may rise to some unheard
of level in the next few months or years. However, even if it does
happen, it may not be due to inflation and it may not have profound effects
on everyone. Keeping a lid on government spending is more important
than worrying about the price of gold. Unless, of course, you happen
to be a professional metals speculator.
Steven Laib is a practicing attorney.