A poster in a comment forum made the following (all too often common) comment about gold with respect to fiat (government decreed) money and I responded.  I thought it worthy of a post:

I’ve never understood the appeal of gold.

You cannot eat it. It isn’t used to make anything that cannot be done with other metals. The only reason it has value is because other people think that it does.

Have you not just described what fiat (government decreed) paper money is as well?

That aside, historically there have been many commodities used as money. Salt, sea shells, wampum, tobacco, yak dung, but as time progressed, local markets became less localized and wider in scope thanks to transportation improvements.  Commodities used as money either suddenly or progressively were displaced as the commodity as it became widely available.

For example, a given market might have used “salt cakes” ( baked salt whose weight denominated its value – the larger the cake, the more purchasing power it had – but as soon as the first foreigners arrived who had salt in plenty quickly traded it for as much as they could.  They flooded the local market with salt.  Prior to that, local savers who stockpiled salt cakes to trade for wealth (the ability to acquire products and services in their market) found themselves poorer (or destitute) as salt lost its value.  In otherwords, there was a massive expansion of the money supply (salt cakes in circulation) that eventually (or quickly) wiped out salt as money.

The last of the free market monies evolved into metals such as gold or silver as they met a number of desirable characteristics such as:

– Durability
– Portability
– Fungibility/Interchangeablity.
– Divisibility.
– Scarcity.

Money, no matter what form, is simply an intermediate medium of exchange. Wealth is not money, it is the disposition of money into the market in exchange for goods and services that gives rise to wealth.

At this point, take note of what forces brought money into existence.  It wasn’t government.  It was the market.  Money is a commodity like all other commodities.  It is subject to the most basic force of economics, the law of supply and demand.  The free market demanded money be brought into existence as it facilitated trade; it was more efficient than barter (commonly described as a “coincidence of wants”) and it allowed for division of labour.

Another interesting point to note is a business cannot tell “how it is doing” via the barter system.  Consider in month 1,  Acme Inc. captures 5 lbs of lye soap, 3 pitchforks, an iPod, a bushel of hay, a tractor, and a woolen suit but spends one hoe, 25 horseshoes, one Blackberry Storm, and 3 books.  In month 2, Acme Inc brings in 3 wagons, 1 horse, a generator, 3 bottles of whisky but spends 1 carton of cigarettes, 3 French Hens, 2 Turtle Doves, and a partridge in a pear tree, how does the owner go to his accountant and say, “How have we done this month compared to last month?”

Money is simply a universally accepted commodity that is used as an intermediate medium of exchange all actors accept in confidence knowing others will accept it from them.

Why did the free market demand money come into existence? If government and the banking cartel did not have a monopoly on money production, would money never come into existence? History proves this false. On the surface, we accept money from others knowing others will accept it from you. But the forces behind ascribing value to government fiat as opposed to what gives free market money value are night and day. If I have time, I’ll post on that subject.

What if there is a severe depression and people are forced to trade their gold for the items required to live? How much value would gold have then?

Whatever the market values gold at.

So what gives fiat money value as opposed to free market commodity money?

On the surface, they appear to be the same. You toil to produce something of value to others, earning money with the implicit assumption others will accept that money from you in exchange for goods and services you value either in the present or at some later date. Sometimes we call this “confidence”. I don’t dispute this.

However, when it comes to paying tribute/protection money/taxes to government, what form of money *MUST* you use? The one they monopolized via legal tender laws – their own fiat money.

If I opened up “Gilligan’s Money Store” and I printed up pretty, uniform pieces of paper with different inks and designs on them indicating different denominations to reflect each notes purchasing power (we call these dollars but at my store, I call them tribbles) and told everyone in the market to use my notes as money, what would happen? I would be ignored or laughed at. Why? Some say “What’s to prevent another from opening their own store and doing the same?!” Others may say, “You can print as much as you want and falsely lay claim others labour. You’re a cheat!”

However, what if I had a bunch of goons working for me with superior firepower over the market, and I say, “You will pay tribute to me in my form of money…or else! You will report to me how much money you make and I will decide how much of it you get to keep…or else!” Resistance to my edicts will be met with a violent crackdown on you and your family. In this manner, I have just created demand for my money under threat or actual violence.  By demanding my money in the form of taxes, I make it impossible for you to boycott my form of money.  This is the purpose of the income tax.  Some say that FDR outlawed gold in 1933 and demanded it be turned in in exchange for fiat Federal Reserve notes as people were boycotting government money, thus avoiding theft of their labour via taxation and inflation.

Now that I have seized control over the money supply, I can steal its purchasing power slowly over time via the inflation tax. I can’t do it quickly, or the serfs I rule would get disgusted and boycott my money in favour of other forms of money in an agorist economy – the grey/underground market.

Commodity based money cannot be destroyed.  It can be reshaped, and its value is subject to the forces of supply and demand, but it is not created out of debt as is our fiat money via the State/Banking cartel.

Free money is created by productive members of society; fiat is created by the parasitic political/banking class.