What Gives Value To Money?

The local paper’s letters to the editor page is often a source of inspiration for these columns. A recent letter offered a history of U.S. money in which the writer asserted the only real money is silver and gold coinage, or second best, paper money backed by silver and gold bullion. Paper money backed only by the “faith and credit” of the government is the cause of all our woes. It’s backed by nothing of value, he wrote.

The nation ran a trade surplus when it used real money, he wrote, but sank into trade deficits after it turned away from the silver and gold standard. How they’re related he didn’t explain, because there isn’t any cause and effect relationship to connect them. His views are not uncommon, but they fail on several points. Among them, silver and gold have no intrinsic value. They’re worth something because society has found a use for them. It’s the use that has value. Moreover, currencies backed by the productivity of a stable national economy are backed by something that adds measurable value. For that reason, the U.S. dollar has long been the world’s reserve currency without the need of silver and gold because it’s been backed by a stable, strong economy in a stable, strong democracy governed by transparent rules of law. At least until the current administration, but more on that another time.

If a national economy declines in productivity, or its government falls into chaos, its currency may lose value, and it’s true that hoarding the family jewels can be a hedge against it, but only if they can be bartered for goods, preferably in another economy with a stronger currency. Suppose all the world’s currencies go bad. The pretty rocks and shiny minerals would have value only to the extent they could be traded for food, shelter and clothing. It’s an extent with limits. In a time of great need, I might trade one of my scrawny chickens for one of your bags of grain, but for a bag of gold? What good would it be? I’d trade for it only if I had enough chickens in surplus, and a good chance the gold could be traded later for more food, clothing or shelter. Consider the biblical story of the Pharaoh, Joseph and famine. Joseph, who had predicted seven years of plenty followed by seven years of famine, was charged by Pharaoh to manage preparations. During the seven years of plenty he levied a 5% tax on grain production. He hoarded grain, not gold, silver or jewels, but grain. When the seven years of famine began, Egypt had stores of grain to sell. Foreigners paid with gold, but Egyptians paid with land. By the end of the famine, Pharaoh had a lot of gold and owned most of the land, or so the story goes. One of the many morals in it is that grain, not gold, was the true currency of strength in time of need. Those who had gold traded it for food at a dear cost.

I’ve often wondered why people attribute intrinsic value to silver, gold and jewels. It baffles me. They’re worth something on the market only because human convention agrees they have value. In other words, they’re backed not by the faith and credit of a nation, but by the whims of public opinion. Admittedly, public opinion has ascribed value to them for thousands of years, but mostly because holders of power and wealth reserved them for themselves, bidding against each other for possession. As raw minerals, their value was in the potential use to which they could be put in the hands of skilled artisans. In our age they have additional value for industrial and commercial purposes, which is a good thing as long as we remember that it’s their usefulness for a purpose that gives them value, and not something they possess intrinsically.

So what makes for a strong, resilient national currency? A national economy that maximizes economic opportunity for its citizens, which means an economy of people well educated, skilled, healthy, fed, and adequately housed. They’re conditions optimized only in democratic societies where free people are as committed to the well being of the community as they are to their individual self interests.

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