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What Is Money?

By Samuel L. Blumenfeld
April 01, 2004

Money is an instrument of commerce, a measure of value, a means of exchange, and storage for wealth. However, in Argentina not too long ago, that measure of value was abruptly changed by the government, which wiped out a considerable amount of wealth “stored” in that national currency, and raised the prices of everything. And so, money can be a treacherous thing.

It all depends on who or what is backing the money, for, as we all know, paper money has no intrinsic value. A thousand-dollar Confederate note has value only as antique paper, which some collectors may want and are willing to pay for. The government that once backed that Confederate note no longer exists, and therefore its only value today is as an historical artifact.

The “Good Old” Days
Can what happened in Argentina happen in the United States? Not only can it happen, but it has already happened — though more slowly. The prices of commodities in the last century show that a U.S. dollar bought much more fifty years ago than today. I collect old magazines, and the ads reveal much about the changing value of our money. For example, in 1901 you could get the finest suit or overcoat from Hart Schaffner & Marx for $45.00. The Waverly Electric Automobile cost $850. In 1917 you could get a Franklin Touring Car for $1,950. Its most expensive model was $3,100. In 1929, the most expensive Chrysler was priced at $1,595. Its cheapest model was $985.00.

The Depression was a period of deflation. Prices were low, but money and credit were difficult to come by. Today that comparable Chrysler would cost $45,000, but credit would be very easy to obtain. What accounts for this vast difference in the value of money? It has to do with the printing press. Paper money is created by simply printing it up. If too much is printed, you get inflation, that is, more money chasing fewer goods.

Economic History
Money is better understood if you know something about its evolution. Back in the earliest days of trade, barter was the accepted method of exchange. If you owned a cow and wanted bricks, you would go to the producer of bricks and offer your cow in exchange. The brick maker, of course, had to have a use for the cow before it died. So unless that use was immediate, such exchanges were cumbersome and limiting.

As commerce expanded, exchanges had to be made more convenient. So precious metals became the means of exchange. Gold, in particular, became the “money” of choice. It was easily portable, maintained its value, did not rot or spoil, and everybody wanted it. Thus gold coinage became the easiest way to handle this medium of exchange. Gold coinage could be debased, as it was in ancient Rome. But as far as pricing was concerned, buyer and seller decided on the right amount of gold for the exchange. The biggest problem with gold was that it could easily be stolen.

Thus, the need for banks. They came into existence in order to make exchanges of commodities and gold more convenient. Merchants deposited their gold in the banks for safekeeping. They were given certificates or bank notes that could be converted into gold on demand. Banks acted as agents, or go-betweens, for buyer and seller. But instead of gold being shipped from one bank to another, buyer and seller did their business with the bank notes. Thus, accurate accounts had to be kept.

Eventually it became more convenient to exchange pieces of paper than the gold itself. The pieces of paper indicated who owed what to whom. But these pieces of paper had intrinsic value: the buyer’s gold, which was stored in the bank. For handling all of these commercial transactions, the banks were paid fees.

The bankers then got the bright idea of making loans to merchants who needed “money” to carry out a transaction. And so they issued bank notes to the debtor. The merchant paid the bank back with interest. The bank’s great concern was with defaulted loans, for the bank had borrowed the gold from its customer, and had to pay it back. And if it couldn’t, the bank was in big trouble. And if it became insolvent, its notes were no longer honored.

This was the case in early America, where the Farmer’s Almanac up to 1863 actually listed “Worthless and Uncurrent Bank Notes in New England.” Thirteen banks in Boston alone were listed as having worthless bank notes. They were worthless because the bank no longer had the gold with which to redeem them.

Until we abandoned the gold standard, all bank notes were redeemable in the gold or silver on deposit. But today’s government-issued money has nothing but the full faith and credit of the government behind it. Such paper money is called legal tender. By liberating paper money from gold, man had invented the greatest fuel for economic development and expansion in history.

Paper money has its risks and is totally dependent on responsible government for its value. Legal tender was invented to facilitate massive commercial enterprise and growth. But politicians have used it to redistribute the wealth, throwing billions at such projects as the “War on Poverty.”

In Argentina, the full faith and credit of the government simply went down the drain. And so its paper money lost a third of its value overnight by government devaluation. Thus, the Argentine peso proved not to be a reliable storage of wealth.

The same can be said for the American dollar, which buys much less today than it did back in the 1930s, 40s, and 50s. Back in the 1930s, when I was a child, I could buy a hotdog for five cents. Today, the same all-beef hotdog costs anywhere from $1.95 to $3.00. Of course, we all earn more money today for our labor, because even the cost of labor goes up with the cost of everything else.

No Longer a Gold Standard
The reason why the powers-that-be found it necessary to separate money from gold and silver is because the metals placed a tremendous brake on the expansion of credit. Our present booming consumer economy, which is so dependent on easy consumer credit, is a direct result of that policy. The only way to satisfy the tremendous need for credit was paper money backed by the full faith and credit of the government. In other words, it is the taxpayer who backs our credit economy and its paper money.

Today, money consists mainly of figures in computers. Even in supermarkets, more and more customers are using plastic to make small purchases. Paper money, or legal tender, is not even being used. The credit card registers the amount owed the store, the data is then put into the account of the customer, who then receives his monthly statement with the transaction recorded. He then makes the necessary payment by check or computer and the bank changes the figures.

The convenience of plastic has expanded its use. To buy gas you insert a credit card in the pump, fill it up, and get a receipt. It’s all done by numbers in computers. Everyone now has a cell phone. Everyone has a computer and is now on the Internet. You can buy or sell just about anything to anyone anywhere in the world on eBay.

Indeed, technology has made lots of goods and services less expensive, despite inflation, because it has lowered the cost of production. For example, the cost of a long distance call today is much less than it was back in the 1930s. And the price of chickens, once considered a luxury, has significantly declined. Competition and technology account for this favorable trend. But what we gain in technology, the government takes away in higher taxes or by the hidden tax called inflation.

Money Today
So what is money today? The money that becomes figures in a computer must still be earned the old fashioned way, by working for it, or earning it through prudent investment. That is, for most people. The expansion of government has made it possible to pay the needy in welfare checks and food stamps.

It is still possible to use gold as a storage of wealth. As long as paper money is susceptible to inflation, the dollar will continue to decrease in value. Thus, we have experienced exactly what the Argentines have, but over a much longer period of time.

Those people in Argentina who owned gold at the time of the collapse came out ahead of everyone else because the price of gold is set on the world market in London, and it is now worth as much as holders of the Argentine peso have to pay for it. Also, those who owned valuable real estate or precious works of art did well.

Because paper money is vulnerable, it is prudent to invest and store money in ways that will maintain and hopefully increase its value. Putting it in the bank at today’s low interest will not increase its value. The stock market is still the best way to grow wealth, that is with stock in companies that will grow and prosper.

Real estate is one of the best ways to store wealth, particularly in areas of increasing value. It makes sense to take advantage of today’s low mortgage rates to buy a house. Antiques and valuable works of art also make good investments.

As for gold, it may have a lasting value, but legal tender laws have banned it as a currency in favor of the paper dollar, so its price in dollars will fluctuate. Its price is subject to periodic fluctuations caused by political and economic crises. There is no way of knowing for sure what the price of gold will be tomorrow. In other words, those who bought gold when it was $800 an ounce lost more than half its value as it declined to $350. It all depends at what price you buy it and at what price you sell it.

In short, our greatest security is not in paper money but in the ability to create an income for ourselves. In order to do that we must be able to create and provide value for others. America blessed with a huge number of individual entrepreneurs and inventors who keep making things better and better. The genius of capitalism is that it can take a cartoon character of a mouse and build it into a billion-dollar entertainment conglomerate. It can take a simple hamburger and turn it into a worldwide fast-food phenomenon. And it can take a simple carbonated drink and make it universally recognized as the symbol of a nation.

The Bible tells us that the love of money is the root of all evil. But money now is not a shiny pile of gold, but figures in a computer. Our goal should be to use the gifts God has given us to create value through our efforts, our intelligence, our genius. That is the only way to make our economic pursuits pleasing in God’s eyes.


Topics: Economics, Government

Samuel L. Blumenfeld

Samuel L. Blumenfeld (1927–2015), a former Chalcedon staffer, authored a number of books on education, including NEA: Trojan Horse in American Education,  How to Tutor, Alpha-Phonics: A Primer for Beginning Readers, and Homeschooling: A Parent’s Guide to Teaching Children

He spent much of his career investigating the decline in American literacy, the reasons for the high rate of learning disabilities in American children, the reasons behind the American educational establishment’s support for sex and drug education, and the school system's refusal to use either intensive phonics in reading instruction and memorization in mathematics instruction.  He lectured extensively in the U.S. and abroad and was internationally recognized as an expert in intensive, systematic phonics.  His writings appeared in such diverse publications as Home School DigestReasonEducation Digest, Boston Magazine, Vital Speeches of the DayPractical Homeschooling, Esquire, and many others.

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