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What is Money? A Basic Economics Lesson from 1947
Saturday, 27th September 2008 (by J.D.)This article is about Basics, Economics, Funny Money
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I was pleased recently to discover another handful of short films about financial topics from the 1940s and 1950s. I’ll share them over the next few months, starting with this timely piece from 1947. With the recent economic turmoil in the U.S., it’s worthwhile to answer the question: What is money?
This ten-minute film takes its structure by following a single $5 bill as it circulates from person to person, being used in a variety of ways: to buy goods, to pay for services, to save in the bank. These transactions allow for a discussion of the history and nature of money.
Before the advent of money, people bartered. People still barter to a degree. The film provides a simple example:
Not long ago, Tom Havens got a spotlight for his bike by trading a catcher’s mitt for it. Swapping like this works well between friends. But what would you trade in a hardware store for a gallon of paint? And how would the store owner get the paint and the other goods he sells?
Modern economies are too complex and our jobs are too specialized for barter to be effective. Instead, we rely on money as a quick and easy medium of exchange. To be useful, the film says:
- Money should be something of value.
- Money should be easy to carry.
- Money should be divisible.
- Money should be durable.
Gold and silver emerged as early money because they met these four requirements. As money evolved, however, and as economies became more complex, this commodity money was replaced by representative money, paper notes and metal coins backed by reserves of valuable metals. (This is the gold standard that was once the basis of world currency.)
Today, however, people all over the world use fiat currency, money that obtains value by government mandate. This film was made in 1947, during the slow transition from the gold standard to modern fiat currency:
The values of the money we use every day are the values fixed by the government. The paper bills, and even the coins, are not in themselves actually worth the amounts they represent. Their face values, however, are guaranteed, not only by huge reserves of gold and silver, but by the stability of the government, which fixed those values. As long as people remain confident that our government is strong and secure, they will continue freely to accept and spend its money without questioning the value.
Money is not only a medium of exchange, but also a standard of value. Because $5, say, is a known entity, we’re able to estimate the value of other things, like a bowl of berries, or an afternoon at the movies, or a book.
Money also serves as “a standard for future payments — a yardstick by which we measure the value of anything bought or sold to be paid for in the future.” It’s also a storehouse of value. That $25,000 in your savings account represents accumulated wealth.
For more on this subject, read this brief history of money.
19 Responses to “What is Money? A Basic Economics Lesson from 1947”
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September 27th, 2008 at 9:07 am
One of the reasons that I enjoy economics so much is that it is part math, part science, and part human psychology. Paper currency is only worth something because everybody agrees and believes that it is worth something. It is amazing to me that we built such a complex and (generally) well-functioning financial system based on the common belief that little green pieces of paper have value.
RDS
http://financialvalues.blogspot.com/
September 27th, 2008 at 9:35 am
Once upon a time, our ancestors had nothing like paper money - and they survived. Money has evolved so much, and wondering what type of money technology will bring in the future. Plastic, EFT, Interac, SmartChip … what’s next?
A Dawn Journal
http://www.adawnjournal.com
September 27th, 2008 at 10:49 am
JD,
You need to get a copy of “The Money Masters” DVD if you don’t already have it. It is a very informative documentary on money and who really controls it. The presentation is a little dry, but the information is invaluable.
http://www.themoneymasters.com/
September 27th, 2008 at 12:52 pm
Money is just a ‘token’ which reflects time spent working. You work so many hours, you get so many ‘printed pieces of paper’. If you are clever and lucky, you can parlay those pieces of paper into more pieces of paper. With that little stack, you can hopefully buy time off.
The equation of time/money is why I feel that theft of your possessions is a major issue. When a thief steals you pile of paper, your TV, your car, he/she is in essence stealing time from you. The item is not important, but every hour that you spent working, is an hour you have lost on this planet. It is an hour that you can never ‘buy’ back.
Theft is not taking a replaceable item, it is the purposeful shortening of your lifespan.
My apologies for the early morning philosophy… I’ve been thinking about what money and possessions really mean a lot lately. (Particularly in light of the stock market decline and drop in home values.)
jegan
September 27th, 2008 at 3:19 pm
Dr. Ron Paul has been trying to push this notion for a VERY long time
September 27th, 2008 at 8:27 pm
John Egan makes an excellent point above. The transition of currency from the basics of bartering items to todays immensely complex financial system is incredible.
However, I believe that some of today’s financial crises are a direct result of the historically recent transition from paper to plastic currency.
When the disconnect between the value of plastic currency and the time it takes to earn said currency becomes as great as it is today, it is no wonder America is in a financial crisis.
If your fundamental perception of the work to value ratio is at odds with reality, you are going to attempt to live outside of your means and find yourself in financial trouble.
September 27th, 2008 at 9:16 pm
Our money is created from debt. Without debt, the money supply disappears. This google video, although long, explains the history of our monetary system.
http://video.google.com/googleplayer.swf?docid=-9050474362583451279
September 28th, 2008 at 8:41 am
Yeah, I like those old videos. Archive.org has a lot of them too. The Prelinger Archive:
http://www.archive.org/details/prelinger
Paul McKeever (Canadian Freedom Party Leader) has a great series on money & banking. You guys might want to check it out.
It’s a six-part series, just search “money” in the video box:
http://www.youtube.com/paulmckeever
September 28th, 2008 at 9:24 am
“How to you make change when the price is half a cow?” That cracked me up.
One of the underlying themes of this video that interests me is inflation. The kid bought a gallon of paint for $5 and the other guy bought gas for $5.
I’ll be honest. I don’t understand inflation, but videos like this highlight it.
http://www.goingcarless.com
September 29th, 2008 at 9:14 pm
Fiat money is *not* a store of value. Like a new car driven off the lot, it loses value the second it leaves the printing press, as more bills roll off the printing presses after it.
With nothing to to give the dollar intrinsic value, as it had on the gold standard, its value is determined solely by the amount of money available, and how easy it is to get more of it. That is the original and true definition of inflation: an increase in the supply of money.
When there is an increase in money, prices go up to match. The increase in prices is the symptom of inflation that people see and feel.
All of the booms and busts in our economy are caused by our fiat money and the Federal Reserve system. They create money, create easy credit, and spread out new money liberally and cheaply. The vast amount of cheap money available encourages borrowing and spending and investment in risky ventures. This is the boom, and prices rise as boatloads of cheap money hit the market, as we plainly saw in the housing boom.
But booms never last forever, and sooner or later the Fed raises rates, decreases the money supply, makes credit more expensive, and they cause a bust. Sometimes they risk putting themselves out of business, but thanks to their vast financial influence, they are able to get government to force taxpayers to cover their losses and keep them in business. This is the sole reason for the existence of The Fed, the FDIC, the World Bank, the IMF, etc.
With fiat money, the longer you hold on to it, the less its worth, because they are constantly printing more.
Bailouts won’t save our economy, they will make it worse. Only disbanding The Fed, eliminating fractional reserve banking, shrinking government, and returning to a silver or gold standard will.
September 29th, 2008 at 9:21 pm
Mike.. Very good comments… It used to be that we were on a gold standard .. And dollar bills stated ‘redeemable’ on them… If I remember correctly, it was Nixon’s administration that abandoned the standard. Now currency just states ‘In God we trust’… And seriously, with George ‘Dubya’ Bush as our countries CEO, God help us all! Because, it sure doesn’t look like our government has the understanding or will to do so.
jegan
September 30th, 2008 at 8:10 am
I’ve been following the gold and silver markets for some time now and I am disconcerted with the fiat money that we use today. I have multiple posts on my blog about a myriad of topics, but recently I’ve been bitten with the “silver bug” and I’ve focused on it a bit more.
I talk about some of the history and probable future of silver here (http://jasonmoran.blogspot.com/2008/08/silver-spoons.html)
October 1st, 2008 at 12:10 am
It’s a bit of a tangent, but a few people might appreciate this very real, very concrete example of modern hyperinflation. This banknote is essentially worthless today as legal tender, but it trades on eBay for thousands of times it’s bank value.
http://flickr.com/photos/mistermoss/2899197879/
October 1st, 2008 at 4:30 am
Agree with everything that Mike says.
Unfortunately governments are run by people who beleive they have a right to impose decisions upon others through force.
Are you going to trust somebody that is holding a gun to your head to give you financial security?
October 1st, 2008 at 5:06 am
This blog is really great. Just found it today. Finally someone who can see through all the smoke screens put out by the central banks, economists, governments etc. If only a lot more people were interested in learning the fundamentals of money the banking cartel could not get away with this phenominal deception. But history has shown time and time again that we as humans learn nothing from history.
I’m not totally convinced that a gold or silver standard will work in this modern society, though.
I would like to see a monetary system with currency issued by government with its value based on people’s labour or products and services contributed to the marketplace.
The long term problem here is to keep the people in Government honest.
“Power tends to corrupt and absolute power corrupts absolutely”. It doesn’t matter wether it is politicians or bankers.
October 1st, 2008 at 6:55 am
Folks, this entry is not meant as support or the gold standard. Though I haven’t done much reading on the subject, I’ve done enough to know that it has problems of is own. It’s subject to inflationary pressure, too. In fact, EVERY GOVERNMENT IN THE WORLD uses fiat money because there are concerns with the gold standard. To me, this seems like a pretty powerful argument that it’s not some panacea.
October 1st, 2008 at 10:44 am
It’s interesting to think of the evolution of money. I wonder if one day we will lose hard currency to some form of electric currency… I don’t see how this could be good in the overall though.
Does anyone have any opinion on this?
October 1st, 2008 at 12:42 pm
CoolProducts… We’ll probably see the effective discontinuance of currency within our lifetime:
- Credit and debit card use is increasing at a faster rate every year.
- Currency is more and more expensive to produce. A penny now costs mre to make than it is worth. personally, I’d like to see the demise of the penny anyway. 30+ years ago on American military bases, we didn’t even use them. We just rounded up or down to the nearest nickel.
- The growth of the Internet and Web accessible cellphones encourages a paperless society.
- Asian cellphones are already ‘payment ready’. In other words Asians already pay for meals etc with their cellphone and can look it up immediately with online banking to confirm the amount and to check to see if it cleared the bank.
- Like many people, I hardly ever keep cash these days. I primarily use cash for the newspaper and purchases under $5.00. I prefer the record keeping, the ease of checking my spending habits at the end of the month and the ability to allocate payments for tax purposes.
The most interesting idea I’ve come cross lately is the presupposition that we will have an implanted chip. And if anyone thinks this is far-fetched, then I’d like to point out that not only do we implant chips in dogs, cats and other animals, but in places where kidnapping is more prevalent (think Mexico and Columbia), people are implanting their loved ones as a means of identification. Then there are the ‘forward thinking; crowd that are implanting RFIDs under their skin for a variety of purposes.
A ‘Brave New World!’
jegan
October 1st, 2008 at 6:46 pm
There is already wast amounts of “money” existing only on computers. The long term goal for the banking cartel is to have one currency for the whole world. Bit by bit we are moving away from physical currency and into virtual money all controlled from the central banking platform. The way it is sold to the world is convenience.
Don’t get me wrong here, I like internet banking and the convenience of it, however once it gets to the stage where people need to have microchips under their skin in order to buy or sell, you have lost your freedom and independence, because you are no longer in control the bankers are. Of course you can choose to participate in that scheme as a matter of convenience or what ever other reason (matter of national security looking at you with a frown on their face while trying to convince you), however I would never choose to participate in such a scheme.
Again look at history and how those who have opposed central banking have been dealt with.
Central Banking does not serve the good of humanity, it is a mere instrument to control masses and profit from the masses.
And here we are in 2008 with yet another financial crisis unfolding.
No tax payer funded bailout is going to fix this one.
It is strange how President Bush said at the beginning of this crisis that; “The American economy is fundamentaly strong” even though it is rooten to the core.
And now it is a case of: “vote for this bail out or else……”.
Sounds like the weapons of mass destruction in Iraq which were never found.
Maybe he has come across some financial weapons of mass destruction in his own backyard???