Finance

In Money We Trust?

Money is only useful if people agree that it can be trusted.

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Look at the dollar bills in your wallet. They say they are "legal tender for all debts."

But are they? What makes them valuable? What makes them worth anything?

Each bill says, "In God We Trust." But God won't guarantee their value.

The $20 bill depicts the White House. Congress is on $50s. But neither guarantees the value of our dollars.

I wouldn't trust them if they did. I don't trust politicians, generally, but I especially don't trust them with money. Since President Richard Nixon took the U.S. off the gold standard, the dollar has lost 80 percent of its value.

So what makes money trustworthy?

A new PBS documentary, In Money We Trust?, points out that money is only useful if people agree that it can be trusted.

I made a short version of the documentary.

To earn trust, money should be "reliable, like a clock," says Forbes magazine publisher Steve Forbes. "It has to be fixed in value: 60 minutes in an hour, 60 seconds in a minute. Imagine if that floated each day. That would make life chaotic."

Throughout history, people needed a way to assign a fixed value to money.

"The best mechanism for this would be some kind of commodity that's permanent, easily transported, easily understood by everyone. And that medium was, of course, gold," says anthropologist Jack Weatherford in the documentary.

But gold isn't the only thing to which people have pegged the value of money. They've also linked it to things such as silver, crops, and salt. Salt-based trade is where we got the word "salary."

But gold created "a kind of mobility in people's lives that they never had before," says Weatherford.

But gold is heavy—hard to carry around. That limited trade.

So people created banks.

"The Knights Templar developed a system where they said, 'Well, you can just deposit your money here with us and then, when you need some, withdraw it from your account,'" explains economist Nathan Lewis. "This enabled the peasants to travel Europe without being in danger of being robbed."

That meant people could engage in more trade.

"You could…sell a bond in London," says Lewis, "and build a railroad in India."

The increased trade made the world much richer.

In the United States, the first secretary of the treasury, Alexander Hamilton, fixed the dollar to gold and silver. The whole world came to trust the dollar as a reliable indicator of value.

But governments like to enrich themselves by debasing currency, making it appear the government has more wealth than it really does—spreading the same wealth over more units of currency.

The evil emperor Nero did it in ancient Rome, says Weatherford. "They would call in all the coins, melt them down, reissue them—of course, with his picture on them," but with less gold in each coin. Rome's decline was tied to the decrease in the trustworthiness of its currency.

"When you change the value of money, you're stealing property," says Forbes.

That happened in Germany after World War I. The victorious nations demanded that Germany pay for the cost of the war. So, Germany just printed more bills. That created massive inflation. That inflation helped elect Hitler.

Governments rarely resist the temptation to print more currency.

During the Great Depression, Franklin Roosevelt confiscated private supplies of gold.

Without a clear legal peg of each dollar to a specific amount of gold, the government could print more currency. That only added to the financial instability.

After World War II, governments returned to gold-based currency. "Those two decades," says Lewis, "were the most successful economically of any time."

The documentary argues that a return to the gold standard is what's needed to have reliable money.

Today, most economists disagree.

But In Money We Trust? will give you a new appreciation for how important it is that we get this right.

As technologist George Gilder concludes in the documentary, "All this is the struggle for trust."

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32 responses to “In Money We Trust?

  1. “Look at the dollar bills in your wallet.”
    And there is your problem.
    No one has dollars in their wallet. They have a chip that links a bunch of ones and zeros to their identity. All the gold in the world will not replace the computer. The fascists have already won. Whenever they want they can eliminate all value in banks, credit unions and Wall Street. Then you WILL do as they say, or “no soup for you”.

    1. I carry $40 cash, just in case I need a tank of gas to get home (and all my plastic fails at once).

      And good luck stopping people from using alternatives when the “money” they give us ceases to be trusted.

  2. You’re not trusting the money. You’re expecting other people to value it. Why would they value it? Because they all expect others to value it as well. So it’s a network of expectations that give money its value, not trust.

    1. But why do they trust in paper US dollars/Federal Reserve Notes?

      Because people can pay their US taxes with them.

      If the government dissolved tomorrow or next year or in 200 years, and no longer collected taxes, the value of the FRNs would disappear overnight (see CSA dollars, c. 1865).

  3. Throughout history, people needed a way to assign a fixed value to money.

    But you can’t do that. Even if you peg a currency to the value of something else, there’s no way to actually fix the value of that something in relation to all other somethings. I mean, you could try to do so through authoritarian fiat and enforce it in a draconian manner, but like a minimum wage or a price cap, it only restricts people’s actions and doesn’t really change the subjective marginal utility that a person assigns to things.

    1. But that’s not how it works. You don’t peg the currency to the VALUE of something else; you peg it to a QUANTITY of something else.

  4. Most of the arguments against the trustworthiness of fiat currency apply equally to gold. Yes, it has some intrinsic value as a commodity but that intrinsic value is usually only a fraction of its currency value. Gold has value primarily because other people have faith that it has value.

    By the way, the article is flat wrong in the assertion that there is or ever was a fixed value to money. Sure, you can peg your currency to any one commodity but its value continues to fluctuate against everything else. It’s like a bunch of chips floating on a surging sea. They’re all constantly going up and down relative to each other. Whether you tie your currency to one of the existing chips or create a new chip that floats independently on the sea makes little actual difference.

    1. But some commodities are more stable than others. And, even more importantly, the value of gold is determined by the market and not by a central bank.

    2. All value is relative, meaning determined by individuals.

      All transactions are dependent on values being different. If values for things weren’t different, no one would trade their stuff.

      Gold doesn’t have inherent value per se, but it has been valued for it’s beauty and usefulness very consistently, by nearly every human, since its discovery.

      Pieces of cotton with pictures of dead Presidents on the other hand, not so much.

      -An Economist

    3. People have faith that gold has value because it doesn’t depend on political entities continuing to exist. Gold is more or less permanent, and hard to jack up the supply of (unless someone finds a gold asteroid….)

  5. before I looked at the bank draft saying $9300, I have faith …that…my best friend realy bringing home money in their spare time at their laptop.. there aunt started doing this for only about 17 months and resently took care of the mortgage on there mini mansion and got a great Smart ForTwo. this is where I went,

    1. Jesus Christ, Kirkland. How much did you have to drink this morning?

    2. Be careful there—depositing $9300 will get you investigated for “structuring”.

  6. You can’t trust what has been corrupted.

    Money is simply transferable work. Neither it nor debt grows on trees. Interest is the corruption of money.

    Our economy is a corrupt fiction. Why else would it be designed with recessions and depressions where the rich need only sit on their growing piles of money.

    Trust in work.

    1. Rob: Depressions and recessions are a natural oscillation in a free market economy with too much delay in the feedbacks. That is, when a product stops selling well in stores, it takes time for the manufacturer to learn about this and change to producing something else. In 1929, this was a very long delay – first the store manager had to either notice this item remaining on the shelf longer, or finish an inventory (usually this was annual) to see that sales of it had slowed. It was probably several weeks for a big slowdown to be seen, then the store would leave this item off the next order. That went in by mail to a distributor, who would add up the orders from many stores (manually) and eventually mail an order to the manufacturer with a reduced quantity. The manufacturer would add up the orders and realize that item wasn’t selling, months after the slowdown in sales began. At that point, several months worth of excess production was already in warehouses and stores, so the manufacturer didn’t need to just slow down the production, but to stop it as soon as possible, and lay off the workers.

      BUT there were also about six months of materials and parts in stock and on order that could not be canceled or returned. That could put the manufacturer into a condition where it could not pay for the materials it was receiving – even for the other product lines – and the rest of the plant shut down as the company went into bankruptcy. And this rippled back to the suppliers, who not only had to shut down their own plants (for a while, they hoped), but lost the revenues they depended on for operations _and_ for paying their loans. There are more bankruptcies. Other manufacturers might have to shut down production of items that are still selling because they can’t get the parts.

      Then the banks become panicked – too many of the loans they made are turning sour, both for businesses that shut down and mortgages to laid-off workers. And they try to protect themselves by calling in all the loans they can. Now _other_ businesses are short on operating funds…

      1. I’m always amused by nerds explaining the reality of fiction.

        Keep it simple stupid.

        Money is work. People don’t need to work less during depressions.

        1. So, Rob has discovered the secret to ending depressions: everybody continue working for free. Arbeit macht frei.

    2. Misek parrotting the labor theory of value and denouncing interest: typical (national) socialist views.

    3. Interest is the price for an exchange between Party A who wants money now but doesn’t have (and who expects to have more later), and Party B who has money now but would gladly part with some for more money later. Nothing corrupting inherent in that.

      1. Interest is the price of renting someone else’s money.

  7. But In Money We Trust? will give you a new appreciation for how important it is that we get this right.

    Ah, the collectivists at Reason are at it again: “we” need to make decisions and impose them on society. Because that’s what the “libertarians” at Reason are all about: making collective decisions.

    Here is a libertarian idea: how about government abolish the fed and give up control over money? How about private institutions and individuals decide what to use for money for themselves, with government getting out of the way?

    1. So “private institutions and individuals” don’t get to call themselves “we”?

      It seems to me that you are reading more into the article than is really there. The “we” in “how important it is that we get this right” could be read as “government” but a more natural reading would be as “society” or “the people as a whole”.

      1. The “we” in “how important it is that we get this right” could be read as “government” but a more natural reading would be as “society” or “the people as a whole”.

        That’s how I read it. That is, Stossel subscribes to the fiction that there is such a thing as “society” or “the people as whole” that ought to have the power to make decisions for all its members, decisions that can either be “right” or “wrong”. That’s what makes Stossel’s thinking collectivist.

        In fact, “society” has no decision making power at all. The reason the US has fiat money is because it is in the economic interest of a small financial elite who used their political power to push it through, not because “we” (as a society) made a decision to have it and got it wrong.

  8. Throughout history, people needed a way to assign a fixed value to money.

    Money does not, and never has had, a “fixed value”. The very concept of a “fixed value” of anything is nonsense. Money, like anything else, has different values to different people and in different contexts.

    1. Must have fallen asleep in history class. A dollar used to be an ounce of silver. You could even break the old Spanish pieces of 8 into pieces, two for a quarter dollar (hence 2 bits).

      1. Yeah, you missed the part where the value of silver measured in any other good or service you care to choose was not constant over the period that the US dollar was on the silver standard.

      2. Must have fallen asleep in history class. A dollar used to be an ounce of silver.

        And an ounce of silver does not, and never had, a fixed value either.

        Nothing has a fixed value. The value of any commodity, whether fiat money, gold-backed money, silver, apples, nuclear waste, etc., always depends on time, context, and the individual.

  9. The fundamental problem with the gold standard is that gold isn’t just a rare metal anymore. It’s an industrial product with a speculative collector’s market as well. Gold prices are extremely volatile and that’s all the more reason not to use it for currency because it would not be a good store of value.

    1. Compare the value of a one-twentieth of an ounce of gold coin in say, 1913 and the present day.

      Then repeat that thought experiment with one US dollar from 1913 and in the present day.

      I know which I’d rather have, and which has been less volatile.

      1. A change in value between just two points in time tells you nothing about volatility

  10. All i know is if we get to mad max times, and someone offers me gold in exchange for my food, water, guns, or ammo, i’m going to laugh in their face

    and then rob them of their gold 😉

    unless you’re big on jewely, gaudiness, or electronics manufacturing, gold has no more inherent value than monopoly money

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