The Story of Money – Complete with unhappy ending.

Here are the key things you need to know about money:

Money was a creation of the market — not of government.  Based on all evidence, it evolved in voluntary transactions which drove people to use items compact, incorruptible, and not easy to find or replicate.  In the more advanced trading economies, from China and India to Greece and Rome, and Europe and America, that evolved into precious metals.

Governments early on discovered the potential of monopolizing and then corrupting money as a form of hidden taxation.  This was done rather crudely at first – with “coin clipping,” literally peeling the outside edge off of coins to steal some of the metal, and then to pass them along at their face value.

Governments facilitated the process by having coins based on something other than weight.  An honest money should just have been a certain weight of metal — say a British “pound” of silver — the original source of the name for British fiat money.  Today, by the way, a pound of silver is worth about $500, and a British pound is worth about $1.60.

The Romans went from clipping to simply changing from precious metals to cheap metals for their coins, and then minted them by the millions, which is why ancient Roman coins can still be purchased for low prices.  This process was replicated in the U.S. in the 20th century, and now there are discussions about switching from relatively expensive base metals in our coins to even cheaper base metals, as the copper and zinc in a penny already costs more than a penny, and the metals in other coins are on the same journey.

But modern states are much more ambitious, and have followed the Communist Manifesto on this point:

Centralization of credit in the hands of the State, by means of a national bank with State capitaland an exclusive monopoly.  (From Chapter 2 of the Communist Manifesto – Karl Marx – this is one of the ten planks of Communism)

Paper money was introduced privately as a proxy for precious metals; many U.S. banks issued “bank notes” in the 19th century; the same in Europe.  This worked well in some times and places, but of course some banks issued more notes than they could back, and instead of focusing on that irresponsibility, bankers and governments conspired to centralize the practice.

Governments recognized the potential, and came in big, eventually outlawing private bank notes and monopolizing the process.   So what governments did was steal, via a gradual process, the goodwill of hard money based on precious metals, and transfer it to their own fiat (“it shall be so”) money.   Now they were free to fabricate money without limit, except for the ambiguous limits imposed by the market via inflation and credibility.

Today the amount of paper money in circulation in the U.S. is entirely based on demand for paper money — the Fed and treasury create as much cash as the market wants, with no action by Congress.   And the demand for that money is of course heavily influenced by the creation of credit, which is most heavily influenced by how much, if any, credit is artificially created by the Fed.  And that has been two trillions monetized in the past four years, whereas it was a total of $800 billion from 1913 to 2007.

This “monetization,” or “quantitative easing,” is the purchase of government debt — or other debt — by the Fed, with electronic credits recognized as money.   It is money from nothing, and it is what is floating our fake economy, financing government profligacy, bailing out Wall St., and robbing savers along the way.  It is a straight-out wealth transfer from savers to borrowers, and from the most solid citizens to the profligate and the connected.

It requires no action by Congress.  The Fed is a creation of Congress, but Congress disclaims any responsibility for actions of the Fed, and of course is well served by the process.

If the Fed were to cease monetization and attempt to restore sound money now, a depression would start — except that the screaming from Wall St. would force the resignation of Bernanke and the appointment of another puppet.

It is difficult to see any good end to this — the government and powerful parts of the economy are addicted to subsidized credit; they are stealing without accountability.  Why would they stop?  They will take what they can get until some historic crisis kills the goose, or otherwise cuts off their access to our wealth.

While this monetary situation prevails, only the international markets and the world economy’s tolerance for more dollars and more profligacy from the U.S. limits the wealth that the U.S. government can absorb and destroy.  Congress will fiddle away, and act the victim when it all blows up.  Yet like so much else in our system, Congres and only Congress has the power to address this.

This type of money — fiat money, backed by nothing but the self-restraint of governments and the tolerance of markets, prevails around the world.  There is no sound money, and therefore the depreciation of all paper moneys against gold is the best measure we have of the market’s confidence in this paper money.

Every paper money story in history has ended the same way, and so will this.”

Not exactly uplifting, but it seems to be an accurate reflection of reality.  And while reality is an acquired taste, in regard to monetary policy and its effects, it’s one we all ought to acquire sooner rather than later.

(Image courtesy of Images_of_money at Flickr – http://www.flickr.com/photos/59937401@N07/)