The Origin of Money

(And How It Was Stolen from You)

by Alexander "Ace" Baker

Money. Everybody wants it, and you can always use more. But what is money? Where does it come from? Is it really the “root of all evil” as the Bible and Pink Floyd have said? Do we really need it? How did we all come to value little slips of paper with portraits of dead presidents on them? Why can’t they just give everybody a million dollars and make us all rich? And why is any of this important to those who are concerned about human liberty?  

I’ll anticipate some conclusions here: Money is vital to a prosperous society, without it mankind could do no better than a primitive agricultural society. Money originates and evolves privately, in the market, as a solution to the problems presented by direct barter. Governments (in collusion with large Banks) around the globe have forcibly taken over and monopolized the creation of new money, and abolished the natural gold standard for the sole purpose of expanding their own power and confiscating wealth. All other “justifications” for government money are lies based on completely discredited economic hogwash. The unprecedented and artificial “fiat money” imposed on us now represents a grave threat to civilization itself.

What is Money?

Money can be defined as: A generally accepted medium of exchange. Theoretically, money can be anything that people desire to own, not for its direct use, but rather for its later value in trading for things that are useful. In practice, around the world and throughout history, one substance emerged as “the people’s choice” as the best money, and that substance is gold.

In the Beginning . . .

Imagine a primitive village with a fisherman (Mr. Fisher), a baker (Mr. Baker), a wagon maker (Mr. Wagoner) and a berry picker (Ms. Berry ). Even in primitive societies, workers tend to specialize like this, because of what Ludwig von Mises called the two most important facts about humans(!!):

1. That a group of people can produce more goods by specializing and trading than they can in self-sufficient isolation.

2. Man’s ability to recognize fact #1.

So trading goods with others is a mutually beneficial, natural way for humans to improve their situation. If Fisher wants bread and Baker wants fish, they will want to trade, say one fish for two loaves of bread. So far, so good. But what happens if Fisher wants bread, but Baker doesn’t like fish? This is the first problem with barter, the so-called “double coincidence of wants.” Fisher has to want what Baker has at the same time Baker wants what Fisher has.

To solve the problem, Fisher might go visit Ms. Berry , the berry picker, because he knows that almost everybody likes berries. He trades his fish for a basket of berries, not because he wants to eat them, but because he thinks that Baker will trade loaves of bread for them. When this happens, berries are beginning to function as money, because they are being demanded not just for their value as food, but for their value in exchange.

So we see that money has a function. It solves problems. And like anything else that has a function, it stands to reason that some items will work better than others. You could pound a nail in with a rock, but a hammer works better, because it has certain qualities (leverage, flat surface) that make it superior to a rock for that purpose. And so it is with money. Some things will possess qualities that make it a better money than other things.

Good Money vs. Bad Money

What are the properties that make for a good money? One we’ve already touched on, and that is that money must be something that nearly everyone values.  Another problem with barter is divisibility.  Mr. Baker and Mr. Wagoner might agree that a nice wagon is worth 1,000 loaves of bread, but Wagoner doesn’t want 1,000 loaves, he only wants one. He can’t whack off 1/1000^th of a wagon, that would be useless. So a good money must be something which is still valuable even when divided into very small amounts. Other qualities that make for useful money include durability and also interchangeability, where one unit is the same as any other.  

It’s very unlikely that anything extremely common, like sand, could ever become money because people just don’t value common things as highly as rare things. That’s good, for another very important quality of good, sound money is that it should be costly to produce. Briefly, this is because the ability to create money without cost carries with it the extraordinary power to redistribute real wealth to whoever is allowed to create it. More on this later.  

What began to happen, over centuries, in separate societies all over the world, is that people tried out all sorts of things as money - salt, seashells, cattle, etc. This was a spontaneous, natural competition to determine the best money. That is, the best according to function, as determined by the market, not the whim of some tyrant.

And the Winner is . . .  (as you might have already heard)

Gold. Precious metals in general and gold in particular have been chosen time and time again by the market as the best-functioning money. It happened independently, in separate societies, over and over again before being integrated into a world market, so as the world market did begin to take shape, gold naturally emerged as the chosen money.

At the risk of being annoying, this bears repeating:

Money is not an abstract or arbitrary concept, it is a very real phenomenon with tremendous beneficial consequences for human existence. It has a purpose. Why on earth would we ever want to settle for anything less than the very best tool for such an important job?

The Original Bankers, and The Original Sin

Now imagine we’re in a somewhat more advanced society, perhaps in the Middle Ages. Picture a village with farmers and various other cobblers, coopers, smiths and shopkeepers readily exchanging gold for their goods and services. The existence of a widely accepted, well functioning money is making possible the wider and wider division of labor, allowing society to produce more, increasing the standard of living for all.  

What if you wanted to safely store some of your gold until you needed it? In many towns, the local goldsmith was the only one around with a decent safe, so Mr. Goldsmith (sensing a legitimate business opportunity) would allow you to warehouse your valuable money (for a small fee), issuing you a paper receipt, which would entitle you to reclaim your gold on demand. Once there were many such warehouse receipts floating around, people realized they could conveniently exchange the receipts as money, because everyone knew that these pieces of paper were “as good as gold.”  

As you may have guessed, the goldsmiths were the original bankers, and these warehouse receipts were the original paper money.  Once paper money backed by gold became established, Mr. Goldsmith noticed something very interesting. On any given day, only a small percentage of townspeople actually came to reclaim their gold. And when they did come to redeem it, they didn’t care if they got exactly the same gold back, only that they got the correct amount.

“Hmmmm” thought the less-than-honorable Mr. Goldsmith, “What’s to stop me from just writing up some extra receipts for myself to spend? Sure, more and more people will come in to claim gold, but so what? Even if two or three times as many people start showing up, I’ll have enough gold in reserve to cover it. I’m rich!” He was so proud of himself for his stroke of genius that he went right over and kissed himself in the mirror. And thus was born the fine art of counterfeiting, or “Fractional Reserve Banking” as bankers came to euphemistically call it.

And this counterfeiting scheme worked like a charm. Goldsmith would print money for himself to spend . . . or lend. People were suspicious of Mr. Goldsmith’s newfound extravagant riches, and they were also curious about something else. Prices on things around the village had been going up and up. You see, the creation of new money must have the effect of chasing up prices, because the amount of money that is spent is closely related to the amount of money that exists. If more money exists, then more money is spent, and if more money is spent to buy the same amount of goods, prices must be higher. This, of course, is called inflation. So if they gave everybody a million dollars, prices on everything would go up correspondingly, and no one would be better off.

The Bank Run - A Beautiful Thing

Anyway, the people’s natural suspicions about Mr. Goldsmith were correct. It is simply fraudulent for the owner of a warehouse to issue receipts for goods that don’t exist, or to lend out someone else’s property that is supposed to be in safekeeping. If you print a deed to a house and there’s no house, that’s wrong. If you print a title to a car and there’s no car, that’s wrong. And if you print a claim to gold when you have no gold, that’s wrong also.

Eventually the villagers smelled a rat. They got together, receipts in hand, and all showed up at bank to demand their gold, most of which simply wasn’t there. This became known as a “bank run.” Needless to say, the people were most unhappy with their discovery that the banker they trusted with their savings was a lying crook who had swindled them. Many a dishonest banker met up with vigilante justice, no doubt. The potential for a bank run became an indispensable free-market check on the integrity of bankers. For while any banker can be tempted to enrich themselves by artificially expanding the money supply, they are fearful of going out of business, and they are damn fearful of an angry mob of swindled customers. The problem then, as bankers thought of it, was to figure out how to expand the money supply endlessly, without cost to themselves, and without fear of a bank run.

Meanwhile, Back at the Royal Palace . . .

The king had a different problem. Kings dream of empowering themselves and securing their place in history through conquest and imperialism. Trouble is, military adventures are very expensive and the peasants hate being taxed. Like bankers, kings too fear the wrath of an angry mob.

Well, leave it to Mr. Goldsmith to be struck with yet another bolt of evil brilliance. He goes to the king and says, “Look, make my bank the official bank, and tell the people they must accept my paper money for all debts. Grant me the exclusive right to print money, take anybody else who prints money and put them in jail. If you do that for me, oh royal one, here’s what I’ll do for you. Anytime you need financing for your war, just print up some pieces of paper and call them “government bonds.” I’ll “buy” the bonds from you with my paper money, then you’ll have all the money you ever need!” 

The king, being a politician, was good at lying and making up plausible sounding excuses. So he justified this new central banking cartel by claiming it was necessary to keep those greedy bankers in line. Get it? With a nod and a wink, the government pretends to be the ally of the people, while in reality seizing the money supply, creating a banking cartel, and destroying the market mechanism that was the people’s only real recourse against the inherent dishonesty that is Fractional Reserve Banking.

Keynes, the False Prophet of Econ

The preceding was a stylized fable, but conveys accurately the essence of what has occurred in the real world, e.g. with the Bank of England, and the U.S. Federal Reserve. Nowadays, the excuse given for having a central bank is “managing the economy” (controlling inflation, preventing deflation, keeping interest rates low, stimulating job creation, blah, blah, blah). Belief in the wisdom of government economic meddling is largely based on the theory of “economist” John Maynard Keynes. Keynesian theory holds that a free market will over-produce goods, leaving workers unable to buy their own product, which causes massive business failure and unemployment. The only remedy, according to Keynes, is for government to print and spend lots and lots of new money. It’s not hard to understand why politicians around the world gushed praise and knighthood upon Lord Keynes, while ignoring true economic science, which figured out long ago that government intervention into the economy is always destructive.

It’s beyond the scope of this article to refute Keynes. Suffice it to say here that Keynesianism is utter nonsense from beginning to end. It is self-contradictory, relies on shifting definitions, defies common sense, contains logical absurdities, and disregards human nature. It would be laughable if only it hadn’t been taken seriously. For a scholarly dissection of this evil doctrine, please see “The Misesian Case Against Keynes” by Hans-Hermann Hoppe .

The State vs. The People

A government money monopoly radically changes the relationship between a people and their rulers. In reality, government is utterly dependent on its productive citizens for everything that it buys, just as a blood-sucking parasite is dependent on its host. Under a system of private money, this is obvious to all. All government spending eventually returns back to the hands of private citizens, and if the government wants to spend more, it must again extract wealth from the people. Clearly, government is supported by the productive activity of private citizens.

However, once government acquires the exclusive privilege to create new money without limit, a strong illusion is created that makes it now appear that the people are dependent on government. In truth, government has become the source of money, but not the source of real wealth. Sadly, today millions of people mistakenly believe that their government is the cause of their prosperity. Nothing could be further from the truth. (See “The Fed is Lifeblood to the Root of Evil” for more on how central banking works to confiscate and redistribute wealth).  

Clear and Present Danger  

Sound money is crucial to the division of labor and thus to society itself, but that doesn’t mean that people will automatically and forever accept something as money for no good reason. The more dollars that are printed, the less each one is worth. The less money is worth, the worse it functions. And if money stops functioning, people will discard it as useless just as they throw away a broken old VCR. The best single explanation of the fall of the Roman empire is that various Caesars had relentlessly diluted the gold content of their coins (inflated the money supply), to the point where people didn’t want to accept them any more. Without good money, the problems of barter reappear, and people have no choice but to revert to a subsistence economy, which is precisely what happened in Europe in the Fifth Century.  

It almost happened in Germany in the early 1920s. The German government had gone off the gold standard to finance its war in 1914, and now was printing money as fast as it could, trying to pay off its war debt. In 1923, 1 billion Marks were worth what 1 Mark had been worth a few years before! Creditors were wiped out, savings accounts and life insurance policies became worthless. People would buy anything – soap, hairpins, scrap-metal, anything to avoid holding money, which was visibly losing value every minute. The society was reverting to a direct barter existence. Germany was able to pull back from the brink of complete societal collapse only by issuing a new currency, the Rentenmark, that was backed by real property and factories.  

The solution to all this, as in most things, is liberty. Under freedom, gold would almost certainly become money once again. A 100% reserve gold standard would have the benefit of preventing inflation (because the creation of new money is costly), and preventing deflation as well (because once gold money comes into existence, it stays in existence). The complete reliance on irredeemable paper money is unprecedented, having existed only since President Nixon destroyed the last vestige of the gold standard in 1971. Most of the major world currencies (the Yen, the Euro) are backed by the U.S. Dollar, which is backed by nothing. We seem headed toward a single world paper currency controlled by a single world banking cartel. Today there exists no barrier whatsoever to the unlimited creation of new money and bank credit. There is a strong incentive for those in power (the U.S. Federal Government, the large multi-national commercial banks) to enrich themselves by doing so. The only thing restraining them is their judgment and mercy. God help us.  

Credit for the core ideas expressed in this article must be given to George Reisman, Murray N. Rothbard, Hans-Hermann Hoppe and of course Ludwig von Mises.