Tuesday, December 4, 2012
Summary Money is everything, money has history, and everyone has an opinion on money. Money has been around for centuries and no one really knows why it came to be but it’s logical that we need money. We use money for trade, to start a business, and to evaluate current and past economic states. Money is used in government more than any other entity in the world, especially by The United States Government. It is even included in the document that created our government. Money has changed forms but stayed relatively similar since its conception. It takes money to make money and to start a business. Money has a downside because everyone wants it but it is the people that create and use money that makes money immoral and not the actual currency itself. The Federal Reserve System determines how much money is in circulation for the United States but there are critics. There’s one thing for certain: money affects us all, every day. “Money makes the world go round.” “Money is the root of all evil.” “Never use your own money.” You’ve probably heard these statements before. Money is the current medium of exchange for goods and services in the form of coins and banknotes . Money is also the “liquid” (and hence, not frozen from use) form of capital, which is the wealth “owned or employed in business by an individual, firm, corporation, etc.” (http://www.merriam-webster.com/) and is typically used in all facets of business. In most countries, money is currently a type of “fiat” currency, meaning it does not represent ownership of a tangible commodity and is really only a way to pay a debt. Money used to come in the form of commodities like gold, silver, or salt. Currencies can be exchanged for capital, which includes labor, equipment, or buildings. Why do we use money, currencies, and commodities instead of everyone just working together to share what they see around them? Do all people need money to survive? Should capital be private or public? Where do you get capital to start and continue running a business? There are many opinions and theories about all of these questions concerning money, and there is a lot to understand about the history and future of money for people around the world. Money has existed for centuries in different forms and is a phenomenon within historic societies. The first coins were not stamped and were a measurement of weight. The first stamped coins are thought to have been stamped around 650 B.C and were typically made of gold or silver. With the introduction of banknotes, or paper representation of commodity money, people could carry more money around with them because the weight was not an issue. The United States dollar was linked to gold until Nixon delinked the U.S. dollar in 1971, and since then the American dollar has drastically lost its value due to the increase of money supply and the printing of fiat money, or inconvertible paper money made legal tender by a government decree (http://www.merriam-webster.com/). No one really knows why humans created money but it seems to be a logical progression of bartering. Carl Menger, the founder of the Austrian School of Economics states, “As each economizing individual becomes increasingly more aware of his economic interest, he is led by this interest, without any agreement, without legislative compulsion, and even without regard to the public interest, to give his commodities in exchange for other, more saleable, commodities, even if he does not need them for any immediate consumption purpose. With economic progress, therefore, we can everywhere observe the phenomenon of a certain number of goods, especially those that are most easily saleable at a given time and place, becoming, under the powerful influence of custom, acceptable to everyone in trade, and thus capable of being given in exchange for any other commodity.” (Menger, Dingwall, and Hoselitz) An example, to illustrate this concept, might go something like this: Imagine that you lived in a society where you did have to barter and that you were a sheep herder. You could not possibly find someone to trade your sheep or wool for food or health services or whatever individual need you had directly. You would need a way to transfer your goods to an intermediary and then transfer that again for your food or services. Therefore, the only logical explanation is to create that intermediary which could be “most easily saleable at a given time and place”, so that it would be “thus capable of being given in exchange for any other commodity”: money. Different commodities have been used throughout the ages as money. The word “salary” comes from the Latin word “salarium”, and it is believed to have gotten that name because Roman soldiers were paid in salt. (www.ahdictionary.com) Historically though, gold and silver have had the longest run as the sole legal tender for world governments. Gold and silver have played a controversial role in recent years for the leader of the free world and the most powerful capitalist nation today. In Article I, Section 10 of the United States Constitution it states: “No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.” ("Constitution of the United States of America") Therefore, we should have been using only those two things to trade since 1789. Gold and silver lasted nearly 200 years as our nation’s way to barter before President Nixon changed that. Because of war and shortages of gold and silver, there were reasons to change our monetary system, but today there are many people asking to bring back the gold standard. United States Congressman Ron Paul calls commodity money, or convertible money, “sound money” and is one of the leading voices of the movement in favor of a return to commodity money or, more specifically, gold and silver. The current argument about U.S. money and the price of loans originates between two economic schools of thought: Austrian Economics and Keynesian Economics. John Maynard Keynes theorized that more centralized or “government” spending will increase growth in a more stable manner. The Austrian School, created by Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser and others, asserted that the economy should be treated as laissez-faire (or “leave alone”) as possible. They claim that interest rates, or the “price” of money, should instead be set by companies and banks lending out their capital, and that the “boom and bust” cycles we go through are actually created by an unsustainable amount of credit being loaned out, typically by the Federal Reserve System. When Nixon took America off of the Gold Standard, the New York Times quoted him, saying, “I am now a Keynesian in economics.” Before the Federal Reserve was created, which was 100 years ago next year, the value of gold typically stayed in the range of 27-30 dollars an ounce, but then became suddenly very volatile from the late 1930’s to the mid-40’s due to The Great Depression and World War II. Since 2009 the price of gold has stayed above $1000 per ounce, proving that our dollar doesn’t buy what it used to. Before 1971, our dollar read “Silver Certificate” along the top, but now it reads “Federal Reserve Note”. This illustrates how U.S. money now has only the value that a buyer is willing to take for it and is not linked to any actual commodity. Why were gold and silver used for so long and then suddenly taken away? There have been many writings by various theorists on the issue, but most mainstream scholars now mention that the demand for gold is higher, there are problems associated with the overprinting of the U.S. dollar, and the Federal Reserve has imbalanced and unlimited powers that should be more strictly regulated or taken away altogether. The U.S. dollar has lost so much value in the last several decades that it isn’t even worth the cotton it is printed on. Just last week, Congress discussed getting rid of the George Washington dollar bill and moving to coins in order to save money in the long run. If the money wasn’t devalued so much this suggestion wouldn’t have even been made and prices would be more stable. The truth of the U.S. dollar is that while the value of things like milk and fuel haven’t changed in several generations, the price, or amount of U.S. money it takes to acquire them certainly has, creating the illusion that things are continually becoming more expensive when they are actually not. So money is a part of capital, which is anything relating to or being assets that add to the long-term net worth of a corporation. In economics, it means all assets within a business and can include machinery, buildings, money, goods that are already made to make other goods and services, supplies, and even labor or people. Companies need capital to start up and to run day-to-day business, and start-up capital can be acquired in many ways. A savings account accruing interest from one’s youth is a long but rewarding way to start a business. Many mortgage their homes or sell valuables to make the investment. However, the majority of people who set out to start a company do not have the luxury of enough capital in any form, and have to take out a business loan. Trying to get the money from friends and family is somewhat risky and complicated way to get capital. Risk is involved with all investments and business ideas, but personal relationships may not be able to handle the risks associated with business or the unfortunate side effects of loss or failure. One benefit to borrowing from family and friends is the good chance that it could be interest free, since you fully intend to pay back the money. Finding outside investors or private investors is an effective but risky way to get capital, and many advise that business starters be sure know their business well if going with outside investors, because the investors will want to know quite a few intimate details of the business. In most cases investors want to be part owners or charge high interest rates. Banks are another good source of capital. Commercial loans are often the best bet, as they are the most common way to acquire capital. Timing is often said to be everything, because it could determine the overall interest paid and interest paid on all loans can, technically, be called the price of the loan. It is what you will pay back the lender for lending you the money. The current issue with the price of loans is that they are grossly underestimated in the current market. The Federal Reserve or “Fed” sets the interest rate at which it lends money to banks, and then those banks lend out to average people trying to start a business. Granted, a low price is a good thing when you are trying to borrow money, but there are more risks in the current market for those trying to start a business. Perhaps the most important component to starting a business, after deciding what type of loan to get, is creating the business plan. The business plan is a set of goals, statements, and outlooks that the company plans to start and achieve. Entrepreneurs try to add the type of company and background information or knowledge and expertise they have about the industry, because it is crucial to gaining the confidence needed from investors or banks to provide the startup capital. Since money has been around for so long, many people have theorized about the morality of it. The concept of payment of debts using money has intrigued philosophers, economists, and tax-paying citizens alike for centuries, and Aristotle was one such person. Aristotle wrote about commonly determined ways people lived and how they would be more moral in his series of books called Politics. He would propose a question and then present the pros and cons of the answers he saw. Some of his questions were: Should women be owned privately or publicly? Should children be owned privately or publicly? Should property be owned privately or publicly? and “… should the citizens of the perfect state have their possessions in common or not?”(Aristotle) Aristotle was such an influential and a powerful thinker, it could be argued that if his answer to the last question had been that it was morally true that all things should be publicly owned, most societies today would not need money or the exchange of payments for debts. One reason for his position was his belief that possessions should be privately owned, for the most part. His argument was thus: “It is clearly better that property should be private, but the use of it common; and the special business of the legislator is to create in men this benevolent disposition. Again, how immeasurably greater is the pleasure, when a man feels a thing to be his own; for surely the love of self is a feeling implanted by nature and not given in vain, although selfishness is rightly censured; this, however, is not the mere love of self, but the love of self in excess, like the miser's love of money; for all, or almost all, men love money and other such objects in a measure. And further, there is the greatest pleasure in doing a kindness or service to friends or guests or companions, which can only be rendered when a man has private property.” (Aristotle) One group of Austrians explained the need for privately owned possessions in this way: If 1,000 people lived in a community then they would all do exactly 1/1,000th of their part for the community. We see, even today, that there will be some people who will be either unable or unwilling to do their part and thus rely on the other majority of people to do it for them, leaving at least one person to do 2/1,000ths of the total job for the community but not receiving any additional benefits. (Summers) It could be argued that when Aristotle says “but the use of it common” he is inferring that the people of a community should be able to use privately owned property, although he did not say much about compensation for that property. Either way, without money, the transfer of the private property would be very difficult. -Imagine the amount of visits a dentist would have to make to buy just a few pieces of equipment if he had to barter for everything! There is little evidence of wide-scale bartering done in history. It is common knowledge that there was bartering going on, though. It seems feasible that you could trade your way to the top without money, just as Kyle MacDonald did in 2005. He took one single red paper clip and, in just under a year of trading up 14 times, had a two-story farmhouse. (MacDonald) It is not feasible or realistic that everyone could do that, however. In the current market, the most common source of income is labor, which means having a job and a paycheck. There are issues that have risen by those working for large companies and corporations, though. There are cases of people claiming to not make enough to live on at these jobs. The morality of money and labor comes in to effect with all jobs, and in these cases, many are exploited and forced to take what they are offered, even if it is unrealistic for a human to survive on. Some people look at the difference between what an upper executive would make compared to those below them, and feel that it is too great, not justified, and in many cases downright greedy and immoral. The infamous story of the American energy, commodities, and services company Enron illustrates how some large corporate executives possess the power to hide money and “cook the books” or lie about company losses, which can and did destroy the one-time giant, taking with it the savings and retirement funds of thousands of its unknowing employees and investors. Many people in the Occupy movement are active in protests in major cities across America, and claim that skilled workers, devoted long-term employees, and educated graduates are not paid fair wages, able to find acceptable positions offering reasonable pay and benefits, or provided expected retirement and savings options after years of loyal service. Their claims have many students moving from the creative and liberal arts programs over to the maths and sciences or business programs. For example, the average annual income of Americans in 2011 was $42,979.61, according to the Social Security Administration (“National Wage Index), but the average starting pay for graduates with a Supply Chain Management degree, according to a recent BusinessWeek report, was $49,500 and after 5 years jumped to almost $100,000 annually (Taylor). One way to close the controversial gap between worker and executive might be profit sharing; when the company makes more, the workers make more. Some believe that the capital owners should first look at this model to be moral about their capital and money, and it seems like the kind of “benevolent disposition” that was the “special business” of Aristotle’s legislator. Objectionists like Ayn Rand wrote about laissez-faire capitalism in her stories: The Fountainhead and Atlas Shrugged, which support the idea that we should continue to let the capital owners decide whether or not to be greedy, but then she also wrote “The Virtue of Selfishness”. It may best be explained that money is not moral or evil but that what money can be used for and how it is used and distributed can certainly be found moral or evil. Much like the saying, “Guns don’t kill people: People kill people”, it is not the gun that pulls the trigger and it is not the money that bankrupts people and leaves them in poverty. As Aristotle said, people should not hoard, whether it is money, women, or private property. Money makes the world go round because we need to be able to exchange goods and services between people and companies and without it, there’s a good chance the entire world would still be back in the Stone Age. However, the truly moral people should arguably avoid greed; use their prosperity in ways which do no harm, and share their excess to help the less fortunate. Acknowledgements Money affects us every day and is probably one of the most interesting subjects anyone can talk about because it affects us every day. I’d like to acknowledge the centuries of philosophers, economists, and politicians that have studied and theorized about currencies and money. My past reading and understanding on this subject allowed me to write about this subject without the need of every sentence to be a quote. Also, I’d like to acknowledge the one friend of mine, Caycee Carley, that I trusted enough to proofread my findings and thoughts on this subject. My sources include: Aristotle. "Book Two." . N.p.. Web. 20 Nov 2012.
Editor, ed. "The American Heritage Dictionary." . N.p.. Web. 4 Dec 2012. .
MacDonald, Kyle. "One Red Paperclip." . N.p., n.d. Web. 3 Dec 2012. .
Menger, Carl, James Dingwall, and Berthold Frank Hoselitz. Principles of Economics. New York: New York University Press, 1981. eBook. .
Summers, Matt. "Aristotle's Legacy: The Reality and Ethics of Communal Property." Ludwig von Mises Institute. N.p., 17 2009. Web. November 20, 2012. .
Taylor, Victoria. "Supply Chain Management: The Next Big Thing?." . Bloomberg Businessweek, 12 2011. Web. 20 Nov 2012. .
United States. Congress. Constitution of the United States of America. Philadelphia : , 1776. Web. .
United States. Social Security Administration. National Wage Index. 2012. Web. .