Exchange, is perhaps the most important thing that any man, woman, or child can ever do! No kidding. Think about it from the angle or age of any single living man, woman, child, or even animal. An animal, who is hungry, and spots a prey, exchanges his security and hunger, for the danger of capturing a meal. The exchanges go right up the ladder of intelligence through the entire animal and fish kingdom to humans, which are at the top. Children exchange things every single day of their lives. They exchange toys, time, adventure, possessions, friendships, etc, for other things, and like animals, no money is involvedÂ… usually anyway. I remember when my son was 6, and for Christmas I gave him a live steam model tractor, which actually worked on steam. A few hours later, he had sold it for $5 to a friend. An exchange of his tractor, for which he had no comprehension at his age, of how wonderful it really was, for a $5 bill, which could be exchanged for bubble gum, ice cream, or whatever, appealed to a 6 year old. Outraged, I quashed the deal immediately. We still laugh about that little exchange.
When man first came on the earth, he immediately began exchanging things for the mutual benefit of both parties. Cro-Magnon Man, probably traded his rock for a piece of wood, or something like that. He didn’t need his rock, but wanted a piece of wood, and his trading partner needed a rock. Civilization progressed in that manner for thousands of years, till some bright man or woman realized that a “medium of exchange” was needed, because it was damned inconvenient to trade a rock for a piece of wood, or a dozen eggs for a box of nails, perhaps. The medium of exchange became what is known as “money” to most, although I have given up calling it that, as it has no value. I call it dollars or currency, neither of which indicate value.
Of course, if one was to have a “medium of exchange,” it must have value, so that the medium could be used to store value. Example: Suppose a farmer had a crop of sweet potatoes, and he used the medium of exchange to “sell” them, but didn’t need any gas, lumber, or roofing at the time he disposed of his sweet potatoes. The buyer of his crop, “sold” them to others who wanted them, and his “profit” needed to be placed in a secure place, as he needed nothing at the time he sold the sweet potatoes. The medium of exchange, or money, needed to have a value, and not only value, but a calibrated value, so different amounts of the medium could be used to store values of different amounts. Not only that, but the medium of exchange needed to be compact, as the medium needed to be carried around to “buy” things, or “exchange” the money for items which were desired or needed for a civilized life style to continue. Thousands of years ago, either the Chinese, or more probably the Egyptians, discovered that the best “money” or “medium of exchange,” was gold and silver. Why? Because they didn’t burn, were compact, and easily carried about, didn’t rot, bugs didn’t eat them, were beautiful, and above all were scarce, and required energy and wealth to be expended to obtain them. Gold and silver, were the most natural things to be used as stores of value and exchange mediums, as they had all the things required for a successful store of value, as well as the ability to be carried about and traded for goods. The traders knew that if they sold a chariot for 20 ounces of gold, or 320 ounces of silver, that the gold or silver could sit in their home or pocket, and not lose value, until they needed something, and they could “buy” what they wanted with the silver and gold. The gold and silver “money,” would hold its value.
Those with a surplus of “money,” because of being good business people, lucky, or even inheriting money from their parents, found that they could “loan” their money to others who needed it, and who could “secure” the loan with tangible goods or property, which had equal value of the “money” borrowed. If they defaulted on the loan, the security belonged to the loaner. For some reason, those who loaned money at exorbitant rates, became known as “loan sharks.” Maybe because they eat people’s wealth like a shark.
Eventually, people became tired of carrying gold and silver about, and they desired a place to store it. Storage places came into being, and those who stored gold and silver, gave receipts for the gold and silver. These storage agents, eventually became known as bankers, and these receipts began to be traded as actual gold and silver, due to the reliability of the bank or storage agent, who held the gold and silver. These receipts became known as checks. The owners of the gold and silver who had “deposited” their gold and silver in the banks, (savings accounts, CDs) wanted to earn “interest” on their money, and allowed the banker or storage agent to loan their gold and silver out at interest, and as payment for the storage agent’s efforts and diligence, he was rewarded with part of the interest charged. The “depositor” received income from his assets being used and loaned, and the loaner, or banker received income from his actions also. The banker couldn’t loan gold and silver he didn’t have, and he had to be very cautions as to whom he loaned someone else’s gold and silver to, because if the loan went bad, he was responsible to the depositor.
“Money” became used to “exchange” valuable things for other valuable things, to store value for future use, or for income derived from loaning money to someone else. All the while, actual, physical “money” was still in the form of gold and silver, with notes being used to represent the physical gold and silver. The word “dollar” comes from the German “thaler,” a 16th century coin. It came to mean a twentieth of an ounce of gold in America until 1933. America coined gold and silver in various sizes, shapes, and styles, but these coins always had the actual value of an ounce of gold. An example was the well known “Double Eagle” twenty dollar coin, which contains .9875 of an ounce of gold. Gold was pegged at $20.67 per ounce for 150 years in America, and silver at $1.29 per ounce. It varied a bit, depending on new discoveries and new mines, but the rule held fast, at least till 1893, but that’s another subject. In 1980, the ratio was 16 to 1, a historic ratio.
Civilization just romped along, with exchanges being made in gold and silver backed “money,” and currencies of all nations. Governments around the world, had their currencies backed by gold and silver, and in America, Mexico, and Canada, both had gold backed currencies and gold and silver coins, which were freely exchanged across borders. Occasionally, as in any system, things go wrong, but I am writing about generalities, not missing teeth in the cog-wheel, which will be in another piece.
Consider the beauty of it all. No more necessity of trading eggs for nails, or a chariot for a horse. This medium of exchange, eliminated all necessity of barter. Barter of a fashion was done with bargaining for price, and the price was in gold and silver as represented by dollars, pesos, francs, or whatever a nation used. Trade was carried on world wide, as well as locally with gold and silver, and if that was inconvenient, currencies backed by the same, as produced by governments that could be trusted for their honor, honesty, and reputation. Just as bankers or storage agents for gold and silver had reputations to uphold, so did the governments that issued the currencies. When bankers loaned to dishonest or unreliable borrowers, they had to replace the gold and silver they loaned, because it wasn’t theirs to loan. It belonged to the depositors who entrusted their gold and silver to the storage agent, and gave them permission to loan it. If the storage agent goofed, he had to pay the depositor, and it was just that simple.
Nations which issued currencies backed by gold and silver, had to have the gold and silver in their vaults in the same number of ounces as any currency they printed. I was audited for proof every year. Nations decided to make coins out of silver rather than storing it, so in America, the silver dollars, halves, quarters, and dimes, came into being. Nickels had a nickel’s worth of nickel in them, and pennies had a penny’s worth of copper in them. Silver coins were 90% pure, with a hardener added for long life.
There was no fraud, no lies, and no subterfuge with gold and silver being used as exchange, or paper which represented actual gold, and silver coins containing actual silver. Sound wonderful, doesn’t it? Actual store of value, and legitimacy in exchanges became possible, with the use of gold and silver as the exchange material, and represented by physical gold and silver in vaults which were audited every year. Citizens carried gold coins with them, and silver coins as well, and the economy was stable and prosperous. Like everything, this had to get screwed up, by guess who? More next week, but in the mean time, protect yourself!