Money, Government, Prices, and Concealed Corruption
Developing a Price System
The beginning of paper money resides in the direct trade of goods. Society used barter before money came into existence and it directly exchanged one good for another, like a towel for a pillow. As time went by, people commenced to realize that through barter it is complicated to acquire what you desire or have a necessity of when you are not certain that someone is willing to give away their good for what you offer them. For instance, you need a pair of shoes and to obtain them you are willing to trade a blanket. You must travel around your town to find someone who needs or wants a blanket and to obtain it has decided they will give a pair of shoes. If they are not willing to give away the shoes, you have to make the intent in convincing them. This requires much effort, energy, and perhaps resource, which altogether make trade by barter an exhaustive and/or inefficient manner of doing things.
Efficacy and accuracy are achieved in exchange when you discover a good that all people desire. This good has to be one that is utile in itself and can be divided in a form people will continue to find it attractive. Gold becomes a medium of exchange and eventually into money through this encounter. Gold is a rare precious metal that has many uses, many people would appreciate having, and unlike a hat can be divided into smaller pieces or turned into bigger ones to trade anything with it in accordance to its value. Therefore, whether you need gold for your personal uses or not, you value it and find it attractive because with it, you can acquire anything you want or need. The more gold you have, the more things you can obtain and the less gold you have, the less things you can procure.
A price system then begins to develop as people begin to find a good more valuable (you need more gold to purchase it) than the other. Imagine an auction, where people bid and the highest bid takes the product home. An auction is the model that represents how a price system begins to unfold along with the market. When people are trading a hat, maybe one will offer ten gold coins for it, another 12 coins, and the final will bid 15 gold coins. All hats of its type might now be worth 15 gold coins because there are people that value the hats in that quantity. Perchance later in the future, the type of hats might become more or less valuable to the people, but it is the demand of the product and the volition of the people that will always determine the price of all things.
Origin of Paper Money
Metals, like gold, can require much space and be difficult to carry, that is until banks are created. A bank was utilized as an area to conserve the gold of others safe. In the past, when people took their gold to the bank, this one gave them a piece of paper that proved and contained the amount of gold they had stored. Whenever a person wished, they could go to the bank, present the paper, draw the sum of gold it represented, and use the gold to exchange. Similar to what took place with barter, people noticed that much time, energy, and maybe resource are required to fulfill this process. Instead of going through the whole process of traveling to the bank to use the gold for exchange, people began to only trade the paper depicting a quantity of gold.
Money (including the one made of paper) exists through a natural and spontaneous process in which the will of people began to devise a medium of exchange and use it for trade in the need of achieving accuracy in the market. The government did not create money. They did not come in and say, “We must now put to use gold during trade and in the near future, pieces of paper called ‘dollars’ with the portraits of the nation’s leaders on them. If you have ‘this amount’ of dollars, you will be rich or poor.” That would be simply absurd. Just suppose that someone comes toward you and gives you a yellow paper with their picture on it and said, “Here, have ‘ten Jacky Ops’, you are now rich.” How would you know you are rich? If he or she gave “ten Jacky Ops” to everyone and told them, “This is your new money.” How would they know their value and use them for trade? You simply cannot. However, if “ten Jacky Ops” were backed up by 50 kilograms of gold, then you would know how much they are worth and how to use them.
Commodity and Fiat Money
Today, the money we use is not backed up by gold and the government did not create it for the reasons just described. There exist two types of money, commodity and fiat money. Commodity money is based in a medium of exchange or good that is valued generally, like gold. On the other hand, fiat money is something more complex to describe.
Society accepts commodity money through the natural process of finding a medium of exchange. Then, the government monopolizes the production and certification of the generally valued good. The government begins to issue out paper notes that can be redeemed in a given weight of gold and begin to circulate as a convenient substitute for carrying gold coins. These money certificates are finally given different names like dollars, yens, pounds, pesos, etc. Naming the paper notes conditions the public to think of the dollar (or whatever) rather than the gold itself as the money. In the end, the government confiscates all the gold of the people in exchange for the paper note, leaving the people with unbacked paper money.
In simpler terms, fiat money begins as certificates redeemable into a commodity (like gold), and then the government takes the gold away, leaving only the paper. The paper money, though, continues to circulate because people recall the past structure of prices, so the paper money, in this case is not being imposed out of nowhere by the government.
Disadvantages of Fiat Money
Many complications accompany fiat money. Gradually fiat money is created more and more and in this becomes less and less based on gold, until it ultimately is not. When the government increases the supply of money, prices rise to a substantially high level. Because, when there exists more money to bid with, the value of things increments, like in an auction. These increasingly high prices disserve people on fixed incomes for they are receiving, say 500 dollars weekly, but the price of things keeps rising, making the 500 dollars worth less and less.
Fiat money is easy to produce for it is not based in a commodity. Therefore, its production cannot be controlled, which contributes to an uncontrollable and ever growing raise in prices. However, those who receive the newly printed money first are the fortunate ones. Because prices have not yet risen, the first recipients have the possibility to buy the things at a more economical price making them richer. The people who later appropriate the newly printed money that has already worked its way through the economy and has also raised prices are least fortunate, because the money is already less valued.
This means that paper money and paper money inflation artificially encourage consumption over saving. Hyperinflation is an extreme example pf this. Let us pretend that you have purposed yourself to buy something worth 10,000 dollars at the end of the year. Little by little you save your money, but you do not recognize that the government is printing millions of dollars each day, and every month prices are increasing by 50%. The end of the year comes and you notice that the 10,000 dollar product you had saved up to buy is now worth an outrageous 70,000 dollars. Your saved 10,000 dollars are worth practically nothing in this circumstance.
In normal inflation conditions, the results are the same, only less outrageous. This takes people to rationalize and come to understand that it is more convenient to spend their money instantly before it is less valuable. A situation like this one is compatible to business cycles, In these cycles, interest rates fall artificially because the government keeps creating money out of thin air and giving it to banks, not allowing the savings of the people (which are made impossible to have with fiat money) to be the ones that push interest rates down.
Other disadvantage of having fiat money is that it gives more power to the government of controlling the people. When the government has the ability to create money out of air, it becomes easier for them to get hold of the resources of the private sector. It will not matter whether we have high taxes or not, the government will still be able to get hold of your wealth and through inflation control your prosperity.
It all involves prices, our demand and value of products or services and our personal interests in preferring one thing for the other. Notwithstanding, apart from inflation (increasing production of paper money), the government also tries to get its involvement in prices to control them, especially in times of crisis.
Price controls are efforts by the government to limit the ability of prices to move up or down, creating either price ceilings or price floors. Prices always fluctuate because tomorrow there might be less or more demand of a product being less or more valuable to the people. Usually, when speaking about price controls, most people refer to price ceilings.
Just as most of the things the government does and intervenes in, price ceilings are also accompanied by many issues. If firms cannot sell a product above a certain price, the demand of the product might increase and the production of it will not suit the quantity and speed of the demand. The result of this will obviously be shortages. Shortages will damage the economy and in an overwhelming manner in times when resources are extremely urgent.
Imagine a sudden disaster impacts a random city. The people must now seek temporal residence in hotels, leading to a crescent request of rooms available in them. To prevent prices from rising, the government intervenes to keep them at the same value as they were before the destruction.
Now, a family of four normally rents two rooms. And because they see prices at a relatively low price in the crisis, they choose to rent rooms as usual, not counting the other hundreds of people that have a necessity of refuge. Rooms are valued greater in this time and have a truly high demand, not by desire, but by necessity. Therefore, prices must reflect the circumstance taking place and cause people to be prudent and leave resource for the others to utilize. If the prices would have been high, the family of four could have thought twice before buying the rooms and settled with just one. Doing this, they would have left an empty room for another family in need.
Nevertheless, government intervention has created price ceilings for the hotels and perhaps an uncounted family of four will be left out of a hotel room and ultimately of refuge. Government control in prices creates great misbalances in the economy and causes shortages.
Economy today is a puzzle. Even if the government did not control prices, companies would still end up ruined with the existence of false interest rates caused by unbacked paper money. In sequence to this printing, prices inevitably rise because there is more money circulating in the market. Yet, the government insists in prices to not be risen. They say this ignoring that things are valued greater, have higher demand among the people, and their money printing continues to unavoidably raise prices.
Firms purpose themselves to do long-term projects, but they cannot save resources when the people are consuming greatly and not saving money in the bank. Saving is not convenient when inflation is raising prices constantly. Therefore, to conclude I cannot find better words to describe this system than calling it an upside-down, intersecting, contradicting, self-tangled, and corrupt system that alters the economy, making people poorer and giving those that are in control the privilege of becoming richer.
On the contrary, if gold were used today, the value of saving it would increase. As time passes by, gold is worth more or the same, but never less. This would give people the incentive to save for the future, keep interest rates down, consume fewer resources and allow firms to invest in long-term projects successfully. Prices would eventually stay low and follow the voluntary value and demand people give to things. Finally, gold is hard to find and acquire, thus, sooner or later, society would have to conform to a finite quantity. Causing a society of 100 people using 1,000 gold coins, which has an increase in population by the double, to use the same amount of gold, but dividing prices in half, making everything more economically accessible.