In the future, the natural resources will be the most important instrument of interchange. The majority of the world population still is not aware of the natural resources critic situation and their consequences at mid and long term. The reason, perhaps, is because the effects are not yet enough perceptible in the developed nations and, therefore, the mass media do not give the due importance at the issue. The perception of the world reality is completely different from New York, London or Paris, than the perception since the undeveloped nations, where the people everyday struggle by the resources: the lack or scarcity of water, food, energy, other essential goods and services.
Index
- Overview
- Economy and money
- Gold and silver has a restricted utility
- The Financial Capitalism
- Water and food will be the most valued goods
- Changes in the monetary economy
- Financial crisis in the undeveloped nations
- A country can print all the amount of money that need
- Financial crisis in the developed nations
- Origin of the economic supremacy of the United States
- The United States do not have limits to issue dollars
- Europe and the Euro
- Monetary ideas of the big thinkers: Smith, Ricardo and Marx
- Conclusions
- Overview
The coins and paper money that circulate in the world do not have an intrinsic value. They are simply pieces of metal and paper without own value. The unique value of money is the confidence of people in money as mean of interchange.
At the beginning of the times, man employed the barter for their commercial activities but that system could not survive because of the increase and complexity of the volume of transactions. To change goods by other goods was a complicated task; therefore, man began to use bars of metals like instrument of value and interchange. Small amounts of metals represented big amounts of value, but this system neither was effective and man invented the coin of metal. Some time after he decided to guarantee the quality and value of money and invented the minting or coining, which was a legal mark settled in the coins.
During the most part of history the issue of money was made by Kings and governments but sometime after appeared the private banks, which shared with the governments the issue of money. In his book Principles of Political Economy and Taxation, (1817), Chapter XXVII, On Currency and Banks, David Ricardo says that:
“After the establishment of Banks, the State has not the sole power of coining or issuing money. The currency may as effectually be increased by paper as by coin; so that if a State were to debase its money, and limit its quantity, it could not support its value, because the Banks would have an equal power of adding to the whole quantity of circulation.”
“On these principles, it will be seen that it is not necessary that paper money should be payable in specie to secure its value; it is only necessary that its quantity should be regulated according to the value of the metal which is declared to be the standard. If the standard were gold of a given weight and fineness, paper might be increased with every fall in the value of gold, or, which is the same thing in its effect, with every rise in the price of goods.” End of the quote.
- Economy and money
In the evolution of the monetary economy the coins were made of iron, copper, silver and gold. Later appeared the paper money supported in reserves of gold.
In the epoch of the Roman Empire, the copper was the metal employed as money, especially; in the Feudal period too. The situation began to change years after the discovery of America in 1492, because conquers razed the reserves of silver and gold of the continent, and led that fabulous wealth to Europe.
The discovery of America provoked the Commercial Revolution of the 16th century which would exert an important influence in the monetary situation of Europe. The new wealth in silver and gold brought from America to Europe changed the patterns and economic custom. Silver and gold began to have preeminence and consolidated its importance like instrument of value and change.
Between the centuries 16th and 17th a political-economical trend appeared in Europe, the Mercantilism, based in three basic ideas: a) The participation of the State in the economy to guarantee the progress of the countries, b) The surplus in the external commercial balance and c) The use of precious metal, especially gold, as main source of the wealth of nations. Three philosophers, among others, had an important participation in that time: Thomas Gresham (1519-1579), Thomas Mun (1571-1641) and William Petty (1623-1687), they are my favorites of that historic stage. Gresham is remembered by his concept which assures that people retires of circulation the most valued coins, the coins of gold, to melt and keep them in bars. This concept is known as the Law of Gresham.
The 17th and a part of the 18th century was a period of transition, in which must be highlighted the names of big philosophers like John Locke (1623-1704), David Hume (1711-1776) and Jeremy Bentham (1748-1832).
At the middle of the 18th century appeared a new philosophical trend in Europe: the Physiocrats, which main idea was that the agriculture, the land, is the basic source of wealth and that the principal function of the State must be to guarantee the property and the natural order of the society. The French philosopher Francoise Quesnay (1694-1774) was the most important figure of this trend. Quesnay wrote the Tableau Economique in 1758, in which developed for first time a complete analysis of the economic interrelations, base of the modern econometrics.
In the 18th century appears the Classic Economy, which most relevant figure is Adam Smith, (1723-1790), who published his book An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. The other big members of the Classic School are Thomas Malthus (1766-1834), Jean B. Say (1767-1832) and David Ricardo (1772-1823).
In his book, Adam Smith criticizes the influence of the State in the economy and concedes a particular importance to the new form of production that already had begun to surge in Europe: the industry. The conception of Smith is the antithesis of the Mercantilism on the paper of the State in the economy and the antithesis of the Physiocrats ideas on the agriculture.
It must be underlined that the different schools of thinking, the Mercantilists, the Phyisiocrats and the Classical Economy coincide in one aspect: they recognized gold like source of value and base of the monetary system. Later, Karl Marx, (1818-1883), the main critic of Capitalism, would recognize also gold as principal support of money.
In the monetary history there are other emblematic dates. For example, the Bank of England was founded in the year 1694 as a private organization, which is considered the first central bank of the world. But it was in the year 1946 when the bank was nationalized and assumed the monopoly on the issue of banknotes. The Bank of Japan was founded in 1871 and reorganized successively in several stages, among them, in the year 1942, in the post war, and in the decades of the seventy and ninety years. The Federal Reserve of the United States, central bank, was created by the Congress on 23 December 1913, and since then it has the legal authority to issue legal tender.
In the 20th century was established the majority of central banks. The most recent central bank created in the world is the European Central Bank, which administrates the monetary policy of the 17 countries of the Euro zone. The Bank opened their doors in the year 1988 and its headquarter is in Frankfurt.
It is necessary to underline that until the first decades of the 20th century, the issue of money was made by private banks with public support, but, from the second decade of the 20th century, the world governments attributed to the central banks the exclusive capacity to issue money. The coins were not more of gold and silver and the paper money began to be only a legal instrument of change without support in gold. So that the money (coins, bills) and sovereign bonds that exist currently in the world are only simple legal instruments of change issued by the governments, which unique value is its acceptation, the faith in the instrument as mean of change. You can change a piece of bread or a medicine by any other thing, but you cannot change a bill or a coin for other thing if that currency does not give confidence about its capacity of interchange. For example, the U.S. dollar and now the Euro are the accepted currencies to realize the international transactions. If you want to pay with the national currency of other country it is very likely that it will be not accepted.
- Gold and silver has a restricted utility
The currencies support in gold and silver was also an illusion. Why? Because of gold and silver has had ever a restricted utility. The major use of them has been in jewelry. Man attributed value to gold and silver and during centuries the possession of those metals was the wealth of nation’s sign. In the modern world, gold has been employed as instrument of International Reserves by the central banks of the countries. But the value of gold and silver has been an invention of man; they do not have a real and broad utility.
On the contrary, oxygen, water and food are the true wealth because you can live without gold and silver, but you cannot live without oxygen, water and food. We do not appreciate its value because it has had abundance of them so far. But already the situation is changing and many people in many regions of the world are verifying that these resources have begun to be scarce. So that, at long term, the true instrument of value, the true instrument of international interchange will be the natural resources and not money. This fact will imply a new form of power and economic relations, where the undeveloped nations, owners of big reserves of natural resources, will play a new role in the international scenario. I do not want to say that money will disappear, no, I am not saying that. What I want to say is that the world shall recognize that the true wealth is the natural resources and not money. But money will exist forever because in money will be measured ever the amount of goods and services that will be interchanged in the economy.
- The Financial Capitalism
Until now, money has dominated the world. You can buy anything with money. The Financial Capitalism has decided the life and the power of the world. But, if the natural resources scarcity acquires a new and more intense dimension, the Financial Capitalism influence would diminish and the natural resources owners would acquire a new and decisive importance.
The power of the natural resources owners was demonstrated in the years 1974 and 1975, during the Arab oil embargo. In those years, the Arab nations decided do not give a drop more of oil to the Western countries and especially to the United States, in reprisal by its support to Israel during the Six Days War in the Middle East. The embargo caused a catastrophe for the world economy. I remember the image of a citizen reading a book with the light of a lantern because there was not enough electric energy.
In that time, the financial capitalism could not doing nothing to change the situation of oil scarcity, and this demonstrated that its power was relative, it depends of the politicians, because it was a political decision of the Arab nations which determined the crisis. The example commented in the previous paragraph reveals that the true power is not money but the natural resources.
Nevertheless, it must be recognized that the financial sector obtained an advantage of the oil crisis of the years 1974 and 1975, because the new financial wealth acquired by the oil producers went to the Western banks, and the banks lent that money to the undeveloped nations. The explanation is the following: As a consequence of the oil prices increase of those years, which reflected their effects on the prices of the most goods and services, many undeveloped countries had not other option than to request loans to the international agencies and the private financing system. That is the main origin of the undeveloped countries burden debt.
- Water and food will be the most valued goods
The signs of water scarcity and contamination are already visible in many regions of the planet. This affects the food production possibilities. Official documents of the Food and Agricultural Organization, FAO, recognize the production vulnerability.
On 7 June 2011, the New York Times columnist, Thomas L. Friedman, in an article entitled The Earth is Full, assured that Sana, the capital of Yemen, could be the first big city in the world to run out of water within a decade, and said moreover that “that is what happens when one generation in country lives at 150% of sustainable capacity.”
China and other countries of Asia are threatened by the intensification of water scarcity. If, at mid term, China reduce its production of cereals, the alimentary situation of the world will be hard, because this fact would rocket the food prices. Already the situation is difficult because in the recent years the food prices has reached a high level. The World Food Program, WFP, has warned that “Rising food prices have pushed 44 million people into extreme poverty and hunger since June 2010.” www.wfp.org
The Food and Agricultural Organization, FAO, Index of food prices confirms the appreciation of the World Food Program.
6. Changes in the monetary economy
The 21st century shall be a time of big changes since the economic point of view. In the monetary economy the transformation will be intense, because the nations will understand that the current system of interest payment is unsustainable in the new reality of the world. That system does not let to pay the debt and it become in an eternal debt. Money cannot produce money. That is a perversion of the system, and one of the main causes of the world poverty. Wealth must not be money; wealth must be the natural resources and the goods, services and work that create those goods and services.
7. Financial crisis in the undeveloped nations
With the exception of the Western European countries, that adopted the Euro as common currency, the majority of world countries have the sovereign capacity to issue money.
The issuing of national money is an act of sovereignty of the different countries. They can finance their internal needs with own financial resources, this mean, with their national currencies. It is truth that the international monetary system has settled rules for the issuing of national currencies. The most important is its support in U.S. dollars and/or gold. But these rules are used in a flexible form by the monetary authorities of the countries, issuing more or less national money according to their needs. In some countries of Latin America, there are economists that talk about organic and inorganic money, which is absurd. Money is simply money and cannot be qualified like organic neither inorganic. They do not explain the two concepts. We might suppose that they consider inorganic the money not supported in reserves of dollars and/or gold. But these economists are wrong because the support in international currency, U.S. dollars or gold is also an illusion. That support does not exist in the reality, they are conventions created by man.
What the governments of the different countries of the world do not have is capacity to issue the international currency of interchange that is the U.S. dollar. Only the United States government can issue that currency. The lack or scarcity of international means of payment, the U.S. dollars and now Euros, is the big limitation of the undeveloped nations.
The same a country or an entrepreneur, they obtain international means of payment, dollars or Euros, exporting to other countries. But if its capacity to export is not enough for obtaining international means of payments, dollars or Euros, the undeveloped nations do not have other option than to request loans to the International Monetary Fund, the World Bank, other regional financial institutions or the private banking system. So was born the burden debt of the undeveloped nations.
The undeveloped nations have made other big mistake. They have requested loans in dollars or Euros to become those international means of payment in national currencies. For example, if they need to build a highway and they do not have money in national currency they request a loan in dollars or Euros to pay the highway. That is a big error, and it was one of the causes of the big indebtedness of the undeveloped nations.
The undeveloped nations should finance their national needs of development with their own national currencies and to request international loans only to finance their requirements of external goods and/or services. They have the sovereign capacity to do this.
8. A country can print all the amount of money that need
Money has not real, tangible value. The support in gold and silver was and is a lie. The same happen with the precious stones.
But money might be supported in essential goods of high demand, like water, food and petroleum, among other goods. They are a true reserve of value. The true value of things is its utility and the grade of necessity of them. There are essential things and not essential things. You cannot live without the formers but you can live without the seconds.
The economic theory defines inflation as the increase of prices as a consequence of a restricted or non existent supply. But this concept does not reflect exactly the truth. The truth is that inflation is a consequence of the human egoism that wants more and more money. The merchandisers enhance the costs and prices in a constant form in the three sectors of the economy, primary, secondary and tertiary. For ones is cost and for others price, but, in any case, they want more money, because they think that money is the true wealth. This process is more intense in those countries where the governments do not have political force, neither economic capacity to attack the speculation of the privileged sectors of the economy.
The world countries can print all the amount of national money that they need to satisfy the necessities of their economies. Nobody has the authority to impede this. Money is a simple instrument to make possible the economic transactions and not wealth itself. The amount of money in circulation do not determines the inflation.
9. Financial crisis in the developed nations
The financial crises in the developed nations are provoked essentially by two causes: a) The government’s weak supervision on the financial system and b) The unlimited ambition of some bankers. For example, these two conditions promoted the financial fallout in the United States and other European countries in the year 2008.
On 8 June 2011, Reuters informed that in the Asian markets, the U.S. dollar loosed value regarding the Euro because of the investors considered that the interest rates of the U.S. dollar would remain stables. The monetary economy is a big illusion, a castle of sand built in the seashore, because money really is nothing.
In May 2011, the firm Moody s reduced the qualification of the U.S. debt. This fact provoked an important impact in the international financial markets. Those appreciations of the firm let to make some questions, for example:
Who has the authority to qualify the debt of the first economic power of the world?
What is there behind those negative expressions?
It is obvious that behind those negative expressions on the U.S. debt is hide the objective of to debilitate the U.S. dollar to favor other currencies like the Euro and the Chinese currency Yuan. It might have, moreover, political interests in that kind of campaigns.
10. Origin of the economic supremacy of the United States
The economic supremacy of the United States is based in two facts: a) That the U.S. dollar is the international currency of interchange and, in consequence, the currency employed in the most international commercial transactions and b) That the U.S. dollar is the currency used by the central banks of the countries to maintain their international reserves, this means that the U.S. dollar is the world currency of reserve.
11. The United States do not have limits to issue dollars
Because of the U.S. dollar is the international currency of interchange and reserve, the United States can issue and must issue all the amount of money necessary to its internal activity and the world economic activity. Hence, the people that talk about the “burden debt” of the United States are not saying the true truth.
When the Federal Reserve of the United States issue one dollar it is issuing a debt, yes, that is truth, but that is an internal debt of the United States and not an external debt. Why? The answer is very simple: because according to the international rules, external debt is the acquired in foreign currencies. In this case, when the United States issue a dollar is issuing a debt in its own currency and therefore is an internal debt and not an external debt. So that the United States government has the sovereign capacity to issue the amount of dollars that need its internal economy and the international economy and it will be ever internal debt of the United States.
12. Europe and the Euro
With the adoption of the common currency, the Euro, the most European western nations resigned to their sovereign capacity to issue money. Which are the advantages of the common currency? Which the disadvantage?
Some weeks ago a read that merchants of Galicia, in Spain, are using the antique Peseta and the current Euro in their commercial transactions. The information did not explain how they obtain the Peseta which is a substituted currency.
In the recent weeks has been published also information’s about the financial crisis in countries like Portugal, Spain and Greece. This week was announced a program to help the last country. It is a program of economic restrictions, reduction of salaries, privatization and tax increase for the population that will do gravest the crisis of Greece. The program has been imposed by the International Monetary Fund and the European Central Bank.
The experience of the eighty and ninety years demonstrates that the programs of the International Monetary Fund are completely negative for the countries. Those policies enhanced the poverty, the unemployment, the inequality and provoked the born of leftists governments in Latin America. Sure, Greece shall not be an exception.
The countries accept the impositions of the IMF because they do not have other option. Usually, the nations that fall in the hands of the IMF are those countries highly indebted in the international markets that, moreover, need new loans.
If Greece had not resigned to its sovereign capacity to issue its internal currency by the adoption of the Euro, perhaps today might issue the amount of money that need for its internal need and request only a small amount of Euros to the international community. The case of Greece might be a good example for the other members of the monetary union.
13. Monetary ideas of the big thinkers: Smith, Ricardo and Marx
The opinion of the big economists, Adam Smith, David Ricardo and Karl Marx must be considered when we study the paper of money in the society. There are other important economists, but they are the most emblematic in this matter.
Adam Smith 1723/1790
In his book An Inquiry into the Nature and Causes of the Wealth of Nations, Book I, Chapter IV, Of the Origin and Use of Money (1776), he analyzes the evolution of money and assures that:
“When the division of labour has been once thoroughly established, it is but a very small part of a man's wants which the produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he has occasion for. Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.”
“In the rude ages of society, cattle are said to have been the common instrument of commerce; and, though they must have been a most inconvenient one, yet in old times we find things were frequently valued according to the number of cattle which had been given in exchange for them. The armour of Diomede, says Homer, cost only nine oxen; but that of Glaucus cost an hundred oxen. Salt is said to be the common instrument of commerce and exchanges in Abyssinia; a species of shells in some parts of the coast of India; dried cod at Newfoundland; tobacco in Virginia; sugar in some of our West India colonies; hides or dressed leather in some other countries; and there is at this day a village in Scotland where it is not uncommon, I am told, for a workman to carry nails instead of money to the baker's shop or the ale-house.”
“In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity. Metals can not only be kept with as little loss as any other commodity, scarce any thing being less perishable than they are, but they can likewise, without any loss, be divided into any number of parts, as by fusion those parts can easily be reunited again; a quality which no other equally durable commodities possess, and which more than any other quality renders them fit to be the instruments of commerce and circulation.”
“It is in this manner that money has become in all civilized nations the universal instrument of commerce, by the intervention of which goods of all kinds are bought and sold, or exchanged for one another.” End of the quotes.
David Ricardo 1772/1823
He concedes great importance to the value and support of money. In his book On the Principles of Political Economy and Taxation, Chapter XXVII, On the Money and Banks, (1817) he says that:
“Gold and silver, like all other commodities, are valuable only in proportion to the quantity of labour necessary to produce them, and bring them to market. Gold is about fifteen times dearer than silver, not because there is a greater demand for it, nor because the supply of silver is fifteen times greater than that of gold, but solely because fifteen times the quantity of labour is necessary to procure a given quantity of it.”
“The quantity of money that can be employed in a country must depend on its value: if gold alone were employed for the circulation of commodities, a quantity would be required, one fifteenth only of what would be necessary, if silver were made use of for the same purpose.”
“A circulation can never be so abundant as to overflow; for by diminishing its value, in the same proportion you will increase its quantity, and by increasing its value, diminish its quantity.”
“While the State alone coins, there can be no limit to this charge of seignorage; for by limiting the quantity of coin, it can be raised to any conceivable value.”
“It is on this principle that paper money circulates: the whole charge for paper money may be considered as seignorage. Though it has no intrinsic value, yet, by limiting its quantity, its value in exchange is as great as an equal denomination of coin, or of bullion in that coin. On the same principle, too, namely, by a limitation of its quantity, a debased coin would circulate at the value it should bear, if it were of the legal weight and fineness, and not at the value of the quantity of metal which it actually contained. In the history of the British coinage, we find, accordingly, that the currency was never depreciated in the same proportion that it was debased; the reason of which was, that it never was increased in quantity, in proportion to its diminished intrinsic value.”
He assures moreover that:
“Experience, however, shows, that neither a State nor a Bank ever have had the unrestricted power of issuing paper money, without abusing that power: in all States, therefore, the issue of paper money ought to be under some check and control; and none seems so proper for that purpose, as that of subjecting the issuers of paper money to the obligation of paying their notes, either in gold coin or bullion.”
Other important concept of David Ricardo is the following: “A currency is in its most perfect state when it consists wholly of paper money, but of paper money of an equal value with the gold which it professes to represent. The use of paper instead of gold, substitutes the cheapest in place of the most expensive medium, and enables the country, without loss to any individual, to exchange all the gold which it before used for this purpose, for raw materials, utensils, and food; by the use of which, both its wealth and its enjoyments are increased.” End of the quotes.
Karl Marx 1818/1883
His opinion is very important in monetary matter. In his book Capital, a Critic of Political Economy, Chapter III, Money, or the Circulation of Commodities, (1867), Marx says that:
“Throughout this work, I assume, for the sake of simplicity, gold as the money-commodity.”
“The first chief function of money is to supply commodities with the material for the expression of their values, or to represent their values as magnitudes of the same denomination, qualitatively equal, and quantitatively comparable. It thus serves as a universal measure of value. And only by virtue of this function does gold, the equivalent commodity par excellence, become money.”
“It is not money that renders commodities commensurable. Just the contrary. It is because all commodities, as values, are realized human labour, and therefore commensurable, that their values can be measured by one and the same special commodity, and the latter be converted into the common measure of their values, i.e., into money. Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time.”
“The price or money-form of commodities is, like their form of value generally, a form quite distinct from their palpable bodily form; it is, therefore, a purely ideal or mental form. Although invisible, the value of iron, linen and corn has actual existence in these very articles: it is ideally made perceptible by their equality with gold, a relation that, so to say, exists only in their own heads. Their owner must, therefore, lend them his tongue, or hang a ticket on them, before their prices can be communicated to the outside world. [2] Since the expression of the value of commodities in gold is a merely ideal act, we may use for this purpose imaginary or ideal money. Every trader knows, that he is far from having turned his goods into money, when he has expressed their value in a price or in imaginary money, and that it does not require the least bit of real gold, to estimate in that metal millions of pounds’ worth of goods. When, therefore, money serves as a measure of value; it is employed only as imaginary or ideal money. This circumstance has given rise to the wildest theories. But, although the money that performs the functions of a measure of value is only ideal money, price depends entirely upon the actual substance that is money. The value, or in other words, the quantity of human labour contained in a ton of iron, is expressed in imagination by such a quantity of the money-commodity as contains the same amount of labour as the iron. According, therefore, as the measure of value is gold, silver, or copper, the value of the ton of iron will be expressed by very different prices, or will be represented by very different quantities of those metals respectively.”
“Paper money is a token representing gold or money. The relation between it and the values of commodities is this that the latter are ideally expressed in the same quantities of gold that are symbolically represented by the paper. Only in so far as paper money represents gold, which like all other commodities has value, is it a symbol of value.” End of the quotes.
14. Conclusions
- Money is only metal and paper without intrinsic value.
- The unique value of money is its acceptation like mean of payment.
- The true value of the things is its utility.
- At mid term, the restrictions in the availability of natural resources shall provoke important economic changes.
- A country can print the amount of money that need.
- The United States do not have limits to issue dollars.
- Inflation is not an economic problem but of avarice, a problem of human egoism.
- It is necessary create a new economic option less dependent of the international financial system, to promote the progress and the world commerce.
Entradas
