There are those who try to give the impression that
money can be created by decree or covenant. They assert that an
authority such as the state, or an agreement between individuals can
willfully establish a currency unit. The most conspicuous recent example
of this was the "creation" of " paper gold" or the SDR's (Special
Drawing Rights) by the International Monetary Fund.
Historical evidence does not support the idea that a
new form of money can be created by the mere passage of a law. There is
much more to it than that. Money is not the product of a compact or of
legislative acts. It evolved in the market. As primitive people became
increasingly aware of their business interests, they came to understand
the simple fact that exchanging less-marketable goods for others of
greater salability brought the trader closer to his ultimate economic
goal.
In ancient Greece, as in some parts of Africa today,
cattle were the most marketable commodity, and were used in exchange in
addition to their use as sources of food and beasts of burden. Domestic
animals such as cattle, horses, and sheep constituted the chief sign of
wealth among ancient peoples, both nomadic and agricultural. Their
marketability extended to all economic men. The lack of roads made
transportation difficult, but cattle transported themselves almost
without cost. This made them marketable over a wide geographic area and
increased the constancy of the demand for them. A cow is a commodity of
considerable durability, and its storage costs are negligible where
pastures are abundant and cattle are kept outdoors. In societies where a
large herd served as a status symbol and also afforded economic
security, comparatively few animals would be offered for sale at one
time and consequently found a ready market. Because of these factors and
the fact that the actual trading in cattle was better developed than
trade in any other commodity, cattle emerged as the most marketable
commodity in the economy and hence the natural money of the people.
The division of labor and commercial development and
the formation of cities with their highly industrial population had the
effect of diminishing the marketability of cattle while increasing the
salability of other commodities, especially the metals then in use. The
city-dwelling manufacturer was not in a position to accept cattle in the
course of trade with farmers. Cattle were no longer the most marketable
commodity, and finally ceased to be money at all.
Metallic Money
Copper was the first metal from which tools and weapons
were made. Along with copper, gold and silver were the earliest
materials used for jewelry and ornamentation. Therefore, at the time
when the medium of exchange passed from cattle money to metallic money,
copper, gold, and silver had become the goods of most general desire,
largely because of primitive people's extensive use of jewelry. The
marketability of the metals was greatly enhanced by their usefulness to
all people and the fact that they could be readily transported
throughout a wide market area. The fact that they were durable and could
be stored or held without deteriorating gave them added salability.
As the area of world trade widened and the rate of
turnover increased, the precious metals gold and silver - became more
and more desirable because of their high purchasing power per unit of
weight. This led to obvious advantages in transportation, handling, and
storage and meant that copper would cease to serve as money. With the
increasing division of labor, higher turnover of commodities, and trade
with all parts of the known world, each individual felt the need for
carrying more purchasing power on his person. Under these conditions the
precious metals, especially gold, became the most convenient medium of
exchange and therefore became the money of the most highly developed
economies. Thus money came into being, not as the result of an
agreement, legislative compulsion, or mere chance, but as the natural
result of voluntary exchanges in the market place. It can only continue
to serve as money as long as it proves acceptable under these
conditions.
Neither can a newly created currency gain acceptance
unless it is backed by something which has already proved itself in the
market. The SDR paper met with some acceptance in international finance
only because it was linked to gold, of proven monetary qualities. The
creation of Special Drawing Rights was claimed to be a new way for the
International Monetary Fund to make easy credit loans to countries
guilty of monetary mismanagement. But this was not the creation of a new
international money. Gold is the only international money. A sound
currency cannot be created by the mere passing of a law, and today's
paper money managers would do well to keep this in mind.
At the time of the original publication, Dr. Guarnieri
was Vice President and Chief Economist of International Investors,
Inc., in New York.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
Vol.24, No.10, October 1974.
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