'THERE ARE TWO PURPOSES OF MONEY."' ~Ray Dalio
(There are actually THREE.)
is trash," says billionaire Ray Dalio. And he's not a fan of
bitoin and other cryptocurrencies, either, because they are not a
form of money.
He's quite right about the historic definition of "money" includes medium of exchange and store of value. But he failed to mention a THIRD requirement....standard of measure. These
are the attributes authorities had in mind when they established
the money standard for the United States in 1792 based upon the
directive of the U.S. Constitution of 1789.
MEDIUM OF EXCHANGE means that
money is widely accepted as the element that
expedites the exchange of goods and services for goods and
services. ie: One exchanges his/her skill and energy in the
workplace for the necessaries to sustain life...food, shelter, and so
on. Money was developed as the means of streamlining the
exchange. One works for money and later exchanges the money for housing, clothing and other needs.
STORE OF VALUE means money
must be a carrier of value over
time. If a paper dollar is tucked
away in an empty sugar jar for
a long period of time it
should have approximately the same
purchasing power upon removal from
the jar as when it was put
there. (This is not possible in the age of inflation.)
STANDARD OF MEASURE
means that the composition of the money unit
must be uniform, durable, and scarce enough to reliably serve as
a carrier of wealth. The Founders settled on a dollar unit
composed of 371.25 grains of silver. Counterfeiting dollars
carried the penalty of death.
Bitcoin doesn't meet the
definition of money, says Mr. Dalio. It certainly is not a
popular medium of exchange, not is it of much use as a store of value
measured as it is in fiat dollars. Bitcoin is fiat currency
measured in fiat currency. As for meeting the standard of measure
test, the cryptocurrencies fail at that, too.
There's a little buzz in the
social background about returning to the money defined in the U.S.
Constitution. Modern economists are against it, generally, but
having abandoned the definition of "the dollar" established by the
Constitution the nation is now struggling in the quicksand of
multi-trillion debt. It should be noted that the Constitution has
never been amended with respect to its definition of money.
Currency and Scarcity
curiosity about the world's currency problems (not many nations think
they have enough of it) has driven us into the history books to
see how our media of exchange hold up over long periods of time.
We increasingly stumble into the subject of gold and its ability to
hold value for long periods of time versus present currencies, such as
the Federal Reserve Note. The FRN lost the last vestige of
redeemability in the summer of 1971. It, like most of the other
currencies of the world, is technically an IOU which has no intrinsic
value in itself but circulates as if it did.
We went back ninety years to examine the price of
bread in terms of dollars and gold. A pretty good loaf of bread
could be bought in those days for a dime. Therefore, one dollar
would buy ten loaves of bread. Today one dollar will pay for about 1/3rd of a loaf of pretty good bread. Doesn't say much for the long term purchasing power of the dollar, does it?
Ninety years ago a troy ounce of gold would be
worth a bit more than 100 loaves. One wold think
that improved efficiency in the baking business over the
years would bring the price of bread DOWN. Well, in
terms of gold, it DID! A troy ounce of gold will
exchange today for enough dollars to purchase
some 420 loaves.
Gold, although hated by most mainstream
economists, has done a good job of conveying purchasing power across
the span of almost a century. The historic definition of "money"
demanded that it be not only a reliable medium for exchanging goods and
services, but also a store of value and a standard of measure.
Today's dollar is only a medium for exchange but no one can guess what
its future value might be and even define the substance of "a
dollar." Everyone knows, however, that a troy ounce of gold will
always be 480 grains of the precious metal. Therefore, it is a
predictable standard of measure.
Money attributes vs. function.
A concept rarely explained.
eighty-five years ago the late economist Elgin Groseclose explained to
a bewildered nation the difference between the ATTRIBUTES of money
compared to money's FUNCTION. He used the common fruit of the
peach tree as an illustration.
"A peach has the attributes of form, color, fragrance, and taste, but
none of these is its FUNCTION - which elementally and metaphysically is
that of a carrier of seed."
Dr. Groseclose neatly observes that the natural function
of a peach is to drop to the ground and assist its seed to sink into
the ground and eventually sprout, hopefully becoming a peach tree.
Humans long ago discovered the attributes of the peach included delicious edibility. Consequently, most people rarely think of the function of the peach and think of it only as a tasty fruit.
So, what's the tie-in with MONEY? Groseclose points out that the essential function of money is a carrier of value. Most
economists, however, lump a variety of financial abstractions under the
label of "money." Federal Reserve notes, for instance, are
generallyj considered U.S. money but are still shown in the U.S. Code
as "redeemable in lawful money." Obviously, if a Federal Reserve
Note is redeemable in lawful money it can not simultaneously BE lawful money. (Which raises the question "What is a Dollar?"
Groseclose served as Treasurer General of Iran in World War 2 so
successfully his methods were adopted throughout the Middle East War