©PBeckmann September 2009
As far as our archeological discoveries reach back, human societies have always had some kind of medium to help in the exchange of basic agricultural and household goods. If a farmer in July harvests her potatoes for the year and chooses to exchange his surplus for apples from her neighbor's September harvest, the neighbor gives her say 20 sea shells until the apples are ripe. At that point the apple farmer delivers his surplus apples to the potatoe farmer which in turn "pays" for the apples with the 20 sea shells.
This example shows on a very fundamental level the three basic functions of money:Let's assume the whole economy consists of apples and potatoes, all the sea shells (i.e. money) in circulation reflects the total amount of apples and potatoes. One sea shell is still worth 4 ounces of potatoes and 2 ounces of apples. Now one farmer decides to add to his wealth by doubling the amount of sea shells in the economy (let's assume he can just fabricate them in the same way the U.S. treasury prints money). Since the real economic stuff, apples and potatoes, had not doubled in quantity, one seashell now has only half the value it had before. Since we have twice as many sea shells as before, one sea shell is only worth 2 ounces of potatoes and 1 ounce of apples.
Something similar is currently happening with the U.S. dollar. In order to finance the 2008/ 2009 bank bailout and the federal stimulus program as well as various wars the U.S. is fighting, the U.S. treasury has been printing dollars at an accellerated pace. As a May 2009 New York Times article describes it, "the Federal Reserve is printing money from thin air, and the government is issuing trillions of dollars in new debt as it tries to spend its way out of the recession with a huge stimulus package, new lending programs, health care overhauls and automotive rescues." As a direct result, the value of the dollar in respect to other foreign currencies is increasingly slipping (see chart).
As we have learned so far, money has always been connected to a commodity. Regardless of the underlying commodity, one could always exchange one's money for potatoes, apples, or gold. This old truth changed drastically on August 15th, 1971, when the the U.S. abandoned the gold standard. From now on, the world financial system is kept afloat only by the confidence, that I can redeem my money at any time for a commodity, i.e. I can raid my savings account and buy real estate, gold, wheat,etc. The problem, however, is that by now there is far more money around than there are commodities in the world. If all money got liquidated today, two things would happen:
In its role as the central bank of the United States, the Fed serves as a banker's bank and as the government's bank. As the banker's bank, it helps to assure the safety and efficiency of the payments system. As the government's bank, or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars. Just as an individual might keep an account at a bank, the U.S. Treasury keeps a checking account with the Federal Reserve through which incoming federal tax deposits and outgoing government payments are handled. As part of this service relationship, the Fed sells and redeems U.S. government securities such as savings bonds and Treasury bills, notes and bonds. It also issues the nation's coin and paper currency. The U.S. Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing, actually produces the nation's cash supply and, in effect, sells it to the Federal Reserve Banks at manufacturing cost, currently about 4 cents per bill for paper currency. The Federal Reserve Banks then distribute it to other financial institutions in various ways. (Wikipedia)
It is the last function that got us into the trouble we are currently in. Money has shifted from its original purpose as a medium of exchange for commodities to primarily a store of value. 95 percent of the world's monetary transactions are of pure financial nature. These transactions evolve around the trading of money and the speculation with derivatives and stock. Thus money itself has become a commodity. The actual amount of money transactions dedicated to the exchange of goods of services has diminished to roughly 5 percent.
Since money is directly connected to the value of the goods and services we exchange, their value is being affected increasingly by the value of money itself, which changes not with value of potatoes and apples, but as the results of global financial speculations. In other words, it's the global financial casino that determines today's commodity values and not so much anymore the resources and labor they contain.
Current examples are the wheat price explosion in 2008 that led to a trippling of US. flour prices within six months. Consequently, US. consumers saw their prices for bread increase by over 20 percent because global investors fled the crumbling stock market and sought refuge in real value, i.e. commodities like wheat and gold.