What is Money?

Few people, including professional investors and economists, understand what money is. Understanding the definition of money, what money is and what money is not, is important for anyone concerned with preserving their wealth. For those thinking of leaving their native country to live abroad, understanding what money is, is even more important.

The reason is, a fiat currency different from the currency used in their native will most likely be used as a medium of exchange in the new country. I say most likely, because there are a few exceptions, for example, Ecuador, that use the US Federal Reserve Note as their medium of exchange. Should the dollar collapse, a distinct possibility, and here; an accurate knowledge of what money is will be even more important for those expats living in countries using the USD as their medium of exchange. When the US Federal Reserve Note is no longer accepted as the world's reserve currency, countries like Ecuador will need to adopt a new currency. When this type of currency exchange takes place, those exchanging their old currency holdings for the new currency, almost always lose purchasing power in the transaction.

So, what is money? There is no such thing as money in the strict sense of the word. There are items used as money, like gold and silver, but they themselves are not money, but simply used as money.

Money must possess three elements to be truly considered money. Many thanks to Bruce McCarthy for his enlightenment in regards to what money is; much of this missive was taken from his teachings. 

  1. Money must be quantifiable, that is, money must be countable, such as 1, 5, 10, etc.
  2. Money must be measurable, that is, it must have a unit of measurement to allow division into the quantity or quantities needed. Items historically used as money usually had the same quantity, One Dollar worth of gold or silver, or Ten Dollars, or One Peso of silver, Ten Pesos, etc. of some substance; and
  3. Money must have substance, that is, it must have intrinsic value.

Money must be quantifiable: A dollar of real money (like silver or gold) is a form of measurement, not money itself. Just like an hour, or a mile, or an inch, or pound is a measure of something, and not the substance itself. A real dollar is a unit of measurement. The United States 1792 Coinage Act, which has never been annulled, and is still in effect, defined a Dollar as 371.25 grains of pure silver. Eagle coins were to have the unit measurement of Ten Dollars and contain 247.50 grains of pure gold. Half Eagles were to have the value of Five Dollars and contain 123.75 grains of pure gold, or half of that of the Eagles.

Money must have a unit of measurement. When the US used coins as money, a dollar was the unit of measurement used. Again, a US dollar was measured in grains of either gold or silver.

Money must have substance or be something tangible: a cow, a horse, labor, crops, etc. Paper has never been used as money, paper is too heavy.

Using the above examples, Eagles were used as money, as they were 1). quantifiable, that is, they had Ten Dollars stamped on their face; 2) They had a unit of measure; so many grains of gold, and 3) they had a substance, gold.

Hold a one dollar Federal Reserve Note in your hand, (or any unredeemable paper currency) and ask yourself: What is this one dollar of? What is the substance backing or behind the one dollar? The answer might surprise you: Nothing, absolutely nothing. The one dollar measures no substance.

What gives paper money value is the faith or confidence people have in it - belief that the paper can be exchanged for something tangible, something of value. Federal Reserve Notes, in fact, all fiat paper currencies, are ONLY accepted because people believe the paper they hold in the hand (or the digits in their bank accounts) have value. Any economic system that uses fiat currency as its medium of exchange works on the credit system, from the Latin word - credere - to believe. Credit is not tangible: you can not touch or see credit. You can not weigh or measure credit because credit has no substance to weigh or measure. Credit is intangible. It is all in our imagination.

When a fiat currency debt money system is used, those who create and issue the dollars(which are unredeemable in gold or silver) out of thin air, are able to take real wealth away from those who create substance, something of value, for that which is imaginary, or intangible. They trade something that does not exist for something that does and they eventually get everything of substance for free. This fact is why the framers of the U.S. Constitution prohibited the government from issuing paper money; only gold or silver was to be used as money.

Article 1 Sections 8 and 10 of the Constitution state :Congress shall have the power to coin money and regulate the value thereof. No State shall make anything but gold and silver Coin a Tender in Payment of Debts." Notice it was to be coins, not paper.

We've come a long way from that one pillar the founding fathers set down as the foundation of the American economic system, haven't we?

Large holders of US Federal Reserve Notes and US Treasuries denominated in US Federal Reserve Notes, like China, are losing faith or belief in those notes. They are taking proactive steps to diversify out of those dollars into real assets. They are also taking steps to no longer being dependent on using the US dollar as the world's reserve or trading currency. A wise investor, wanting to preserve their wealth, will also want to take steps to no longer hold their reserves or savings, in US dollars.

That is the reason we are seeing the increase in the price, denominated in all fiat currencies, rising for precious metals, such as gold, silver and even copper.

People are losing faith in the dollar and trading them for real money, gold and silver.

You may want to do likewise.