What is money?

I was asked this rhetorical question in Uni.

"What is money?" (My lecturer didn't give me a good answer... but it was a good question and got me thinking)

As the recent events about the US dollar has shown. Money is not paper. If a country defaults on its payments, its paper money is worthless. If its economy is in shambles or if it decides to just print and print more paper money like tissue paper - well, is it worth anything?

"Is money gold?"

Maybe I'm a bit sore about getting stabbed on the wrong side of the gold cycle, but I'm (not so) sanguine about gold nor do I believe in its mystical power of value.

Let me tell you a story. There was this man who was given three wishes by a magical genie -

So his first wish was to have a ton of gold. He got that.

His second wish was to be in a place were no one else could steal his gold.

So the Genie dropped him into the deepest part of the sea with his one ton of Gold. Absolutely impossible for any thief to get it there.

The man's third wish- issued more frantically - was to be on dry land.

And so the Genie put him on a small island where there was another resident who owned the sole coconut tree.

The man - exhausted - begged the resident for a coconut. And the resident replied, "I'll sell you one coconut for a ton of gold." The man had no choice but to accept the exchange.

So what is money? Money is value. Paper, gold (cowry shells etc..) are only a means of helping to exchanging that value. Gold is limited and is a major cap on expansion. You can't print more gold to keep up with progress. (More on this later).

Food has a value but it is perishable and has a finite lifespan. And depends upon supply/demand.

Gold has a value as an ancient currency but it is actually elastic. Meaning it goes up and down (same as most things). Its value fluctuates. Gold in 1980 was US$800 an ounce. You could buy a lot of things with $800 back then - like a good car. Most people's salaries were less than that.

Since then, its value dropped all the way down to US$250 in 1999. Anyone who invested in gold in that period, lost their pants. Right now Gold is back up again to $800 an ounce (not taking into account inflation). And hey, maybe it will regain its ancient influence; or maybe not. But let's not bow down this idol. Its just a rare "rock". Its not smiling at you. Its just your reflection.

You don't have to dig to make money. It can be created through human skill. People make wealth. Ask yourself how much gold will you exchange for a Van Gough or Renoir painting? How much gold will you exchange for a beautiful mansion or a sports car or a Persian carpet?

Humans can manufacture value. It takes time, effort, skill (resources) and they can build things of value: a Lamborghini sports car, a Nasa sport rocket, a Metropolis, a Railway system, a laptop computer, an internet telecommunication system, antibiotics, pain killers, antiseptics, painfree surgery, etc.. Humans can create wealth and value.

Meanwhile the amount of gold stays about the same. But the amount of value generated by mankind has increased. Will you trade all the world's gold supply for a modern secure civilization - with all its benefits: a road system, a judiciary, police force, water supply, shopping malls, cafes that can brew a decent cup of coffee, etc..? Do you think any of the great monarchs in history enjoyed the same kind of benefits that even the common citizen in industrialized nations do?

Anyways. If you did what will you do with the gold? You can't eat it.

cont....