What is the Value of Money?

25/04/2016 11:36 | Updated 3 days ago

Today, almost every country uses a system of fiat money, which we may define as "currency that a government has declared to be legal tender, but is not backed by a physical commodity". The value of such fiat money is therefore derived from the relationship between supply and demand rather than the value of the material that the money is made of. Consequently, this makes any such money intrinsically valueless and as such this is why we see the value of a currency rise and decline in relation to market movements and speculation. To exemplify how this happens in line with the markets, we may point to the falling value of Britain's pound sterling as a result of the risk of the United Kingdom leaving the European Union as an example.

This system replaced the Gold Standard in two steps, the first of which took place in 1933 when then President of the United States, Franklin D. Roosevelt, outlawed private gold ownership and was ended. The second and final step of the transition was taken by the then President Richard Nixon when he ended the trading of gold at the fixed price of one ounce of gold for $35 on August 15th, 1971. For clarification, the Gold Standard may be defined, and is as such done so by The Encyclopedia of Economics and Liberty, as "a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price". This effectively set the value for any one currency, where, for example, £100 an ounce was the set standard then £1 would be worth one one-hundredth of an ounce of gold.

When then we consider the aggregate sum total value of all coins and notes in circulation, which we may also call narrow money, or alternatively M0, and compare that sum total of £3.59 trillion with M3, which may be defined as all short-term time deposits and long-term deposits in banks and twenty-four-hour money market funds in addition to M1 then we see that the amount of £53.88 trillion dwarfs M0. This is not all that becomes apparent, with £50.29 trillion of virtual currency in circulation our earlier point of money being intrinsically valueless is further illustrated. In an economy where survival was a challenge, commodities such as food, clean water, antibiotics, fuel and rare metals that may be exchanged hold value, whereas fiat money holds no value because it does not represent anything of value and there is absence of belief in it. In other words, you cannot erase the value of gold, but you can erase the value of fiat money by removing the authority that enforces its value.

It might here be noted that only by returning to a standard such as the gold standard, wherein coins and notes represent something of value in a secure location such as a bank, will money have real value and not decreed value which is contingent on an authority's continued existence and the belief people have in such authority. Though governments, businesses, and individuals would become more fiscally disciplined as a result, the trade-off would be that it would reduce the pace by which the overall economy would grow. Furthermore, it would be near on impossible to supply the £71.79 trillion worth of gold that would be required to return to the gold standard to match the last one hundred and sixty years of average two to three percent growth; for at present, even if so much gold was in circulation matching the three-to-four percent per year required is simply not going to happen. We may, however, hope that gold plays an increasing role in the monetary system but acknowledge that a return to a pure gold standard will never come to pass.