Value

Language is about conveying images from one mind to another. Things and actions are denoted by words. How words interact with each other is conveyed through grammar. Thousands of languages are spoken in the world and each language is a world unto itself closed off to anyone outside that linguistic community. The language in turn shapes the members of the community, shapes the very mind of the community. Thus a language, an exceedingly abstract construct, has the power to shape how people think. The language of the community also serves to signal whether someone is a member of the community or not, because languages aren't so easy for an outsider to learn. Nevertheless, every normal human learns to speak his own language effortlessly. Without any help from a grammarian, any five year old can perfectly well express complex thoughts in his own language.
Money is a far simpler thing to use than language, and yet it is far more difficult for the average person to understand. It crosses, even erases cultural boundaries and reduces economic relationships to a single number. At an every day level money is comprehensible to anyone who can count. At the level of abstract theory the monetary system seems incomprehensible. Money is described as debt. What does that mean? It means that when you have ten dollars in your pocket the world owes you ten dollars worth of goods or services. But money has a far more basic definition. It is a unit of value.
Everyone understands price tags. In the supermarket it says, "russet potatoes, $.50 per pound. Easy. The shopper has five dollars to spend on potatoes for which he can obtain ten pounds of potatoes, fifty cents being worth a half dollar. But how is it decided that a pound of potatoes at the supermarket is valued at a half dollar? There's the mystery. What is a dollar and how does it translate into potatoes, tractors, an hour's worth of a plumber's time? Who decides? Not even the strictest of tyrannical regimes can enforce the value of a dollar relative to a pound of potatoes, although many have tried, usually with ruinous results. Only the market can do that. And how does the market establish a value? Every individual who makes a decision whether to pay $.50 for a pound of potatoes helps decide. Let's say the price was $.25 per pound yesterday, and the shopper had every intention of buying twenty pounds with the ten dollars he has in his pocket and spending the other five dollars on two pounds of pork chops and a bunch of carrots and some onions. What does he do when he finds out the price has gone up? He might buy fewer potatoes. He skips the pork chops. He might buy rice instead of potatoes. He might go to a different store. In any event the store owner may not be able to sell as many potatoes as he expected. He might lose money instead of turning the fat profit he had hoped for. The market decided it would rather do without potatoes than pay $.50 a pound. So the next day he marks them down to $.39 to get rid of them. That's the way the market works.
In truth, the buyers and sellers are not negotiating how many dollars a given quantity of potatoes are worth so much as how much a dollar is worth. It may seem to amount to the same thing, but it doesn't. What's true of potatoes is also true of oil, lumber, a toaster, a hat, and especially gold. If you read the financial section of the paper and you look up the price of gold for that day, you might see it quoted at $500.00 per ounce. In reality, it doesn't really mean that. It means a dollar is worth one five hundredth of an ounce of gold. This is because the supply of gold doesn't fluctuate that much because it is a rare metal. Neither does the demand fluctuate that much. In times when the unit of currency is in a state of declining value the demand for gold does increase because nobody wants their stores of cash to depreciate. A rush to exchange worthless paper for solid gold ensues. But the actual value in terms of assets does not fluctuate very much unless there is a shortage of those assets. For many years the value of a dollar was pegged at $35.00 per ounce of gold, but in the end the value of gold is the bedrock of any currency even without official endorsement. This had the effect of enforcing discipline on the money markets. As soon as the central authority tries to issue more paper than gold is worth, inflation will begin to distort the economy. Ignore the fundamentals and catastrophe follows, as in Zimbabwe where a cup of coffee now costs billions of Zimbabwe dollars.
Unbundling the value of a currency from gold often results in economic chaos as schemers like George Soros and Warren Buffet figure out how to game whatever system is in place. This prompts capitalists to promote a return to the gold standard and socialists to politicize the banks. The twentieth century provides numerous examples of what happens when socialists try to fit the market to their own theories.
Gold has one big problem. It is inert. Profit is good thing. Someone with a talent for growing the economy should be rewarded and profit is a perfectly good measure of that reward. Reduce this to basic terms. A farmer to be successful has to at least have enough grain left beyond what he can consume to save for seed, and if he is prudent he will set aside another share for bad years, just as in biblical times. But suppose his crops are so bountiful he still has a surplus of grain. It does him absolutely no good to save it until the mice eat it. He looks to do something else with it. He might trade some of his surplus with someone else, say a shepherd in the hills who has more wool and cheese than he knows what to do with but lacks grain for bread. If the farmer and the shepherd make an exchange they are both better off than they were before. Notice that one did not have to suffer loss in order for the other to profit. They both profit. They can concentrate on what each does well with the resources at his disposal. They are better off together than they were separately. This is very easy to understand. The inevitable problems arise when cleverly predatory people who don't want to farm or herd grab the surplus for themselves, perhaps destroying the source of wealth in the process. Socialists are very good at destroying wealth and so are the linear descendants of bandits. They do this by punishing the people who produce wealth.
Gold coinage for all its advantages had the distinct disadvantage that it was possible to hoard it. No spoilage to worry about. Unfortunately, when gold is hoarded it is out of circulation and therefore inert. It does nobody any good, not even the hoarder. It just makes him extremely attractive to thieves and robbers. And why not? What good does it do locked up in a chest somewhere? Better to grab it and spread it around, except that it's always been far easier to rob poor people of what little they have. When gold is hidden away in a vault the wealthy man's savings cannot be used as seed money to increase the wealth of the community as a whole. This is why the transition away from coinage to paper notes and numbers in ledgers caused such a rapid expansion of the economic base in the west. All of a sudden it was possible to use money to make more money.
What held things back for some centuries was the distrust by the Church of interest bearing loans. I am a great admirer of the Church but in this the patriarchs were mistaken- at least if a prosperous and well fed populace is considered a good thing. Intuitively, it seems somehow immoral that a wealthy man should grow even wealthier merely by putting his excess money out to rent. But the wealthy man doesn't just toss his money to the winds. He chooses where to put it. This is the skill he has. He knows where it will do the most good. At the same time, he takes the risk of losing his investment. This is also a good thing as failure is one of nature's best teachers. It not only starkly illustrates bad decisions, it also separates the rabbits from the lions.
But without gold as a reference point it is exceedingly difficult to establish the value of any given good or service. Today the US dollar has largely supplanted gold as the reference point, but since the general public is largely ignorant of the arcane art of monetary policy, it's entirely possible for all sorts of shenanigans to take place without anybody but insiders being cognizant...until everything blows up in their faces. At the time of this writing we have been afforded an opportunity to witness a meltdown of the financial system as a result of shenanigans known as hedge funds, derivatives, sub-prime mortgages each of which attempts to do one thing in its own way: pretend there is value when none exists. This prompts average investors and savers, like home buyers, to transfer their earnings to something they think will grow in value but which is overpriced in the first place. Eventually the bubble will burst. There are a lot of smoke and mirrors involved in setting the value of something when the unit of value is chimerical. Nevertheless, wherever it has been adopted the modern system of money capitalism has ushered in prosperity and ease unprecedented in the human experience. It is not reserved for the few, but available to the many, to anyone who is willing to participate. We like to think of technology, science, democracy, social factors like a work ethic, whether protestant or Confucian, as the drivers of this prosperity, but without the modern banking and monetary system there would be no way to organize this economic activity. Socialists have proven over and over that they can't do it. Every socialist system ends up impoverishing its subjects. This is because socialists, try as they might, are unable to make the value of something be what they think it should be.