For much of human history, gold has facilitated economic exchanges. It might be difficult to figure out how many turnips to trade for a new car, but it is easier to price both turnips and automobiles in terms of gold, then make the swap.

Of course, gold is not the only “money” that has been used in human society. Livestock may have been one of the first common mediums of exchange, as evidenced by words like “chattel” (property) and “pecuniary” (pertaining to money) which both originally meant “cattle.” Cows have a lot of value, but they are hard to carry around.

Gold can be shaped, melted, molded, whittled, and cast into coins for convenience. A small amount can be used for a large purchase. At prices as this is written, a new 3,000 pound automobile could be purchased for a pocketful of gold.

How does gold get its value?

Gold gets its value the same way any other commodity does, from the average amount of socially necessary labor time involved in getting it. Remember that gold has to be located, mined, smeltered, transported, minted, and otherwise worked on before it becomes a medium of exchange. As it happens, quite a bit of labor time is spent in processing a small amount of gold.

I recently read part of “The Creature from Jekyll Island. A Second look at the Federal Reserve,” by G. Edward Griffin (American Media, Westlake Village, California, 2002). In building his case against the Federal Reserve, this free-trade traditional capitalist-minded writer says, “The free market, if unfettered by politicians and money mechanics, will always maintain a stable price structure which is automatically regulated by the underlying factor of human effort. The human effort required to extract one ounce of gold from the earth will always be approximately equal to the amount of human effort required to provide the goods and services for which it is freely exchanged.”

The first part of Griffin’s assertion, that the “free market” will “always” maintain stable prices, is laughable in light of the financial crisis of 2008, but the latter part of his statement confirms that he knows how gold, and all other commodities, get value – from what he calls “human effort” and what we call, more exactly, the average amount of socially necessary labor time required.

From Roosevelt’s Presidency to 1972, the American dollar was tied to gold. Since 1972, the American dollar has “floated” free of the price of gold. The euro, the yen, the dollar, and all the world’s currencies are measured daily against one another; but all of them are still measured against the price of gold.

In today’s society, the practical, everyday, money commodity is not gold, nor is it even printed dollars. It is bank credit. When one borrows $5,000 from a bank, the bank does not put $5,000 in gold or even in printed paper money into a certain pigeon hole for you. The laws only require that they hold a small reserve. They just hand you a checkbook with $5,000 written in it, and you can write checks on it. Credit greatly expands the total amount of “money” circulating in the world.

What causes inflation and deflation?

Capitalist economists give out a "pop-psychology" version of the causes for problems. They tell us, "Investors are confident," or "Consumers are worried" as if our feelings actually cause the ups and downs of capitalism.



They are over-emphasizing subjective factors. There are real, objective reasons for economic changes. Monetary changes are an important reason for changes in the economy.

One might speculate that if money measures the value of each individual commodity, then the total amount of money in circulation should equal the total value of commodities in existence, or wealth. If one knew all of the dollars and bank credit circulating within our nation, one might estimate the wealth of the United States.

Going even further, one might decide that a sudden new influx of money would tend to increase, or inflate, the prices of commodities. Conversely, if a lot of money were destroyed, individual prices would decrease, or deflate.

These propositions are valid, in a broad general sense. And yet, trillions of dollars in bank credit “disappeared” in the banking crisis at the end of 2008, and prices did not fall. The American government can, in a short space of time, pump a “new” trillion dollars into the economy without seeming to affect prices. They did it in late 2008 and early 2009. Around $1,000,000,000,000 (in new credit) went to banks and other entities. The usual measure of inflation, the consumer price index, barely rose. Why?

One important answer has to do with how quickly money circulates through the eocnomy. If money isn’t circulating, it isn’t going to affect prices. If the government gives a trillion to the wealthiest banks, and they just hold on to it, then it isn’t circulating and prices aren’t affected. On the other hand, if the American government were suddenly to hand out a trillion dollars to the poorest people, and they put it into circulation (spent it) immediately, one might expect prices to rise.

Money affects an economy through both amount and velocity. A small amount of money circulating quickly through an economy might have more effect than a large amount that moves slowly.

In summary, the money commodity facilitates the transactions necessary to a sophisticated economy. Its own value comes about the same as any other commodity, through the average amount of socially necessary labor time needed to produce it. Inflation results when more money is circulated or when circulation increases; deflation occurs when less money circulates.

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