Unraveling the Essence of Currencies: Beyond Government Fiat
In order to grasp the true nature of currencies, we must delve into their significance and fundamental characteristics, unburdened by the mere backing of government fiat. The groundwork for our understanding was laid by Jean-Baptiste Say, an insightful economist who illuminated the division of labor and the pivotal role played by a medium of exchange.
He keenly observed that human productivity flourishes through specialisation, with producers acquiring a broader range of goods and services by means of a medium of exchange. Money, along with its associated credit, assumes the role of a commodity, deriving its value from its exchange utility. Essentially, money represents the right or title to acquire satisfaction from another individual's production. Expanding on "Say's law", whenever two economic quantities are exchanged, they are considered equal in value to one another. However, when money is involved, the other quantities are assigned a price. Price, therefore, signifies value expressed in terms of money, while money itself remains free from price, its value being intrinsically tied to the goods and services exchanged..... A little confusing, but are you still with me??
As long as currency and its associated forms of credit remain closely linked to money, with minimal discrepancies in their values, they too should bear no price, except for a potential variance arising from counterparty risk. However, a divergence between money and currencies may arise if users suspect a breakdown in this relationship. It was precisely the erosion of the gold/dollar link that led to the collapse of the Bretton Woods agreement in 1971.
Consequently, it follows logically that legal tender, or money, is bereft of price. Yet, when the value of currency deviates from that of money, does currency then acquire a price?
Not necessarily. As long as currency continues to function as a medium of exchange, it retains its value rather than being assigned a price. For instance, we can assert that one dollar is valued at 0.0005682 ounces of gold, or conversely, gold is valued at 1760 dollars. However, owing to the dollar's departure from the gold standard, in 1971, a historical relic endures where the dollar lacks a price, while gold is granted one. Which is an inaccurate representation.
You coild argue that gold falls victim to Gresham's law, being hoarded rather than spent, thereby serving as a medium of exchange only in dire circumstances. Consequently, its circulation remains limited. Nevertheless, fiat currencies have persistently depreciated relative to legal tender, which is gold, to such an extent that the dollar has lost 98% of its value since the abandonment of the Bretton Woods system, while sterling has suffered a 99% decline. Over the course of fifty-one years, this erosion has occurred so subtly that users of unanchored currencies, oblivious to its magnitude, have failed to take notice.
The progressive loss of purchasing power relative to gold can endure indefinitely, as long as the prevailing conditions permitting this decline persist without causing undue alarm. Moreover, due to the absence of a suitable alternative, it proves highly inconvenient for currency users to confront the possibility of their currency becoming valueless. Thus, they persist in clinging to the illusion of its utility until its debasement can no longer be ignored.
In essence, comprehending the intricate nature of currencies necessitates disentangling them from the mere backing of government fiat. By grasping the historical underpinnings and inherent value distinctions, we can better appreciate the evolving dynamics between money, currencies, and the delicate balance of trust upon which they precariously stand.
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