Best of the Week
Most Popular
1.U.S. Inner City Turmoil and Other Crises: Ron Pauls Predictions for 2015 - Dr_Ron_Paul
2. What’s In Store For Gold Price in 2015? - Ben Kramer-Miller
3.Crude Oil Price Ten Year Forecast to 2025: Importers Set to Receive a $600 Billion Refund - Andrew_Butter
4.Je ne suis pas Charlie - I am not Charlie - Nadeem_Walayat
5.The New Normal for Oil? - Marin_Katusa
6.Will Collapse in Oil Price Cause a Stock Market Crash? - OilPrice.com
7.UK CPI Inflation Smoke and Mirrors Deflation Warning, Inflation Mega-trend is Exponential - Nadeem_Walayat
8.Winter Storms Snow and Wind Tree Damage Dangers, DIY Pruning - Nadeem_Walayat
9.Oil Price Crash and SNP Independent Scotland Economic Collapse Bankruptcy - Nadeem_Walayat
10.U.S. Housing Market Bubble 2.0 Meet the Pin - James_Quinn
Last 5 days
U.S. Escalation in Ukraine Is Illegitimate and Will Make Matters Worse - 1st Feb 15
The German 10 Year Bund Effectively a Call Option at 30 Basis Points - 1st Feb 15
Australian Stock Market Index ASX200 Technical Analysis  - 1st Feb 15
Stock Market Major 4 or Primary IV Wave - 31st Jan 15
Gold And Silver Price Probability for A Lower Low Has Increased - 31st Jan 15
U.S. Bond Market Has Reached Tulip Bubble Proportions - 31st Jan 15
The 3 Big Reasons My Apple Stock Price Prediction Is Still Coming True - 31st Jan 15
199 Days of Hell - Unintended consequences: Oil and the Worst Battle in History - 31st Jan 15
Kaminak Yukon Gold - 30th Jan 15
U.S. Asset Price Deflation Coming Up? Food Prices Drop? CPI Negative? Credit Deflation? - 30th Jan 15
An Often Overlooked Predator: State Governments and Income Taxes - 30th Jan 15
Bullard Says Rates at Zero Interest Rates Not Right for U.S. Economy - 30th Jan 15
Why the European Central Bank's Massive Economic Experiment Will Fail - 30th Jan 15
Gold Price Short-Term Bottom Due, Higher into February - 30th Jan 15
Silver and Other Precious Metals To Manipulate - 30th Jan 15
Socialism Is Like a Nude Beach - Sounds Like a Great Idea Until You Get There - 30th Jan 15
To Create Unlimited Market Liquidity or Not; That Is the Question - 30th Jan 15
Seen the Energy Downturn Movie Before, and Not Worried - 30th Jan 15
It’s Not Time to Sell Everything – Yet - 30th Jan 15
13 Investment Themes for 2015 - 29th Jan 15
The Raging Currency Wars Across Europe - 29th Jan 15
The End of Currency 'Safe-Havens' - 29th Jan 15
Ron Paul on U.S. Fed, Central Bankers Monetary Psychopaths - 29th Jan 15
Why Microsoft Stock Will Provide Major Investing Returns - 29th Jan 15
Exploring the Clash Within Civilizations - Mind the Gap - 29th Jan 15
Saudi Arabia Changes Kings, But Not its Oil Policy - 29th Jan 15
Crude Oil Price Bulls vs. Resistance Zone - 28th Jan 15
Acceleration Of Events With Rising Chaos – US Dollar Death Foretold - 28th Jan 15
The Fed and ECB Take the West back to when the Rich Owned Everything - 28th Jan 15
Washington's War on Russia - 28th Jan 15
Cyber War Poses Risks To Banks and Deposits - 28th Jan 15
Lies And Deception In Ukraine's Energy Sector - 28th Jan 15
EUR, AUD, GBP USD – Invalidation of Breakdown - 28th Jan 15
“Backup-Camera Envy” Is Driving This Unstoppaple Investment Trend - 28th Jan 15
The Great "inflated" Expectations for Gold, Oil, Commodities -- and Now Stocks - 28th Jan 15
How to Find the Best Offshore Banks - 28th Jan 15
There’s More to the Gold Price Rally Than European Market Fears - 28th Jan 15
Bitcoin Price Tense Days Ahead - 27th Jan 15
The Most Overlooked “Buy” Signal in the Stock Market - 27th Jan 15
Gold's Time Has Come - 27th Jan 15
France America And Religious Terror War - 27th Jan 15
The New Drivers of Europe's Geopolitics - 27th Jan 15
Gold And Silver - Around The FX World In Charts - 27th Jan 15
It’s Not The Greeks Who Failed, It’s The EU - 27th Jan 15
Gold and Silver Stocks Investing Basics - 27th Jan 15
Stock Market Test of Strength - 26th Jan 15
Is the Gold Price Rally Over? - 26th Jan 15
ECB QE Action - Canary’s Alive & Well - 26th Jan 15
Possible Stock Market Pop-n-drop in Store For SPX - 26th Jan 15
Risk of New Debt Crisis After Syriza Victory In Greece - 26th Jan 15
How Eurozone QE Works: A Guide to Draghi's News - 26th Jan 15
Comprehensive Silver Price Chart Analysis - 26th Jan 15
Stock Market More Retracement Expected - 26th Jan 15
Decoding the Gold COTs: Myth vs Reality - 26th Jan 15
Greece Votes for Syriza Hyperinflation - Threatening Euro-zone Collapse or Perpetual Free Lunch - 26th Jan 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Learn to Trade

Aristotle and the Definition of Money

Commodities / Fiat Currency Apr 30, 2009 - 12:36 PM GMT

By: John_Lee

Commodities

Best Financial Markets Analysis ArticleThere are countless tips on how to make money. This article is not about that. Rather, we examine the definition of money, what makes good money, and how some bad monies stay bad while others have become acceptable through new ideas and technology. In the end we will talk about how money and currency will evolve in the future.


Definition of Money

Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are as a medium of exchange, a unit of account, and a store of value.

Aristotle on good money

Aristotle (384 BC - 322 BC) was a Greek philosopher, a student of Plato and teacher of Alexander the Great. Aristotle discovered, formulated, and analyzed the problem of commensurability. He wondered how ratios for a fair exchange of heterogeneous things could be set. He searched for a principle that makes it possible to equate what is apparently unequal and non-comparable.

Aristotle says that money, as a common measure of everything, makes things commensurable and makes it possible to equalize them. He states that it is in the form of money, a substance that has a telos (purpose), that individuals have devised a unit that supplies a measure on the basis of which just exchange can take place. Aristotle thus maintains that everything can be expressed in the universal equivalent of money. He explains that money was introduced to satisfy the requirement that all items exchanged must be comparable in some way.

Within such frame work, Aristotle defined the characteristics of a good form of money:

1.) It must be durable. Money must stand the test of time and the elements. It must not fade, corrode, or change through time.

2.) It must be portable. Money hold a high amount of 'worth' relative to its weight and size.

3.) It must be divisible. Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics. An extension of this idea is that the item should be 'fungible'. Dictionary.com describes fungible as:

"(esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind."

4.) It must have intrinsic value. This value of money should be independent of any other object and contained in the money itself.

Money, 1,000 years ago

Only humans satisfactorily solved commensurability with the idea and practice of money. Throughout history, we have seen the adaptation of various forms of money. Here are some examples with relative merits denoted.

One couldn't treat oil as money since it was not exactly durable and portable. Neither could one use a business (such as a restaurant) as money since it is hardly divisible and ever lasting. Gold has been the choice of money for over 5,000 years because it is valuable, durable, divisible and relatively portable.

Trading assets on paper

A thousand years ago, the ownership title of a land parcel or a business is merely a piece paper for decorative purpose and a registry for the tax collector. The oldest existing stock certificate was issued in 1606 for a Dutch company (Vereinigte Oostindische Compaignie) seeking to profit from the spice trade to India and Far East . Though very profitable in its day, when the company was dissolved in 1799, it was some 10 million Dutch guilders in debt.

American Stock exchanges were introduced in the early 18 th century and wasn't prominent until the 19 th century, where we saw globalization expanded massively with computer technology, air travel, transcontinental pipelines, and giant cargo ships. Today over 50% of US households own stocks collectively worth over $10 trillion. It's only in the last 15 years that an average person can access instant world news and buy stocks with few computer clicks thanks to the internet. Hundreds of millions of people around the world own publicly traded stocks collectively worth over $40 trillion. Over 5 trillion dollars worth of US mortgages have been securitized and owned by world citizens. Title certificates to commodities stored around the world are changing hands valued in the hundreds of $billions on various commodity exchanges.

Money, today

Oil, which has always carried intrinsic value but difficult to store and exchange for other goods, all of a sudden becomes a viable medium of exchange and store of value through the advent of Oil ETF. Oil is stored in a warehouse and your digital ownership certificate is tucked safely in your brokerage account, which you can practically instantly exchange for anything else you want, whether it be Microsoft, gold, wheat, air ticket, hotel room, for less than 1% of commission. Granted, we rely on dollars to calculate the exchange ratios but the role of dollars has diminished greatly in the process as we used it only as an exchange reference (and a lousy one at best) and never kept dollars.

Like oil, various assets once thought to be non-divisible, non-portable, and non-durable are gaining popularity and being saved in lieu of traditional money such as gold and dollars. REIT ETF allows you to "store" real estate around the world and sell in any increment you like, S&P spider ETF allows you to own a piece of America's 500 largest companies with auto rebalancing. You can own Japan , Banks, Wheat, Motion Picture, anything you desire with transparency, liquidity, and low transaction cost.

Those assets are becoming more attractive as store of value with enhanced trading volume, portability, durability and divisibility.

Fiat Currency

Money must be a good store of value by definition.

Fiat paper currencies are popular at times since they are convenient and can be created at will to please the public. However fiat money fails the all important "intrinsic value" test, as its value is solely derived from legal tender laws. The compliance of such law rests on the credibility and strength of the issuing authority. As we know government and political factions can rise and fall faster than pop stars in some cases. It's no surprise that no fiat money has ever survived through time, and they can never be viable money regardless of technological breakthroughs or other human advances.

The value of a dollar

To Recap

What Aristotle described as good money 2,000 years ago has not changed, sound money must be a good medium of exchange as well as a store of value. Assets such as oil or land once weren't considered to be good forms of money due to poor physical or liquidity constraints, have received renewed interest thanks to novel ideas and innovative technology. The internet and various pooled products (ETF) on world markets enabled those once immobile and/or illiquid goods to be transacted with ease, speed, transparency and low cost amongst world buyers and sellers.

The role of fiat money is vanishing. This morning, I sold Newmont Mining to book a hotel in Hong Kong without owning dollars for long. I don't own many dollars, or euros or yuans. Fiat money carries a hefty premium for being a good currency but bad store of value. There is no reason to keep any money without intrinsic value.

My view on gold from this evolution is mixed. On the plus side, gold will crowd out inferior fiat currencies at a faster pace. On the minus side, the choices of store of value have expanded vastly, reducing gold's role to being a fair medium of exchange. Consequently I don't see the combination of a $2,000/oz gold price, a crashing stock market and $30/barrel oil. If that happens, I'd be selling gold, storing oil, and paying with oil.

How can I pay with oil? One can already make payments with digital gold via www.goldmoney.com , I wouldn't be surprised if one invents a way to pay merchants with a share of Disney, or a slice of someone else's mortgaged backyard through a digital land token!

John Lee, CFA
johnlee@maucapital.com

http://www.goldmau.com

John Lee is a portfolio manager at Mau Capital Management. He is a CFA charter holder and has degrees in Economics and Engineering from Rice University. He previously studied under Mr. James Turk, a renowned authority on the gold market, and is specialized in investing in junior gold and resource companies. Mr. Lee's articles are frequently cited at major resource websites and a esteemed speaker at several major resource conferences.

John Lee Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014