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Understanding Money: Part 4 – The Value of Money

Money and Value

As discussed in Understanding Money: Part 1 – Introduction when nations’ currencies were made of precious metals, the actual value of the currency was carried by the currency itself. It had intrinsic (see next section for a discussion on intrinsic value) value. For a gold coin, the measure of its value was the amount of gold in it. The value of gold as a metal is due in a large part to its scarcity and associated cost of production.

If a bushel of wheat were our commodity currency, we could plant more acreage. For gold, it takes an immense amount of money to find and develop new deposits. It takes years to develop a new deposit before the first ounce of gold is poured. So the supply of gold is what economists term as inelastic. It can’t readily be increased to meet demand. Today, the commercial producers that own significant deposits have a production cost of around $1100 per oz. So its minimum price or value is its cost of production.

Have you noticed that very few people have enough money? This is particularly true of sovereigns – monarchs and governments. A key aspect of a sovereign is it’s control of the money supply. A sovereign may control the ownership of all gold production but it cannot control the amount of production to any degree. What is a poor sovereign to do when it wants more short of stealing another sovereign’s gold through warfare? Fiat or paper currency to the rescue.

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