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March 22, 2006

Honest Money: What It Is and What It Isn't - Part II
by Douglas V. Gnazzo

Quality Theory of Money

Purchasing Power

In a free market, society determines and chooses by consensus, the commodity deemed most worthy to be the common medium of exchange - money. This medium is the most saleable or marketable commodity. It also has the least declining rate of marginal utility. In other words, the commodity:

Retains its purchasing power better than all commodities available for exchange.

The above is very important for indirect trade to function properly. Common sense alone shows that if the medium that represents value between all other goods is constantly changing, to use such a standard of value would be ludicrous, as there wouldn't be a constant standard of measurement to compare the value of other goods to.

It would be as if trying to uniformly measure wool by the yard, when the number of feet in a yard is constantly changing. The wool market would become completely confused and non-tradable, as the unit of measurement it relies on, the number of feet in a yard, would be constantly changing.

The common medium of exchange must retain its standard of measure or value.

Individuals have wants and needs that must be fulfilled. They come to market seeking various goods and services. Once in the marketplace, participants make value judgments based on the utility of the goods and services offered. They compare the usefulness of one item to another.

Free Markets

Over time, the collective social interaction within a free market determines what the most accepted common medium of exchange is. Remember the point of free choice, it is most important, and will be revisited.

Free choice and free markets go hand in hand - much as light is to day.

Although subjective use values are the determinant by which indirect exchange occurs, the subjective use value is concomitant with the subjective exchange value of the media as well. This is but a reference to the anticipated use value of the goods that are to be exchanged.

In other words, when a buyer and a seller come together to exchange, they both must make valuations. The buyer must determine what the values of the goods are that the seller has for sale. The seller must determine the value of his goods as expressed in the common medium of exchange - money.

Both the buyer and the seller must agree on a number of units of money that the goods are worth or valued as. This is known as the price. The buyer must be willing to pay this amount. The seller must be willing to accept this amount. When they agree - exchange takes place.

From the subjective use value of money, to the subjective exchange value of money, comes objective exchange value - the expression of the purchasing power of the medium of exchange in regards to the ratio or amount of goods that can be purchased with it.

Quantity vs. Quality Theory

The quantity theory of money alone is not sufficient as a complete theory of money, and even less so as a sound and working monetary system. The quality theory of money is far superior to the quantity theory of money.

It is not the quantity or number of units of money that one has that is important. What is important is the quality or purchasing power that the money has - the amount of goods it can be exchanged for.

Money is only useful for one thing, to exchange for other goods. The more goods you can acquire with the same amount of money, the greater is your purchasing power, and the greater is your wealth.

When one buys goods with money, they are selling their money. When one sells goods, they are buying money. The main purpose that money fulfills is to be a medium of exchange to facilitate the trading of other goods and services.

Money is but the proof or evidence of exchange that the buyer issues to the seller. For a monetary system to function properly, the buyer must fulfill his inherent obligation that at a future date he will offer his own goods for sale in the marketplace.

Likewise, the seller must offer his commitment that at a future date he will be a buyer in the market. Such reciprocal changing of the roles of buyer and seller is what makes a market.

Money is backed by the value surrendered by the seller, and potentially backed by the value in the possession of the next seller, and so on.

In other words, trade creates money - money does not create trade. The market creates and stands behind money, as the market is the sum total of all producers of the goods that are the real value behind the money.

Money has no intrinsic value in and of itself. The goods and services that money can be exchanged for have value. The most important aspect of money is that it can be exchanged for all goods and services.

The quality theory of money places emphasis on the purchasing power of money. The quantity theory stresses the number of units of the currency. This is mistake by design. It is meant to purposefully confuse and deceive.

Honest Money retains its purchasing power - this is key to the quality theory of money.

One goal of the quantity theory of money is to hide the self-destructive nature of paper fiat debt-money from all unsuspecting users. Debasement of the currency by inflation is another.

Wealth transference is the ultimate goal of paper fiat debt-money.

Wealth

The greatest value of wealth is life. Man's energy, utilized as labor, is the next greatest value, as it provides the means to obtain life's necessities. The next order of value are the goods and services needed to sustain life: food, clothing, and shelter.

Labor is the means to produce goods and services. Goods are produced to be consumed - to sustain life. Money facilitates labor's production of goods for consummation.

It is the goods needed for survival that is the value behind and represented by money. Man's labor stands behind all goods and services, as without the power of labor the goods could not be had. The following is the -

Natural Hierarchy of Wealth :

1. Life

2. Health

3. Biosphere within which man moves and has his being

4. Man's energy utilized as labor to procure

5. The basic necessities of life: food, water, shelter, and clothing

Functions of Money

Money is an abstract concept of a measure or unit of value. It has no value in and of itself. The value lies within the goods and services that money can be exchanged for.

When money is exchanged for other goods, we do not literally exchange the money for the other goods, but the value that the money represents in other goods. We exchange values for values.

Money is the medium of exchange that represents the purchasing power by which other goods can be exchanged for. Money is the standard for comparison - the measure of value between all goods.

Thus, money is a receipt for value. The monetary system is an agreement between traders to regulate the issuance of money, to exchange values in terms of the monetary unit, and to keep an account of all such exchanges.

As a common medium of exchange, and measure of value, money transfers value through space. Money as a standard of value transfers value through time. Money as a store of value transfers value over time. These are

all functions of money.

Functions of Money:

1. Medium of exchange

2. Measure of value

3. Standard of value

4. Store of value

With the evolution of indirect exchange from direct exchange, we witness the development of money. We have seen that the purchasing power or quality of money is far superior to the quantity or number of units of money.

Money has been defined as the common medium of exchange. The importance of the purchasing power, or quality of money, over the quantity of money, provides a further refinement of the definition.

We are starting to see the qualities needed for a sound and workable monetary system unfold before us. At the same time, we can see what policies have weakened our monetary system and should be cast off.

Next week we will elaborate further on the issues involved in a sound monetary system.

Come visit our new website: Honest Money Gold & Silver Report.
And read the Open Letter to Congress

Douglas V. Gnazzo
Honest Money Gold & Silver Report

Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Just recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

Douglas V. Gnazzo © 2005 - 2008
All Rights Reserved Without Prejudice

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