Money and Value

Niall Ferguson's "The Ascent of Money"

This two hour program, shown on PBS yesterday, is one of the most well researched and presented takes on the history of money and how it has evolved over the centuries right up to what is happening today around the globe. I have only two small complaints about this presentation; what was the origin of money and how is money related to value?

To answer the first of these questions let me suggest the following. You are a hunter living in a small extended family community and you are preparing to go out to get some game for the village. You realise that the spear you have is pretty much finished so you go to your cousin and ask him to make you a new one, because he has proven that his spears are the best. He does that. He cuts the tree with a stone knife he made himself, removes the bark and small branches, sharpens one end and hands you the finished product. He has made something for you that has a certain value to you as the hunter and you determine that you will give him something of value to him; perhaps some of the game you will bring back from the hunt. You return with a bunch of wild pigs and you give him one of the younger ones, not so big but wonderfully tender.

What has happened is the simplest form of transaction with no exchange of money, obviously barter. What has exchanged is two items which have value. What could be said is that the pig is worth one spear or the spear is worth one small pig. But it goes deeper than that. Before any of this took place the spear was just a tree, free to anyone with the tools and the skill to covert it into a spear and of no real value just standing there. The same thing applies to the pig. What created the value in each was the knowledge and skill of the spearmaker and the hunter and the agreement between the two that the two values were equal.

Obviously the world of today is vastly different from that ancient village and the way we establish value has changed. What has changed is, of course, the introduction of money. But all money, whether shiny pebbles or golden discs or pieces of printed paper, is the same. Each is a financial promise of an agreed upon value.

Let's say I decide to build a small sail boat and I have the tools and the skill to do that. I go to a supplier to purchase the raw materials I will need to build the boat. Even though what I buy is classed as "raw material" it isn't really raw. By the time it reaches my supplier's warehouse that material has passed through many hands and each has put time and effort and expertise into getting it that far. I make my selection and load it all into the back of my trusty pick-up and pay the supplier a sum of money that we agree is sufficient to properly account for the effort of all those hands that touched it from the forest to his warehouse. At home I get busy and get the boat built. The day after I finish the boat, my neighbour offers to buy it. We agree on a value of the finished boat, he gives me that amount of money and takes the boat. I ask him for more than the amount I gave the supplier to account for my time and effort and expertise.

The theory is that nothing has any intrinsic value, not wood in the form of trees, not iron in the form of ore, not the oil underground nor the air above. The other part of the theory is that all things have value equal to what one person, or group of people, is willing to pay for it. Having said that, we can also say that money is the way we set the value of any product or service.

But money has another purpose that has nothing to do with value or products or services. Over the centuries money has become a way of measuring personal power within our society. This evaluation of power in terms of money was originally limited to the amount of money an individual actually had in his purse or coffers and that stood as the only serious measure through the centuries of kingdoms and empires. As we know the merchants began to take over as world trade expanded and even more so with the industrial revolution. Out of this grew the practice of selling shares in companies, at first to family, then trusted employees and finally the public in general. Today the head of a public company can wield much more power than his personal wealth would seem to justify. The reason is that he has control over much more than his own bank account.

The biggest problem with this kind of power is that it is addictive. Of course every CEO will be held responsible for the welfare of the company he is guiding and all tend to be fearful of a drop in the share price of that company that goes on for more than a month or two. What they, and the rest of us, really need to understand is what the share price of any company on any stock exchange really measures. What that price figure represents is what a single share in the company can be sold for right now! Supposedly the analysts base their buy and sell recommendations on educated guesses concerning the future health of the company and on past performance. History shows that time and again these guys miss as often as they hit. A few years ago the best stock market advice around was coming from a monkey and I am sure there are many analysts out there who have chosen to not remember that.

Of course the other source of problems with this market is the practice of purposely manipulating those indicators that the analysts are relying on and creating investment vehicles that are outside the reglatory boundries or too complex to be subject to serious scrutiny. We know that human beings must be held accountable for their actions and we have an enormous body of law set up to do exactly that. Why, then would we diminish the powers of those whose job is to enforce those laws? Should we also lay off half of the police in the country? Why not dismiss half of the military and mothball half of their equipment? I'm sorry, but any one of those options makes about as much sense as the others.

I don't have a problem with those among us with the education, the experience and the guts to control and guide millions of dollars of wealth as long as that guidance is founded in a deep commitment to the greater good. Thank God that most are.