Money Mischief_ Episodes in Monetary History - Milton Friedman [4]
The Yap islanders regarded as a concrete manifestation of their wealth stones quarried and shaped on a distant island and brought to their own. For a century and more, the civilized world regarded as a concrete manifestation of its wealth a metal dug from deep in the ground, refined at great labor, transported great distances, and buried again in elaborate vaults deep in the ground. Is the one practice really more rational than the other?
What both examples—and numerous additional ones that could be listed—illustrate is how important appearance or illusion or "myth," given unquestioned belief, becomes in monetary matters. Our own money, the money we have grown up with, the system under which it is controlled, these appear "real" and "rational" to us. Yet the money of other countries often seems to us like paper or worthless metal, even when the purchasing power of individual units is high.
CHAPTER 2
The Mystery of Money
The term money has two very different meanings in popular discourse. We often speak of someone "making money," when we really mean that he or she is receiving an income. We do not mean that he or she has a printing press in the basement churning out greenbacked pieces of paper. In this use, money is a synonym for income or receipts; it refers to a flow, to income or receipts per week or per year. We also speak of someone's having money in his or her pocket or in a safe-deposit box or on deposit at a bank. In that use, money refers to an asset, a component of one's total wealth. Put differently, the first use refers to an item on a profit-and-loss statement, the second to an item on a balance sheet.
In this book I shall try to use the term money exclusively in the second sense, as referring to an item on a balance sheet. I say "try" because, with use of the term as a synonym for income or receipts so ubiquitous, I cannot guarantee that even I, who have been aware for decades of the importance of distinguishing between the two uses, will not occasionally slip and use the term in the first sense.
One reason why money is a mystery to so many is the role of myth or fiction or convention. I started this book with the chapter on stone money precisely in order to illustrate that point. To make the same point in a way that is perhaps more relevant to the everyday experience of most of us, consider two rectangles of paper of about the same size. One rectangle is mostly green on the back side and has a picture of Abraham Lincoln on the front side, which also has the number 5 in each corner and contains some printing. One can exchange pieces of this paper for a certain quantity of food, clothing, or other goods. People willingly make such trades.
The second piece of paper, perhaps cut from a glossy magazine, may also have a picture, some numbers, and a bit of printing on its face. It may also be colored green on the back. Yet it is fit only for lighting the fire.
Whence the difference? The printing on the five-dollar bill gives no answer. It simply says, "FEDERAL RESERVE NOTE / THE UNITED STATES OF AMERICA / FIVE DOLLARS" and, in smaller print, "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE." Not very many years ago, the words "WILL PROMISE TO PAY" were included between "THE UNITED STATES OF AMERICA" and "FIVE DOLLARS." Did that mean the government would give you something tangible for the paper? No, it meant only that if you had gone to a Federal Reserve bank and asked a teller to redeem the promise, the teller