What gives currency value (purchasing power)?

war veterans


You may know the phrase “the full faith and credit of the United States of America.” What exactly does it mean? What really gives the US Dollar market value (purchasing power)?


president obama


Some libertarians assert that gold and silver give value to a currency. That is an understandable presumption, but clearly false.


ron paul and mitt romney


In 1971, the US Dollar went from being redeemable for gold (by non-citizens only) to not being redeemable for any particular substance. You could use that currency to do business with the US, like to pay taxes or pay court fees to file a lawsuit or produce an eviction or foreclosure auction or levy.


If the currency had collapsed by 1972, then clearly gold would have been what gave it value. However, 41 years later, the US Dollar is still the dominant currency in the world.

Are there more US Dollars in circulation today than in 1971? Yes, but so what? Is one US Dollar worth about what two dimes were worth in 1971? Yes, but so what? That does not alter the fact that the US Dollar is the dominant currency in the world, being used in millions of transactions day after day.


veterans day


Therefore, the clear reality behind the purchasing power of the US Dollar is obviously not gold (and thus we can presume that it never was). The purchasing power comes from organized violence (and always has).


us soldiers veterans


1861 Confederate States of American half dolla...

1861 Confederate States of American half dollar coin, front and back (Photo credit: Wikipedia)


That is just the beginning of the issue (as it relates to the bubble or speculative demand for gold). The other issue, which I have often repeated in recent years, is that court systems of organized violence created demand for materials like gold and silver by requiring payment in that substance. Why? Because they could mine it and the common people could not.


Imagine- what if a court system says “every citizen in this country has to pay us 2 ounces of gold per year or we will arrest and execute them?” Then that gives a certain demand for gold- especially if the threat is believable. Or, if the threat hinges on “4 ounces of gold per year,” then that extortion racket or taxation scheme will create even more demand for gold.


The public compete with each other for gold even more when the annual requirement is 4 ounces. Why? Not because they want gold, but because they fear the organized violence of the gangsters making the threat.


What if a government demanded that every citizen provide an 8-carat diamond to the government every year. Would that effect public demand for diamonds? What if they demanded a currency like Euros or Yen or confederate dollars?


8 carat diamond


At some point, the people may rebel against the extortion racket, potentially leading to a civil war or colonial revolution. If the rebels kill enough of the old regime, they may then set up their own court systems of organized coercion. If the rebels get nuked or starved to death, then that eventually leaves less people to compete for the same amount of gold, so the slaves settle down and get back to work on the financial plantation.


rand paul - government bullies


6 Confederate States of America currency notes...

6 Confederate States of America currency notes three $10 notes 3 $20 notes (Photo credit: Wikipedia)


So, even the former value of gold when it has been accepted as a currency is not from the chemical compound itself, but from the organized violence of governments who accept that chemical compound as a “casino token” worth a particular amount of organized violence. $5,000 can buy 100 times as much organized violence from a court system as $50. That is the proper way to think of it.


When court systems collapse, then the prior demand “abruptly declines” for dollars or gold or whatever was accepted by that court system. In the case of fiat currency, the value of the paper as a collector’s item is negligible (like what happened to the Confederate dollar when the court system of organized violence of the confederacy no longer forced people to use that currency to pay them taxes). In the case of a metal coin like a dime or nickel, there is the raw metal itself- also almost worthless- or the wood in the case of an old wooden nickel, which you could use as fuel in a fire, right?


wooden nickel


If Libya or Iraq accept gold, that effects overall demand for gold right- certainly locally at least, right? What gives gold it’s purchasing power? I assert that it is primarily just the organized violence of government court systems which offer their organized violence in exchange for gold (or silver or whatever).


Is there industrial value (practical functionality) to silver and gold? Of course! That is why the bimetallic standard eventually was dropped. The masses had too much access to newly mined or newly imported metal. The fact that local supply of metal was no longer controlled by a court system attempting to monopolize coercion is what led to the dropping of gold and silver, with the rise of fiat currencies.


ron paul - silver and gold


Organized violence has always been the issue. Gold and silver were convenient tokens for the elite when they could tightly control supply of those rare, convenient materials for them to mint “casino tokens.”




memorial day



Campaign poster showing William McKinley holdi...

Campaign poster showing William McKinley holding U.S. flag and standing on gold coin “sound money”, held up by group of men, in front of ships “commerce” and factories “civilization”. (Photo credit: Wikipedia)




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2 Responses to “What gives currency value (purchasing power)?”

  1. Simplicio Says:

    Interesting approach. You are, however, addressing one of the causes for the valuation of money, not the source of value per se because the nature of value is subjective. There is nothing intrinsically valuable in gold, pieces of paper, shells or cattle without a human being wanting either some of their properties or something else they can readily exchange it for. It is human desire for acquiring things (by ‘things’ I mean both material and non/material) that makes certain things valuable, in some cases money. Force, military or otherwise is no doubt a factor, because people do not want to be harassed and are willing to fork off some value to buy the shelter from it When fiat money is the only payment instrument and using anything else is forbidden by force then, of course, paper (or, more recently, computer records) will have value. However, when market is not interfered with, it will typically lean toward precious metal money because of its physical properties (commodity, durability, divisibility, portability, …). the goodness of it is its limited supply. There was never a war fought that was entirely financed by gold or silver. Thus paper (and database records) is indispensable to state.

    • jrfibonacci Says:

      I appreciate your comments, but one point you present is a common myth (regarding “interference with a free market”).

      Certainly, functional utility is the ultimate issue of personal, subjective value: given my current inventory in a particular moment, do I most value another goat or another barrel of oil or what? Is winter coming- or am I in Australia and preparing for summer? That part is the obvious implicit foundation of everything else in my prior post.

      However, the idea that certain activities are “market interference” while others are not is not inherent in the language. What is “interference?” Taxation? Extortion? Tariffs? Subsidies? Embargoes? War? Government-sponsored manufacturing? Government-supported public education?

      Ultimately, all activity influences the entire rest of “the market.” What happens in China or Libya does (eventually) influence all of the rest reality. Hurricanes and wars and theft are all possible forms of “market interference.”

      In Colorado, the state will not criminalize marijuana, but what if the US DEA and other Federal Agents still prosecute crimes in Colorado? What if the UN and the local county government get in to a dispute about the proper interpretation of a clause of an agreement of NAFTA or NATO or OPEC?

      Ultimately, the court system is force. A court system attempts to monopolize force (coercion, extortion, execution) by punishing unlicensed coercion, extortion, execution. Court systems extort their domestic population through taxation, dictating what forms of payment are acceptable. If that is Euro or silver or a lamb, that is at the discretion of courts.

      Governments define “unauthorized interference,” then, typically, eventually break their own rules and hide that fact. Since there is no one to police the top levels of the police, we can call them the ruling warlords.

      Borrowing is interference. Selling is interference. Stealing is interference. Buying is interference. Taxing is interference. Government is interference. Commerce is interference.

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