(snippet)
There was a second reason why this “currency” was doomed to fail, in spectacular fashion. Once the Dutch people acquired the knack for growing tulips, they could essentially be produced in infinite quantities. The Dutch people were about to learn an important lesson about money: in order for any form of money to hold its value over the long term, it must be “precious” or rare.
Again referring to tulips, when they first became money, they were both rare and precious. They were originally few in number and since they were originally traded as flowers they were also beautiful (or “precious”). However, when the Dutch began to produce tulips in vast quantities and they also ceased to be “precious” (because they were now traded as bulbs), tulips lost the essential qualities of “good money” – and quickly became worthless.
Regular readers will recall that I have previously provided the criteria for “good money” in previous commentaries. There are four necessary qualities which all money must possess, or else thousands of years of history teaches us that such “money” is doomed to fail as a currency.
In addition to being “precious” or rare, good money must also be uniform, evenly divisible, and “a store of value”. The properties of being “uniform” and “evenly divisible” are basically self-explanatory, but I will spend a moment to illustrate the importance of money as a “store of value”. This refers to the requirement that “good money” must retain the wealth of the holder. For example, over a span of centuries, an ounce of gold has been sufficient to buy a fine, man’s suit. Conversely, the foolish Dutchman who traded his bed, a suit of clothes, and a thousand pounds of cheese for a tulip bulb, suddenly woke up one morning and realized that all he was holding as a replacement for that wealth was one, common flower.
When discussing money as a “store of value”, we cannot fail to discuss how the U.S. dollar – the world’s “reserve currency” – has performed as a store of value. In the less than 100 years since the Federal Reserve was created to “protect” the dollar, it has lost more than 95% of its value. Put simply, the dollar of today is not“a store of value”, and thus not good money.
The question then becomes: was the dollar ever “good money”, and (if so) what has changed over the last 100 years?
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