Money as a Commodity versus Money as a Pact
Since the dawn of history there are two entirely different philosophies behind the money with intrinsic value and the currency without intrinsic value.
Money with intrinsic value is treated as a commodity: both to earn it and to create it you have to produce and give purchasing power in exchange for it, because of its intrinsic value and production cost. It could be said that it seems almost spontaneously evolved: the intrinsic value is always present, and just moves from goods to reference goods to money. The question is: how come that people begun to consider that money had that intrinsic value?
Currency without intrinsic value is totally based on agreement, on confidence. It does not have value, it represents value: we all agree to use it so, whether willing or forced to. And it costs nothing to produce, too. In actual fact, if you set aside all the deliberate and interested confusions, lies, omissions and just look what's there, it is easily observable that its purchasing power suddenly and arbitrarily comes into being the first time it gets exchanged with other purchasing power. This type of money was the result of human brilliance applied, and it's just as old as the other: it was already conceived by Aristotle and called Numisma, and this word derived from Nomos, that means Law, because its existence and use is an act of willingness and agreement, thus ratified as such within the Law. The question is: who is the owner of currency when it gets born, who is the owner of its purchasing power when its purchasing power gets born?
For a better insight into the difference between the two types, let's return to Example Island and do an inventory of the wealth existing on the island; as money exists to serve as a unit of account, we will use it as such.
Money as a Commodity versus Money as a Pact, 2
Suppose the inventory lists food reserves for 1,000 units, coal, timber and fuel reserves for 1,000 units, production tools for 1,000 units, clothing and furniture for 1,000 units, land and buildings for 1,000 units. Amounts to 5,000 units. 5,000 units of survival factors, of valuable products, of purchasing power. Up to this point money has been used as a unit of account only.
If money is a commodity, that is, something valuable in itself, then it has to be added to the inventory. Supposing there exist 5,000 units of commodity−type money, the inventory shall list the 5,000 units of the products above, plus the 5,000 units of commodity−type money units. Amounts to 10,000 units.
Now I ask you: which one is the real wealth on the island? 5,000 units of survival factors, or 10,000 units of survival factors plus money whose intrinsic value is of disputable origin and disputable use for actual survival? Food can be eaten, land cultivated with tools, and so on; how does the “commodity” of the money contribute to survival? Because it is store of value: you accept it in exchange for that amount of product/purchasing power today because you are confident someone else will accept it for more or less the same amount of product/purchasing power tomorrow. But its purchasing power is just a consideration agreed upon, regardless of what money is as an object.
So the truth is that the value of money as a survival factor is just the same for both money with intrinsic value and currency without intrinsic value. To find out which one is better or worse we'll have to dig deeper. As to this, it's interesting that the whole history of civilisation is the history of the contest between these two types of money, but it's of even greater interest to dig below the “official” history to find out what are the consequences on economy – that is, on the wealth of us all – of using one or the other.
However, it’s not that simple – it’s not just one is good and the other is faulty, and that’s all.