True Money: Part I
WHAT IS MONEY?
Lets boil it down to 2 very simple dot points:
- medium of exchange
- store of value
Back in "the day" when the use of currency was less common than it is now, people would often conduct trade by bartering directly with what ever they
had, food, animals, etc. Humans soon realized that this method of conducting trade is very tedious and that by using smaller and lighter objects with
a commonly agreed upon value, they could conduct trade without having to lug around the items they wished to trade with.
The objects we use as a currency act as our "medium of exchange" so that we don't have to barter with other less convenient objects. Because it is
commonly accepted as a currency we must be sure it will act as a stable "store of value". Gold or silver for example are good candidates because they
are rare resources which are hard to find and hard to create, thus they hold value well over the long term.
But how do we choose which objects to use as our currency? As a child I spent much of my time playing in the woods, and one day I invented a game
where we would use "bush money" to trade with each other. The bush money was simply a certain type of tree bark, it wasn't very hard to find. It was
easy to conduct exchange with the bark, but we quickly realized that this bark was too abundant to use as a currency.
Instead of trying to understand what a currency is, it's better to think about what a currency isn't. So what else would make a bad currency? Sand on
a beach would make a bad currency, and again it's because there's too much sand. Of course sand has a small intrinsic value, and we'll get into that
idea more later, but it's not relevant for now. The main point is that our currency must have certain properties for it to work as a currency.
As we can see, the single most important property of any currency is the ability of the currency to hold value over time, and for it to hold value
over the long term it must remain scarce and hard to create. The purchasing power of our fiat paper money constantly decreases because the Government
/ central banks constantly create new money and put it into circulation. But there are also other properties a good currency should have.
IDEAL PROPERTIES OF A CURRENCY
: should be rare and hard to create/find
: should be easy to divide into smaller units
: should be easy to securely store large amounts
: should provide privacy on transactions made
: should be hard to counterfeit/forge
: transactions should be fast and easy
: future value should be relatively predictable
: no single point of failure or issuing authority
How does beach sand fit those criteria? Not very well. It's not scarce but it is divisible. Considering the abundance of beach sand it would require a
lot of sand to make purchases, and that would make it hard to store, as well as making transactions slow. Therefore it would not be practical. It
would also be relatively easy to forge new sand since it's just crushed up sea shells, and that could make the value unstable.
is a good example of a tried and tested currency which was used for quite some time
by people all over the world. Although many types of shells were used, the best ones to use were rare shells which are hard to find. These shells are
also much harder to counterfeit than sand, especially back in the time they were used commonly as a currency.
Because the rare shells were so scarce they provided a stable basis as a store of value and transactions became practical. Shell money is even
decentralized since anyone can go out and hunt for new shells. The only property which shells don't really have is divisibility, since breaking up the
shell would surely invalidate its status as a unit of currency. In any case the shells worked as a pretty good currency back then.
Another interesting currency used quite some time ago was the Stone Money
used on the island
of Yap. These were extremely huge stones hand crafted into the shape of a massive donut or coin with a hole through the center. The larger the stone
coin the more it was worth. These stones were scarce simply because they were so hard to create.
Since they were so rare and so hard to create they were worth quite a bit, but the downfall was that they were extremely hard to transport and they
were not easily divisible. This made transactions difficult and the result was that these stone coins were only used in large transactions. This is
why we tended to gravitate towards precious metals over time, they are more easily divided into smaller units.
Precious metals such as gold or silver fit the above criteria very well, with the only downfall being that carrying around a lot of gold or silver can
be tedious due to its weight, and it could also be dangerous. To remedy this problem some nations like the United States adopted a
, meaning they used paper notes which represented some amount of real gold in a
vault some where, and you could even redeem your notes for gold.
However once we introduce paper notes we open the door for counterfeiters. This means we must have centralized organizations to not only supply the
notes, but to ensure the integrity of the existing notes already in circulation. So a gold/silver standard is certainly not perfect, but it is much
better than what we have now. Not to mention it is written in the Constitution of the United States that only gold or silver should be used.
Another more recent currency is the electronic P2P currency known as Bitcoin
. The global P2P system
enforces a limited currency and makes it virtually impossible to create fake bitcoins. It is highly divisible and provides a moderate amount of
anonymity to users. The scarce and decentralized nature of bitcoin is unlike any other electronic currency ever seen before and is proving to be quite
WHAT DETERMINES THE VALUE OF MONEY?
What do rare shells, huge boulders, precious metals and bitcoins all have in common? Obviously, they are all scarce. However, more importantly, no one
was forced to use any of these currencies. In each case it was a spontaneous voluntary formation based on group consensus. Natural emergence fueled by
the needs and desires of the masses. They recognized that a currency must have certain properties, and they chose accordingly from what was available
What about tree bark, beach sand and fiat paper; what do they have in common with each other? Abundance. Isn't it odd that we don't use bark or sand,
yet we use paper... not because we want to use paper, but because we are forced by the Government to use it as legal tender. What gives this paper
money value if it's just paper the Government says is money and has nothing tangible backing it? This is a tricky question indeed.
But to simplify as much as possible, the value really comes from the demand for the currency in question. And the demand is really determined by how
widely used that currency is and how much commerce is being conducted with that currency (this is why it's important for the US dollar to remain as
the master petrodollar). It's like anything else, if more people demand something, but the supply of that something is limited, the value goes up.
Now you might wonder why all of our fiat currencies tend to decrease in value over time if economic growth causes the purchasing power of the currency
to increase. The value of the currency will only increase if we have economic growth AND the currency supply remains limited. However this is not the
case with our current money system. Instead new money is being created all the time and injected into circulation.
In reality the value of the dollar should increase with some link to economic growth in the United States, however they steal this extra value by
constantly injecting billions and billions of new dollars into circulation. Not only that, they inject so much new money that it causes price
inflation, meaning the purchasing power of the dollar is always dropping and your savings are always becoming worth less and less.
10/3/2013 by ChaoticOrder because: (no reason given)