What is money and why do we need to transition out of the current system?
For thousands of years, at the dawn of bartering, we’ve traded in commodities. These commodities are real-world assets that have a universally agreed-upon value. Even farm animals have been long traded as commodities. There are artefacts that suggest we’ve also traded in seashells, stones, tulips (fascinating illustration of deflation). But as you can imagine there wasn’t a lot of agreement on value.
Currency is an idea. It’s an idea we all must believe holds value for an exchange of value to work. But what makes money — money? Here are four key requirements:
- Storage of Value, which is broadly determined by the following point
- Broad acceptance or a majority belief that it has value within an ecosystem
- Limited Supply
Two historical examples of the supply and demand principle: During the 15th century, due to limited yields, one tulip was worth well over tenfold a labour worker’s annual salary, (https://en.wikipedia.org/wiki/Tulip_mania- I usually avoid citing Wikipedia, but this sums it’s up thoroughly).
Giant rocks were shaped and there was an acceptance of value amongst tribes of Yap, Graystone was difficult to obtain, their exposure to European markets gave them access to mining tools. Oversupply was the result. This led to a depreciation of value for that tribe’s commodity (http://www.bbc.com/.../20180502-the-tiny-island-with...).
Another clear limitation of the Yap’s currency was the Greystone was not easily transportable given some of these stone weighed hundreds if not thousands of kilograms.
Along comes Gold and Silver. In particular, Gold has been revered for god knows how long. It is durable, safe, non-dissipative and does not corrode like every other element. It is RARE. Meaning: Limited Supply. The harder something is to get, the more it is worth. (https://www.bbc.com/news/magazine-25255957).
As such it can store value — as historically there is wide agreement in how much it is worth. It was here before us and will be here long after we’re gone.
However, we reached a point that carrying around gold wasn’t exactly convenient or safe as anyone could steal it. Then we had paper money that was redeemable in gold in the form of banknotes and certificates. Whatever amount of note you had was redeemable in that amount of gold and you could withdraw that from the bank. As it’s a commodity with universally recognised value, it is reasonably stable over time and could be stored without value diminishing. But the US Central Banks were out of control, refer to the video link in additional references.
A problem with this system was that inflation and deflation were common, or rather could be manipulated.
Back to our supply and demand principle: If there is too much supply, its value is recognized as less (inflation). Because it is easier to obtain and compromises the market benefit of rarity. If there is not enough, then it is harder to obtain. People will pay more to get it. This basic principle works in a frightening way, Great Depression, GFC and today (excessive toilet paper runs as people panicked over COVID causing a limit to supply).
But what is playing out today has been ongoing since before the Great Depression. In 1933, President Roosevelt forced his citizens to exchange gold for well below the market price and gold ownership was illegal right up until 1970. In 1959, Australia implemented a law that took away citizens gold when it was “expedient to do so, for the protection of the currency or of the public credit of the Commonwealth [of Australia]” (https://theconversation.com/how-the-us-government-seized...).
Then Treasurer Peter Costello, now Co-Chairman of Nine Entertainment; sold off two-thirds of Australia’s gold reserves into a buyers’ market, meaning: he practically gave it away (https://www.abc.net.au/.../worth-its-weight-in-gold/351864).
Refer to reference materials down the bottom for more information. In 1971, Nixon abolished the US gold standard. (https://www.forbes.com/.../nixons-colossal-monetary.../...).
Australia abolished the gold standard in the 1930s in response to the UK doing so, but it remained redeemable in gold for some time, (A bit boring, but informative Radio Documentary on History of Gold in Australia: https://www.abc.net.au/.../the-story-of-the-gold.../3054362).
Bring in — fiat currency. The biggest reason why we need out of the current monetary system and dive into Cryptocurrencies and commodities (Great read on the ferocious decline of $AUD value: https://www.asgoodasgoldaus.com.au/.../australias-dollar.../).
I also like to try my best to be balanced. When Australia floated (put AUD on an exchange to allow market punters to determine its value) it was widely viewed as “visionary” at the time, but Hawke and Keating were popular leaders, so their success may be conflated. (http://www.documentarytube.com/.../australia-s-floating...).
It is acknowledged in this article however the dangers of free-floating currency from the 1997 Asian Financial Crisis, speculators had made a bet those currencies would go down, they sold and many others panicked then sold. Market drops, refer to the chart in the image.
The exchange FIAT rate is determined by a market of government bonds. Basically, an IOU, or debt. These debts are floated and exchanged in the markets. Debt itself is a commodity/asset that can be owned. Just like we trade stocks and crypto on an open market, Bids can be placed on government bonds. The domestic cash flow, or the fiat money those IOU’s cost us, go into circulation.
On top of that, we have a capital reserve monetary system, basically, banks give loans out of thin air without any deposit, because the asset itself (let’s say, a house) is debt. Worth a squizz of this forum link to see the discussion of modern $AUD monetary policy (https://australianpropertyforum.com/australia-does-not....
In the US, It is far less opaque as to whether they operate a fractional reserve system, they do. Additional references below do far better justice at illustrating it than I do. But basically what gives our Fiat $AUD value is market activities from the purchase and selling of bonds, the central bank's ability to increase the money supply and regular bank lending.
The reason why we need to transition out of this system can be found in all the aforementioned and link materials. There is a growing desire for centralised institutions to stop meddling with currencies and for people to have financial freedom. Because when you have money sitting in the bank, the rewards for your time and freedom just sits there, losing its purchasing power. The world wants a safe way to store their wealth, a common agreement that it is intrinsically valuable and of limited supply, also something that doesn’t weigh them down like a 1 tonne Yap Rock. Cryptocurrencies provide an opportunity to tick the boxes on what makes a DIGITAL commodity valuable and build upon it in ways I still don’t think many of us can fully anticipate.
Let’s also briefly consider money from a philosophical perspective. Money is energy. It is a fungible representation of human labour and innovation. When money is being printed out of thin air on top of the existing supply, this dilutes human energy and diminishes the value of what you have worked so hard your entire lives to accumulate. You might remember your grandparents telling you that everything is so expensive now as they used to be able to go to see a movie and buy snacks for 20c and now you’d be looking at $30 to do this. But here’s the thing, it’s not that everything has gotten more expensive. It’s the purchasing power of your dollars that has severely depreciated. With the Coronavirus money printing and the impacts, the lockdowns have had on supply chains we are starting to see more of the cost of living trending upwards, with no indication of it stopping.
If people are serious about Cryptocurrencies, they’ll already know all this. If you’re new, you need to be willing to understand it. To ensure you behave like a smart investor, you need to understand what makes something valuable and the market forces that reflect a psychological consensus around whether there is a growing acceptance of its value. Understanding economic history along with contemporary trends will better equip you to recognize opportunities in the market and protect your wealth.
Additional Reference materials:
a. https://www.youtube.com/watch?v=DyV0OfU3-FU&feature=youtu.be Mike Maloney — Money vs Currency — Hidden Secret of Money,
b. https://www.youtube.com/watch?v=o48-_fY58jg&t=7s George Gammon — Real Reason They Want To Ban Cash.
c. https://www.youtube.com/watch?v=EqjkWNsePoU&t=6s... Peter Joseph — Zeitgeist. Skip to 1:15:57, watch for 20 minutes (Interesting doco, can watch all of if you want, but it’s explained in a broader context). Part III: Don’t Mind the Men Behind the Curtain.
d. ‘Fake’ by Robert Kiyosaki. Cannot recommend this audiobook enough. If you haven’t already, download Audible, create an account, use your free sign up book to buy it. Also would recommend following Robert Kiyosaki on Youtube ‘The Rich Dad Channel’.