We all need it, crave it, and sacrifice the very freedom we love, to earn it. In the modern world it has become central to everything we do. It dictates and limits almost everything. But few people really know the basis of what it is, how it is created or controlled.
Basis
Money is not a natural occurring phenomenon. We invented it. It's more of a psychological operation than a natural one.
What constitutes money?
To function as "money" a minimum of three criteria must be present.
It must be an effective unit of account, a store of value, and a means of exchange.
In world war II cigarettes quickly developed into a currency. Particularly in prison camps. It meets all three criteria and simply developed in the vacuum of necessity.
The cigarette trade however, was frowned upon by many senior officers. They didn't want a currency based on vice.
Many attempts were made to change the currency to something else. All failed. Trading defaulted back to cigarettes. Why? Because despite meeting all the above criteria the alternative currencies decreed by the senior officers, lacked 2 things.
Public adoption, or public confidence. And Value basis. More on this in a moment.
By Decree
The money we currently use Is "Fiat currency".
The word "Fiat" means decreed or declared. The money is declared by government, and universally adopted. That's where the psychology comes in.
People must believe that it has a "value basis" to accept it initially, and continue to have confidence in it. Public confidence is paramount. Without it, a currency collapses very quickly. Recent examples are Zimbabwe and Venezuela.
Basis
Once a currency collapses, and a new one is issued, public confidence is lost, and a strong basis is needed to gain widely accepted public confidence.
Traditionally, Gold has been used. Zimbabwe has recently issued a new gold backed currency. The currency system we use today has its origins in 1944. With the end of world war II in sight, world leaders gathered in Bretton Woods new Hampshire (USA) to develop a new world money system to rebuild the world economy going forward.
After much discussion and debate it was agreed that the American dollar would be the global reserve currency. All world currencies would be tied to the US dollar. And the dollar would be backed by gold.
Why did the US dollar emerge supreme?
They were able to demonstrate the largest gold reserves, holding more than 8000 tonnes.
The world had confidence.
This changed however in 1971 when president Nixon declared that the US dollar would no longer be backed by gold. Much turmoil ensued in global markets in the following years with many loosing confidence in the US dollar and abandoning it for Swiss francs.
In 1974 the US dollar stabilised, A deal was made with Saudi Arabia making all world oil sales to be transacted in US dollars. The dollar was now backed by oil!
We are theoretically still under this (Petro dollar) system today. Although world currencies are loosely based on other commodities and major export products.
Money Creation
Unlike the gold standard, (wealth based) where you had to have the gold in the vault, in order to issue the currency. We now operate under a debt based system. It works this way.
The money issued in a debt based system has no wealth to back it up, so it has to be based on future projected wealth.
For example.
A miner has a lease with millions of tonnes of iron ore. He needs to mine it, in order to realise it's potential wealth. He doesn't have the money, so he borrows it.
Most people think that this borrowed money comes from somewhere. It doesn't. It is created on the spot. Out of nothing. With a few keystrokes. Based on future wealth potential.
Another example is real estate.
Few of us pay for a house from wealth already built from productivity. We borrow. The money is created based on future earnings. The higher the property values, the larger the debt per capita. Not the best system. But that's how it currently works.
DEBIT MONEY vs REAL WEALTH
Productivity based wealth, and debit based acquisition might seam the same to most. In reality, they are chalk and cheese. If you can shun debt, and create wealth with productivity, your wealth will be solid and real. It's a hard road initially but very rewarding if you can do it.
Steve Wilson
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