What exactly is money?
I’ve explored money before. Some say, “Everybody knows what money is.. so why ask stupid questions about it?” For simpletons, money is coin or cash in hand, or credit in the bank – end off. If that’s you, then kindly depart now.
This is not a tutorial on money or how to make money. If you want that sort of knowledge, move on – even more swiftly! NOW!
In a survey done in 2014 only 1 in 100 people knew where money came from. If you don’t believe me maybe you would believe that part in the video below 2:50 to 3:59 – or you could simply assert “It’s a fake survey.”
In the simplest terms money is a representation of value. This then leads to another question of “what is value?” It’s also this simple: if you had to work harvesting potatoes for one day to receive one chicken in wages (which you would then cook), the chicken represents the value of your labour. Today our financial systems has evolved into coins, cash and credit – those things have replaced payments in ‘chickens’, ‘potatoes’ or other produce. Ordinary people who work or otherwise receive a living, get paid in currencies. Those currencies are known as ‘fiat’.
There was a time when gold (or silver) was money. I shan’t go into the history of that. As I said this is not a tutorial – get that through your own thick skull. Up to around 1913, most of fiat was backed by gold. However, there were problems with that, so over the next few years nations decided to abandon the Gold Standard. In a nutshell what that meant is that fiat was controlled by central banks – who were legally allowed to print as much ‘money’ as they liked. The financial woes of the world post-WW1 were solved and fiat endured through WW2. Whenever there was a financial crisis, it was easy to ‘print’ more money – now unhinged from anything solid such as gold.
For a deeper understanding of money see video below – which may disappear soon.
Today the American central bank – the Federal Reserve (aka the FED) – has become a model for most other central banks. But note that originally the FED was modelled on the Bank of England. Both banks were originally private banks – yes private bankers who held the most fiat. The American govt did a deal with a bunch of private bankers – who were basically allowed to draft the legislation that would allow them to lawfully print their money. Don’t argue with me – go read about it. The Bank of England was incorporated into government more closely but still operates largely on a private bankers’ model (in other words it’s dressed up a bit). For a short take on the FED see video below:
What about money in paper or coins? The physical nature of that sort of money hides its true nature. These are physical representations of value. So – instead of collecting a live chicken at the end of a days work, you get a few quid – which enables you a choice about what you might do with that money. Your employer gives you that money. But a bank somewhere – your own bank – and the central bank – have given others the credit in that physical money. It all tracks back to a central bank credit. They backed it to it’s stated value – and you don’t really need to think much further than that. This is how most people are. Well the Indians got a shock in 2016, when their government (and central bank) decided that 500-rupee and 1,000-rupee denomination ceased to be legal tender from Dec. 31, 2016. There was chaos! In other words, the guarantee of credit in the notes was pulled suddenly. A similar ‘stunt’ was pulled recently in Trinidad & Tobago on 100 dollar bills. But focus – the issue is that what’s in your hand or at the bank is only a promise of credit – nothing more.
What about Gold – is that better? Better for what? Some say gold is untouchable, like at 25:03 in the first video above. That’s not true! Gold was made illegal in 1933. If they could do it once, they could do it again. The probability of ‘they’ banning gold again is separate debate. Low probability doesn’t mean it can’t happen.