First is Money
Jeah: Can I get some apples 🍎 ?
Leah: I want wheat 🌾 in exchange, do you have it?
Jeah: Ummm… I have some sheep 🐑 , will that work?
Leah: No! I have them farm full. Sorry! 😐
This 👆 is how barter system used to work a very long time ago, millenniums ago. The biggest problem was faced by workers who were given same things by everyone in return for their work.
💬 Worker M: What! No apples? Same bag of rice. Ugh! 😩
Some genius then to make it easier to buy things or Transact, created a note or document called IOU which is short for I Owe You. Now, we just had to carry these IOUs to people who take these and give us things that we wanted. And good part was, your IOUs couldn’t be eaten wolves 🐺 .
But as human population grew and spread in a bigger area, people also started to create their own IOUs which led to chaos. Everyone had to remember who take which ones and what they can buy from them 😟 . And that’s how centralised coffers run by kings started and then eventually people started banks and these facilitators start taking some fees to facilitate these transactions.
But have you ever thought: What is the value of money? 🤔
I mean, money is just a document or paper which a sovereign government prints and distributes to people so they can transact without having to trade their sheep. But does money have value in itself? 😕
💬 You just said it is just a document to buy goods we get from government for our work.
Yeahhh… but there’s more to it. If the only money that were produced is because of the work done, in the form of building a house or growing peas, we would only have money that is equivalent of the total production, also GDP. And if that would be so, the money will only be enough to be used for individual needs and that’s what happened for very long time even up until just a century or two ago.
And this is where the debt comes in. In order for debt to have value, money has to have a value or so it has to be perceived that way. Interesting, isn’t it 🧐 !? But which one is it? Money has value or is it perceived value? And that brings us to next part,
Store of Value
When we started to print more money as debt money, we needed a store of value which can also be trusted by people in order to believe this new money has value. Can you think which other thing has value to people?
💬 Ummm… let me think what could be that? Ohhh..😲 Gold. Is it?
Right, you got it. Gold🥇 has been valued by everyone everywhere for millenniums now and so is Silver🥈. So central or federal banks and government started to buy Gold and Silver depending on which has more notional value to the people in their country and started printing money against it. Till this point, Gold and Money were not really linked together in a formal way to have a standard price💱 even in a city. They were two different currencies and should still be seen as two different currencies even now.
Anyway, buying Gold for cash increased its price and it also became an asset with good return value. Ultimately, a lot of people bought, creating a bubble and then it popped and people lost money like always. It also did cost banks a handsome amount so banks also started to manipulate the value of Gold by increasing/decreasing the supply and demand and kept its prices almost stable but increasing to compensate inflation 💹 .
Some of you might have heard this term, Inflation, but most people have not. Inflation happens when there is abundant supply of money or people have more money in their hands. Let’s take an example:
Jeah: I got an awesome phone📱. Woo 🎉 !
Leah: I love it. I will get it too.
Company: Hey! What can I get you?
Leah: I want awesome phone.
Company: Alright! Here it is 1199$, only.
Leah: But my friend got it for 1099$!
Company: Umm… we have increased the price because of demand. It will cost you 1199$, only. Do I get it for you?
Leah: Oh okay! No problem, I got it 🤷♀️ . Here’s my card.
This👆 increase in 100$, is called inflation. Inflation happens where there are more people are willing or have to pay more for the same thing, irrespective of demand or not.
Inflation usually is considered for items or products which are necessary in life like oil, energy or electricity, food etc. The product like awesome phone doesn’t come under that bucket, hence they usually are called to be priced according to market demand. But in all practicality, it’s the same thing just affecting different sections of the society.
But the good question is why is Jeah okay with paying more or rather why she had to pay more, right?
Because she got money and extra 100$ doesn’t affect her negatively. This further raises a question how she could have so much money? There are lot of people who get good money:
- from the work they do – entrepreneurs, farming, film stars, doctors, engineers, scientists etc.
- from inheritance – forefathers had accrued lands or built companies which are valuable.
- from investment – stocks, housing, gold, giving loans, Bitcoin(pfft, of course) etc.
There is one other way to look at this, the money was not worth 1099$ when Leah wanted to pay. The money lost value by 100$ by that time.
💬 Uhhhh…what? How? 👀 There wasn’t enough demand-supply issue then.
Out of the options to get money, the riskiest option of making money is investment. You are definitely going to lose some portion of money when things are not right like 1999 and 2008 stock market crash📉 . In order to save people and companies from going bankrupt, government often prints more money and infuse it in the market through loans to banks or companies.
💬 But where does this money comes from? Do government sell Gold for this? 😱
This question brings us to another segment
Fiat money, pronounced: fee.aa.t
If a government start selling Gold to compensate for the loss in market, it will also cause Gold prices to fall 📉 . Simple demand and supply or in other words deflation(opposite of inflation, prices going down is good).
Until this point in our understanding, the central government or federal banks didn’t have any debt created of their own. It was only from the borrowed money from other governments or companies. So, the only option for it to borrow during crashing market is from other countries and giving them upper hand in trade.
In order to not let Gold prices also fall and not borrow from others, government and central banks created a new kind of money called Fiat money 💵 . The banks could create them as much as they want and in anticipation that this debt can be cleared by the produce or value of the future. There is still more Gold to be mined and electricity to be produced. Hence, they could create money which has a value of 0️⃣ .
💬 So where is it getting its value from? Is my money Fiat?
The value that the fiat is getting, is by inheritance from the value backed currencies already in circulation like Gold or the other cash printed before, technically. But you can’t completely know what is its true value. There has been so much money printed or Gold mined before we faced this problem that it’s impossible to calculate true value now.
What you can know though is inflation. Whenever this new money is put into market, it causes prices of everything in market to rise from stocks📜 to apples🍎 .
Why? Because this money eventually reach the people like Leah through loans or payments and they are ready to spend more for the same stock and apple. The other way to look at it is that the money that you had in your hand and bank account is now worth less or as its called devalued. 🤯 right? I know. The extra 100$ that Leah spent is the devaluation of the money.
You can argue that we have more money so it is not devalued per se. It might not be true for you but if we take average for everyone, people have to pay more than before. Leah is lucky enough to get more share of the Fiat money but Jacky is not, she hardly got any money to buy food, awesome phone is a dream and no one is paying more to her for working in a restaurant.
At this point, it should be made clear that concept of Fiat money was great
- to stabilise or grow the economy📈 . It is technically called stimulation, yes the same that your country gave away in billions.
- to fund the additional projects like going to the Moon or building Large Hadron Collider or Atal Tunnel.
But the downside of printing more Fiat was discarded by central governments. The more our economy grow, the more Fiat we have to print to compensate for losses and eventually the debt can never be paid if we continue.
This has taken us back to starting point on the circle. Remember IOUs, they didn’t value either but now we have a very complex and slow financial system with surplus money of literally 0 value which is de-growing an individual’s purchase power significantly, especially for the poor.
Today, there is a huge disparity between the riches and poorest sections in almost every country. More and more assets are being owned by the richest, while poorer sections are getting less. Richest are buying lands and government assets, while poor are stuck with money which is losing value. Any stimulation that has been provided is trickling top to bottom making rich people further more rich: 🏡 🌆 💵 💶 💴 💷 🏭 📊. And that’s how people will spell capitalism for you 🤐.
💬 But what can we do?
You always ask right questions. 👏
Did you notice the bold words and phrases, these are either the problems or important points and that’s what Bitcoin aims to solve if we want it to and the only thing that actually can. Bitcoin is our another chance to reform and revolutionise our financial system which works for all and not just for few or controlled by few. It is about giving everyone the ownership of their hard earned money. It is about giving freedom to spend your money, your way, on your terms and also retaining the value as we go.
I have written an awesome explainer on Bitcoin which refers to this post quite often.
If you have read so far you might also want to checkout Two Types of Economy.