Everything You Know About Money Is Probably Wrong — Pt.2

That man is richest whose pleasures are cheapest

— Thoreau

Let us continue our brief journey through the history of money. For those who missed the first part of this article, you can find it here.

Why Silver and Gold?

As was noted in part one, for most of human history, trade among trusted groups tended to occur as an informal contract. I need something from you, you give it to me and an informal contract arises between us that says I will repay you in like value. It must be said to the critics, of course the evolution of money is more complex than what has been outlined thus far.

What I aim to capture here are the broad strokes as they might apply to the industrialized pseudo-capitalist economies of today. In other words, the financial system born from the Euro-Christian nation states of the late Middle Ages. With that said, it is around the time of the Renaissance that we start to see specie being utilized in a very similar fashion as paper money today.

Of course, this still does not tell us why gold, or silver, or bronze might be valued as a unit of exchange. As best as can be surmised, precious metals (and gems) seem to have an almost universal appeal. Whether in China, India, ancient Rome, or Western Europe, throughout history, people just seem to like gold, silver, and gemstones!

That they are relatively scarce and difficult to acquire also apparently adds to the value equation. And, with gold in particular, it is relatively easy to work with, and it does not degrade when exposed to the environment. So, the best answer of why precious metals have been used as a valuable unit of exchange appears to be simply because, unlike gems, you can readily reshape and divide it without waste, it is stable and non-toxic, and people really like it.

Throughout history, people just seem to like gold and silver

Nevertheless, in the late Middle Ages in Europe, as societies became more complex, specie became more and more refined in appearance and weight. To be sure, sovereigns routinely tinkered with those weights and measures. They would change size and purity, they would recast them at different weights, or they might ban one form in favor of another. Almost universally, these changes were an attempt to deal with spending more than the sovereign collects, e.g., deficit spending.

The simplest way I can this explain is: if you are a sovereign and you need more gold than you have to buy things and to make coins, the easiest way to do both is to take all the coins you made before and make them weigh less. Then, as the idea goes, you force your population to trade in the new coins as if they were the same value as before.

This is one of the major problems of using precious metals as money. You can only shave down a coin, or mix it with base metals so many times before your population either demands more of it as payment, or simply stops using it. King of England shaving down your coins? Use Italian ones, or French ones instead! They start doing the same thing? Switch to Swiss coins, or German ones.

You can only shave down a coin…so many times

Of course, the sovereigns of these nation-states could have all gotten together and coordinated their money tinkering, but they were too busy fighting and trying to steal stuff from each other. By the mid-to-late 1800s though, these systems stabilized quite a bit, with gold and bi-metal (gold and silver) economies all roughly adhering to an international gold standard. This continued for the most part right up to the Great Depression, when most of the Western economies abandoned gold as a standard economic unit.

The rise of fiat currencies in the modern age

The mass adoption of standardized fiat (paper) currencies took the place of gold in general around this time, and pretty much continues to this day. In the post-World War Two era, the Bretton-Woods agreement created a scheme where United States dollars were convertible to gold at a fixed rate, but that fairly well imploded by 1970, with the United States formally abandoning Bretton-Woods in 1976.

Since then, almost all fiat currencies in circulation today ‘float’ their respective values based on a complex system of international exchange. It must be said the United States still enjoys a privileged position in this hierarchy, as the majority of global trade is settled and accounted for in US dollar values. I would also point out the widespread adoption of floating fiat currencies in the industrialized West has coincided with a rather unprecedented peace, at least in the industrialized West. Think about it this way, can you imagine Germany invading France today? It is almost unimaginable…

Floating fiat currencies offer a number of advantages to the sovereign. You technically cannot go bankrupt anymore. Trouble being, if you are irresponsible in the management of your internal national finances, your ability to pay foreign debts goes way down. That is, unless you are the United States! Our privileged position allows us to be incredibly irresponsible financially and people keep taking our dollars — for now anyway…

Can you imagine Germany invading France today?

Provided the sovereign is generally responsible in the management of their fiat currency, it grants a lot more flexibility to finance stuff. Need a little more, you print a little more. Inflate your currency too much so the value drops too fast? You print a little less. Going back to Part One of this article where we discussed what is money, the definition I put forth is: ‘to facilitate the exchange of value in low or zero trust situations and the bulk extraction of a fractional value of personal or collective industry through taxation.’

The world of today is socially complex. Global communication is instantaneous, nearly every point in the world is accessible by air within a day or two, and goods are produced and shipped everywhere. We exchange value with strangers all the time, both foreign and domestic. The glue that holds this all together is trust. Fiat currency stands in for the promise to return like value.

I do not know the person who runs the Starbucks on the corner and they do not know me. The sovereign backed currency provides the contract between us. If you give me a coffee and I give you US dollars in exchange, the US government sort of guarantees you will receive like value later on. In truth, they run a little scheme where they continually inflate the supply of money, aiming for you to lose about 3% per year of value. Leaving that aside for now, I have to pay my taxes in US dollars and through that mechanism, the sovereign extracts a fractional value of my industry. The sovereign in turn demands that those dollars be accepted for all debts public and private.

Sovereign backed currency provides the contract…

This is all fine and good to a point. Some sovereigns are much better at this balancing act than others…Finland and Canada stand out as an exemplars. The clever among you may notice the United States is pretty far down the list at number 24, below the financial powerhouse of Honduras and just above the other Central American financial juggernaut of Costa Rica. In other words, we are pretty piss-poor in terms of banking stability. For further perspective, Honduras and Costa Rica are literal banana-republics, though there is a pretty fair argument to be made that the US is one too…

The end of fiat stability

The Bretton-Woods agreement last almost thirty years before it imploded on itself. American adventures in Korea and Vietnam (among other things) created deficits that would have bankrupted the United States if it kept the gold peg envisioned by Bretton-Woods. Likewise, the floating fiat system has lasted for about thirty years now and it has pretty much imploded as well. Most people have not realized it yet, but it has definitely happened. What that means is both scary and exciting! We will cover what that looks like now and in the future in part three.

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Tin Money

Tin Money

An objective, evidence-based exploration of crypto and finance — https://bio.link/tinmoney

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