Chapter 2: "What is Money?"
Chapter 2: "What is Money?"
This post is Chapter 2 of the book I’m writing. You can read the Introduction here
Let’s forget for a moment everything we know about money and define it in the simplest way possible. Money is defined as a unit of account, store of value, medium of exchange yada yada. Those are the academic terms we learn in economics classes.
But I like to define what money is in a relatable way. What it means to you and me as an everyday worker. The definition I came up with is:
“Money is a measurement”
Just bear with me, this won’t be like your math class in high-school.
Just like how we use inches or centimeters to determine height and kilograms or pounds to determine weight, money is also a measurement.
But what does money measure?
“Money measures the value of our work or our job”.
Just like a weighing scale or a tape measure, money is a tool we use for measuring. If I asked you why do you work? You might answer for the money.
That is technically true but that is not the real answer. After all, money is just a paper. Why is it that almost everything we do is influenced by how much money we can get?
We study in school to get good grades so that we will get a good job so that we can earn good money.
What is it that we want with a piece of paper called money?
It’s not the money itself that we want, it is what money can buy.
Money is not the end goal. It is not accurate to say that we do our work because of money itself.
We do our job so that we can exchange it later for something that we need or want.
Money is just a measurement tool to value our work.
By looking at money as a measurement tool, we will realize how money that can be printed steals from us. Money that has inflation is like having a weighing scale that can be adjusted or a ruler that can be shortened or lengthen.
Imagine buying 2 kilograms of apples from me but because I can adjust the weighing scale, I can say that it measures 2.5 kgs instead 2 kgs. You will pay more than the actual weight of 2 kilograms you’re buying.
Imagine buying a land from me that is 100 square meters, but I will say that it is 120 square meters because I can change the way I measure things. You will think you’re buying a bigger land, but I just changed the numbers because I can.
Because I can change the measurements, I can steal from you. This is how inflation works too.
Inflation is theft, but this is not obvious. They don’t teach this in school. We also don’t learn how money really works. We’re often busy thinking about how to earn more money so we can buy this and buy that.
Whenever the government prints more money, they are changing the measurements. Whenever the government increase the money supply, they are distorting the reality of everyday workers like you and me.
The more money that is printed, the more money there is chasing a limited amount of goods, which drives up the prices of everything.
By printing money, they are making our work worth less because the money we earn from our job will buy fewer things. We will need to earn more just to keep up with everything becoming more expensive.
All of this because we have money that can be printed. A money whose measurement can be changed. It is just not visible to the naked eye because we were taught to believe that:
“Money printing = inflation” is good.
But in reality “money printing = everything becoming more expensive” is bad for everyone.
⚡Money is stored energy
Unfortunately, most people earn just enough to get by. If you're lucky enough to have money left after basic necessities like food and shelter, you either buy things you want in life or you save that money.
Money is a tool we use not just to buy what we need or want but also to store our energy. Receiving money for your work is analogous to charging a battery. The electricity you put to a battery is the work you do. The battery itself is the money. It’s your stored energy for later use.
You will use this battery to light a lamp or power some appliances. In real life you use the stored energy in the form of money to buy things you need like food or things you want like clothes. Or you might just save your stored energy (money) perhaps for a later use like buying a house, college fund of your kinds or just in case of an emergency.
This is an important analogy to make, because if you view your money as stored energy, you will realize that inflation or money printing not only makes prices increase, but also steals your energy. Money printing devalues your work by stealing your energy.
In the book Your money or Your life, they had this same concept of money is equal to life energy.
If you work and earn $5,000 a month, that $5,000 money in your wallet or bank account is a storage of the hours you put in at work for a month.
If you work 5 days a month, 8 hours a day, that is 160 hours of your energy stored in that $5,000 money
Your per hour rate is $31 ($5,000/ 160 hours)
Suppose that you want to buy a house worth $310,000. That is equivalent to 10,000 hours of work1.
Let’s say that you’ve already work 10,000 hours and saved $310,000.
But the government printed more money resulting to inflation, the house now cost $350,000.
It means that you need to work more additional 1,290 hours to buy the same house that you’ve already worked for. 2
When government print more money, price of almost everything also increases. We accept this inflation is normal, but we don’t see is that we are being robbed of our energy.
You should have already bought the house but because the government printed more money, the price of house increases. This is the fact that is not known to people. We just accept the fact that prices rise naturally. We don’t ask why so most of us don’t know the reason why.
Because of Money printing, we are being robbed of our time and energy.
Inflation is not just increase in prices. It is devaluation of the work and value we produce.
Inflation is theft hiding in plain sight.
So far, we’ve learned that:
“Money is a measurement tool”
“Money is stored energy”
By viewing money as that, we will just not view money as paper or digits in a bank account to buy what we need or want. Money is a tool we use to measure the work we do. Money is where we also store our work or energy. An imperfect money whose measurements can be changed robs us of our energy.
🖨️Why do we print money?
Money evolved to a money that can be printed because the money we use need to adapt to the modern world. Money was not always money that can be printed.
Chapter 1 reveals that inflation is a result of money printing. To understand why we print money, it is important that we go back to learn the history of money.
By understanding history, we will learn how money became the way it is today, money that can be printed out of thin air. By studying the past, we will understand the flaws of our money. We will also realize why we need bitcoin today, because bitcoin was invented to solve the flaws of our money today.
“The more I study history, the less shock I am of current events.”
- anonymous
📜A Brief History of Money
Just a disclaimer that this summary is a simplified one. There are better resources to read if you really want a deep dive on the history and evolution of money. This won’t be an exact detailed history of money. I’ve just taken the most important parts that will help you understand why we need bitcoin today.
🤼Barter
Barter is exchanging goods or services for other goods and services. Bartering means I will give you this if you give me that or I will do this if you do that and vice versa.
It’s like when your mother tasks you with washing the dishes and your sibling with cleaning the living room but you don’t want to wash the dishes, so you ask your sibling to swap tasks with you. That is bartering.
Another example is when you order ice cream for dessert and your wife orders cake, but she changes her mind and wants your ice cream instead. So, she asks you to exchange desserts and you agreed (assuming you have a choice).
Before the invention of money, bartering is how we trade with each other. The problem with barter is you might not find someone that wants what you have. Imagine a world where money doesn't exist, and you own a sedan, but you want to swap it for a pick-up truck. I’ve happened to have a pick-up truck and you’ve asked me to swap it for your sedan. However, I’m only willing to swap this pick-up truck for a motorcycle. Barter won't happen because there is no mutual desire to exchange. The fancy economic term they used for this problem of barter is “lack of double coincidence of wants”.
Money was invented to solve this problem. Instead of exchanging goods and services, we can pay each other with money instead.
🐏Beads, Shells, Animal teeth, Livestock etc.
When our ancestors moved from bartering to using money, the first objects they used as money were cattle, beads, seashells, salt etc. The problem with these forms of money is that they are easy to get. Good money should be scarce or limited in supply. Scarcity means rare, hard to produce or hard to get. If money is easy to get or produced, it will be abused by those who can get it or make more of it, just like the dark example of what happened in Africa:
The Slave Trade
Glass beads were used as currency in Africa in the 16th century. Africa didn’t have the technology to produce glass beads. Meanwhile in Europe, they had the technology to produce these glass beads. Some suggest that in the 16th century, Europeans brought these easy to produce beads to Africa to buy their resources. Some suggest that this also led to the slave trade in Africa. Europeans with their easy to produce beads bought African resources and also slaves. 345
This is the downside of having money that can be easy to obtain or produce by others. Real wealth like natural resources or land can be bought by cheap or easy money. Even human beings were bought as slaves because of easy-to-get money. These benefit those who are the closest to the production of this easy to produce money.
Money should be hard to produce or hard to get. This is called hard or sound money.
🪙Metallic Coins
People then moved to using precious metals as money. Precious metals like copper, silver, gold are scarce or hard to get money. Precious metals are not easy to produce or obtain unlike glass beads, shells or stones. You need to dig the ground to find and mine gold. These are types of hard or sound money. These rare metals were added to metallic coins that were used as money.
The Fall of Roman Empire
By the year 117 AD, Rome had conquered much of the known world. During the Roman Empire, they were using silver money called Denarius which has 4.5 grams of silver. But like any government at that time, success means more rising costs. To pay for the rising cost of running the Roman Empire, they produced more silver coins. They did this by reducing the grams of silver in Denarius coins.
The empire cannot make more money because they are limited by the silver they had, unlike shells or glass beads, you can’t easily obtain silver.
But in order to create more money, the empire instead reduced the grams of silver used in their coins. This is an early example of money printing. They reduced the silver required in coins so they can print more Denarius coins to pay for their expense.
This leads to more money circulating resulting in inflation. This led to hyperinflation that caused social unrest, revolution and wars. The Roman Empire ceased to exist by 476 AD.
There are many examples like this in history where currency debasement leads to hyperinflation. This hyperinflation felt by the population leads to social unrest and wars that made the empire collapse.
🏆Gold Standard
Since it is hard to pay with gold coins and gold bars. The gold standard was born. According to historians, the gold was stored in merchants who acted like vaults. These merchants issued a paper as evidence that you had gold.
If someone wants to buy something, you will just hand the receipt paper as payment. Whoever possesses that paper has now claim to the gold held by the merchant in their vaults.
This resulted in the birth of paper money backed by gold. That was paper money used to be. It is backed by gold. Government would soon adopt this gold standard. England was the first country to adopt the gold standard in the early 19th century.
Each country fixed the price of gold in their local currency. In the UK, the price of one troy ounce of gold was £4.25. In the US it was fixed at $20.67.6 Anyone could request to convert their pounds into the equivalent value of gold.
Because it limited the ability of governments to print money, the gold standard stopped countries from devaluing their own currency. They just can’t print money because they are limited by the gold they have. Money was backed by gold.
But there is one problem with this set-up, we are trusting the government to honor their promise not to print more money than gold they have.
💔Trust is meant to be broken (always when government is involved)
Just like what the Roman Empire did when they devalued their currency by reducing the silver contents of the Dinar, the UK during WWI suspended the redeemability of paper money into gold to fund the war.
The US also suspended the gold standard in 1933. FDR issued Executive 1602 where people are required to sell all their gold for $20.67 to the government.
The stated reason for the order was that hard times had caused "hoarding" of gold, stalling economic growth and worsening the depression as the US was then using the gold standard for its currency.
But the main reason was that they wanted to print more money. After confiscating all the gold of the citizens, the government change the fixed price of gold from $20.67 to $35.
Why did they do that? What this means is that they can issue more paper money, because now the gold the government holds are worth more. They have the same tons of gold in terms of weight, but they change the measurement just by changing the price from $20.67 to $35.
Remember my example earlier when I change the measurements of the apples? Instead of 2 kilograms I will say that it is price at 2.5 kilograms because I can. That’s the same with the US did when they change the price of gold from $20.67 to $35.
The number of apples in my example, didn’t change. I just change the price.
The actual amount of physical gold held by US didn’t also change. They just change the measurements by repricing the gold.
This the flaw in money that is controlled by state, empire, government, dynasty or whatever you call them.
What happen in Song Dynasty, Roman Empire, UK during WWI, US during the Great Depression are all examples of problem that money has when it is issued and controlled by the few.
This problem is Called Centralization.
Centralization means control. It means that when the government is in charge of money, they will be tempted to make more of it.
That’s why bitcoin was made to be decentralized in nature. It’s the opposite or antidote to centralized money.
🏛️Gold Exchange Standard (Bretton Woods System)
From the Classical gold standard with some period in between where the pegged broke because of world wars, the world went to a gold exchange standard.
The gold exchange standard was the agreement made by 44 countries when they met at Breton Woods hotel in New Hampshire in 1944 (aka the Bretton Woods System).
Their goal is to create a system that will encourage countries trading with each other. They need to find a common currency that they can use, which happens to be gold.
But since countries broke the peg of their local currencies to gold, they need to find a common currency they can use. Remember that at this time, only the government holds gold. The ones who traded with other countries are not just governments but also individuals and companies. And companies don’t hold gold so they can’t pay with gold. Government doesn't like gold as money also because it limits their ability to print more money.
The solution they came up with was the gold exchange standard.
How the Gold Exchange Standard work
The only currency that can be converted to gold was the US dollar. Then each currency can be converted to US dollars. Only the US dollar is convertible to gold, but foreign currencies can be converted to USD.
At that time, most of the world’s physical gold was stored in the US.
Countries will trade with each other using USD as payments. The USD is essentially backed by gold. It’s like the same system where merchants hold gold in their vaults and issue paper receipts. In this scenario, the US was the vault.
This system would work well as long as the US doesn't print more USD than the gold they have.
The problem with this is that it is Centralized. And what we learn is that any empire or government with this kind of power will be tempted to print more money.
And so, the US did.
🫨WTF happened in 1971
President Nixon suspended the redeemability of US dollars to gold under the Bretton Woods Agreement in 1971. This means that money is effectively backed by nothing. Remember that under this Bretton woods agreement:
foreign currencies can be converted to USD > then the USD can be converted to> gold.
This means that the amount of USD in circulation should be equal to amount of gold. The US with the goals of boosting their economy, and paying for their expenses like wars, printed more paper dollars than the gold they have.
The French became aware of this and started to demand back their gold. The US, fearing that they will run out of gold, suspended the redeemability of dollars to gold.
This is important to understand because this is what allows inflation to become the norm.
Under the gold exchange standard, you cannot print more money unless you have gold. Paper money is backed by gold. You can’t print gold so you can’t issue more money.
That’s when we went to the Fiat standard. Money that is backed by nothing.
SUMMARY
Don’t worry you don’t have to memorize all of this. The important thing to understand is that money has continually evolved ever since we’ve existed.
We went from bartering to using easy money like seashells to using hard money like metallic coins to using paper money backed by gold to using USD backed by gold.
Each evolution of money was meant to solve the problem that the previous money has.
The lessons we learned is that money should not be easy to produce. It should be scarce and limited like gold. However, since gold is hard to carry around to be used as a payment for everyday transactions, we used paper backed by gold. These were held by merchants; these were private money. But we transitioned to government money, a paper money issued by governments that is backed by gold.
Essentially the gold is money, but since it is not practical to pay with physical gold, issuing of paper money that can be exchanged to gold was the solution.
However, governments took advantage of this trust or power. They can’t help themselves but issue more money than the gold they have. The problem with this is that we are trusting the government to honor their commitment. But as history has shown, the government will abuse this power. It doesn’t matter what their reason is.
By creating more money just by simply issuing paper money, this will translate to benefiting the few and harming the masses.
Just like what happened to the African slaves. Today we are modern slaves also because of this money printing. As we will see in this book, we will see how cheap easy inflationary printed money makes us all slaves while benefiting those that are already rich.
This cheap, easy, inflationary, printed money is called Fiat money. Ever since we went off the gold standard in 1971, money is no longer backed by something physical in the real world. We now use what we call Fiat Money.
Fiat means backed by the government trust. What backs our money now? Chapter 3 will answer that question.
Bitcoin fixes this
Bitcoin fixes the problems that fiat money has.
Fiat money is inflationary and controlled by the government or centralized.
History has shown that money continually evolves to become better money. Each evolution of money solves the flaw of the previous money used.
Today, the problem of our current money is not visible to the naked eye, probably because we are gaslighted by the one who issues the money. The government teach us that inflation is necessary for the economy.
I'm not being a conspiracy theorist saying that the government is something like the illuminati trying to control us by printing money. What I’m saying is that the system is broken. The money we used is broken.
Some or most of these politicians have good intentions and think that they can solve problem within the system. They think they just need to manage the money supply better, to have better system from collecting and allocating taxes. But the big problem is that they don’t recognize that the money or system we used is doing us harm. By continuing to expand money by spending more for the economy, it will result to greater damage over the long term.
That’s why bitcoin maxis are passionate about bitcoin, because they see this as a long-term solution to all the problems of fiat money.
Bitcoin is the exact opposite of fiat money.
Unlike fiat money that can be printed into infinity, bitcoin is limited in supply. There will be no more than 21 million bitcoins. '
Unlike fiat money that is controlled by government, no one can control bitcoin.
Money will continually evolve until we find a perfect money. Money also continually evolves because it has to evolve with the constant change of how we live.
Today, we live in a hyper-connected globalized world. I for example work for an Australian company but I’m living in the Philippines. If we still use physical gold as money today, imagine the pain of my client paying me my salary. It is not practical.
We can’t clearly go back also to a paper money backed by gold. Because that didn’t work in the past as trust was broken.
We need money that we can instantly send but not created cheaply like our money today.
A money that we all can hold so that we don’t need to trust governments or banks to hold it for us.
This is why I believe bitcoin will become money. It will take years, decades, no one knows the future. But if you understand history of money, you will recognize and see it first that we need a better money. Because our current money has flaws.
But you don’t need to wait for bitcoin to become money before you buy it. If you recognize it first it will benefit you because you will become an early adopter.
Today bitcoin is not yet money, but those who have bought it since its inception has saw their net worth increase in fiat terms.
That’s the good thing with bitcoin, you will first arrive to want to make more money, but if you stick around and really understand what it is, it is not just a speculative investment that can make you rich. It can also make the world a better place by fixing the money.
We earlier define money as store of energy. If you use bitcoin as saving tool instead, you will have better form where to store your energy.
While bitcoin is becoming money, it is entering a monetization phase where its price continue to go up because more and more people are adopting it. But it won’t be easy, it will be a volatile ride. You need to have conviction to really hold bitcoin over the long term. That’s why it’s important to zoom out and study history of money.
Once you understood the history of money, you will understand the flaws of our current money and will realize that we need a better money which we already have which is bitcoin. The world just doesn’t know it yet. But they will soon, because all fiat currencies are destined to die.
Michael Saylor, one of the biggest bitcoin bulls, said in a podcast that if we can fix the money, we can fix 50% of the problems we’re currently experiencing in the world. I believe that to be true.
Because like we’ve discussed, money is not just a paper, it’s a tool that represent stored energy of everyone. It represents the work that every one of us do daily.
And by the government printing, money, they are distorting that reality, it will manifest in every aspect of our life. We feel in our daily lives that it gets harder to get by because of inflationary money. Having inflationary money does not also encourage saving and thinking for the long term. We don’t see a bright future for ourselves. We live by yoloing and spending money on shit.
That is why bitcoin is so refreshing. It may be a long shot. But bitcoin fixes this. Because money affects everyone. Having a stable money will propel us to a new beginning.
Will bitcoin become money? I believe yes, because understanding history means you know that we are continually evolving, no one know when bitcoin will become money. But I believe it will be.
It’s just natural to expect that fiat money will dies soon and we will discover a better money. Which we already did, that’s why we have bitcoin today. It’s just not obvious for everyone.
But what is obvious is that fiat money has flaws. Sadly, like I said not everyone sees it today. But you reading this will see it, you will see then that bitcoin is the solution. That’s the real reason to hold bitcoin. It’s not just number go up or pump my bag investment. Yes, that too, but imagining holding an NGU(Number Go Up) investment and also an investment that can fix everyone’s lives. I can’t think of any asset or investment that does that aside from bitcoin.
Next: Chapter 3: “How money is created in Fiat”
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$310,000 price of house divide by $31 hourly rate
additional 1,290 hours = price increase of $40,000 / $31 hourly rate