Money is a widely accepted medium of exchange also used for transactional purposes in an economy. The concept of money evolved from the barter trade. Barter trade dates to 6000BC when in absence of money or currency, two individuals or parties exchanged goods and services among themselves.
Historically, different communities used items such as animal skins, beads, shells, stones, metals, cheese, and salt as a medium of exchange. In ancient times, the production of salt was limited in the Subsaharan region and its supply never met its demand, so it was used as a medium of exchange. Similarly, cocoa beans were rare in North America because they were difficult to cultivate and were used from the 16th century till the beginning of the 19th century as a medium of exchange or currency.
Money has two major advantagesseveral advantages over the barter system:
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Unit of account: Unit of account is a standard numerical unit of measurement that can be used to value goods and services, calculate the worth of an asset or commodity, and record the value in numbers. Money is a unit of account as it is divisible and countable. For example, the price of different houses in the UK can be compared in British Pounds.
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Store of value: The store of value is an asset or commodity that retains its value over time and can be saved, retrieved, and used to buy something in the future. Precious metals are considered a good store of value instead of meat or rice because they don’t perish, and their value remains the same. One ounce of gold in Roman times could have bought a Roman toga (a loose flowing outer garment Romans wore), and the same one ounce of gold that is now worth approximately £1,300 can buy you a fine formal suit. This means that the value of gold remained the same since Roman times and it can buy today what it could buy in the Roman times.
In totality, money should have the following characteristics:
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Fungible (Interchangeable): Fungible means that money should be interchangeable with one another. For example, if you give your friend a £100 note and she repays you with a different £100 note, it doesn’t matter if it’s the same note or not, because a fixed amount of money is interchangeable so their value is identical.
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Portable: Money should be easy to carry or transfer. Therefore gold, property and commodities could not be used as money.
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Durable: It should not deteriorate easily and should withstand repeated use.
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Divisible: It should be convertible to smaller units. For example, a £100 note, can be exchanged with five £20 notes.
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Secure: It should difficult or impossible to counterfeit money.
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Transactable: It should be easily transferable.
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Scarce: The value of an item decreases when it is abundant. Money should therefore be scarce and produced with great consideration to maintain a constant supply.
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Uniform: All same units of money should give you the same purchasing power.
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Decentralised: A single entity should not be able to control it. But every country’s currency is issued and controlled by the state’s Central bank.
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Acceptable: It should be available to everyone for use as a medium of exchange.
Fiat money is a currency issued and backed by the government. Historically, the coins were made of precious metals such as bronze, silver, gold and the government-issued paper currency could be redeemed for gold. The United States dollar, UK’s Pound sterling, and Chinese Yuan are examples of fiat money.
Unfortunately, today it is not backed by a commodity such as silver or gold and, supply and demand are drivers of its value and it is backed entirely by full faith and trust in the government that issues it. The central bank of a country decides how much fiat money should be printed to control the money supply in an economy.
A recent example of a country’s citizen’s losing trust in its currency is of Zimbabwe dollar which lost its value in the event of hyperinflation in the economy during 2008-2009 when the company printed money excessively. By the end of 2009, no one trusted in Zimbabwe dollar and other currencies (mostly U.S dollars) were in circulation.
All fiat currencies eventually collapse because the government prints more currency to get out of debt. To fund wars, countries go on printing more money so they indirectly tax the individuals without asking for it. The consequence of these money injections is inflation.
Additionally, the average life span of a fiat currency is 27.5 years after which the confidence in fiat currency collapses. Research on 775 fiat currencies conducted by DollatDaze.org revealed that fiat currency has no historical precedence in holding its value.
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20% of fiat currencies failed because of hyperinflation.
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21% of fiat currencies were destroyed in wars.
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12% of fiat currencies were destroyed when states gained independence.
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Around 24% of them were monetarily reformed and only 23% are in circulation.
Because fiat money is not backed by physical reserves, it loses its value every year when inflation rises.
Despite most fiat currencies only lasting 27.5 years, the British Pound has actually been around for 317 years! What a success you may think, until you consider it was originally defined as equivalent to 12 troy ounces of silver, and today only has 0.5% left of its original value. That’s right, what you could say is one of the most successful long lasting currencies in ciculation, the British Pound, has lost 99.5% of its value.
Most of the currencies in circulation, around the world today, are fiat currencies. Let’s look at some examples of how fiat currencies failed to store value in the past.
One of the best examples of how fiat currencies lose value is of the ancient Roman fiat currency Denarius. At the beginning of the 1st century, Denarius that circulated as fiat currency was made of pure silver. In the reign of Emperor Nero, during A.D 54, the percentage of silver in Denarius was reduced to 94%. The upcoming emperors eventually started abusing the fiat currency to pay off debts and it was further reduced to 85% in 100 A.D, 43% in 218 A.D, and 0.05% in 244 A.D. When the Roman Empire collapsed in 476 A.D, the Denarius was mostly made of cheap metal alloys. It had only 0.02% silver content left and was no longer considered a store of value.
After World War 1, in 1922, when worn-out Germany was unable to pay for the war reparations demanded by the Treaty of Versailles, the country was under extreme economic pressure. The French and Belgian armies occupied the industrialized and most developed areas of Germany that further worsened the economy to the point where it did not have enough money to pay off debt and pay German workers for restorations. To pay the outstanding financial obligations, the German government started printing more money, and soon the highest denomination of currency in circulation was the 100 trillion Mark. The money was in such a massive supply that it became useless. The paper currency lied on the streets, kids played with money bricks, and it was fed into the heat furnaces.
In 1944, when the Bretton Woods system was introduced to create the fixed international currency rates, it required a currency to be pegged to the U.S dollar that was in turn pegged to the price of gold. Congress set the value of one dollar equivalent to 1 troy ounce of gold.
Later, in 1971, to end the domestic inflation problems and address the international dilemma of a gold run, President Nixon ordered the "temporary" suspension of convertibility of the dollar to gold. The problems with the Bretton Woods system started in the 1960s when the European and Japanese exports were strong, the need for dollars was higher. The U.S balance of payments was constantly deteriorating due to internal problems such as inflation, military spending and along with a growing demand for dollars the country, the country printed more dollars that were not backed by gold. When there were more foreign-held dollars than the gold held in the United States, the gold window had to be closed to allow the government to pump more money into the economy while retaining the gold reserves.
In 2020, the U.S Fed printed 22% of all dollars in existence and injected them into the commercial banking systems. The government printed additional money to solve financial problems that were triggered by the COVID-19 pandemic.
In a 2020 interview, the Minneapolis Fed Chairman, Neel Kashkari said that there is an "infinite amount of cash". Upon asking, if the Fed is going to print more money to combat the COVID-19 lockdown situation, he said, "That is exactly what the Congress has told us to do." A few months ago, he told another interviewer that if inflation increases by 4%, he won’t be surprised, or get a shock. He also added; now the Fed will not "shortcut the recovery" like it had in the past and accepted that they were wrong all along, and the workers had to pay the price. This reflects the mentality of those who control the money supply.
Every year the US Fed increases its supply of dollars by 13% for the government to pay off debt. The number of goods and services remain the same, and the money supply goes on increasing faster than the real output, higher inflation is the ultimate outcome.
Today, one troy ounce of gold is worth $1,824 and therefore the US dollar has lost 92% of its value.
Fiat currencies are not sound money because the government taxes money, and even devaluation of money is a type of immoral taxation that is constantly lowering the purchasing power of our cash. We need a system where the money we own grows instead. We need money that grows in our bank accounts and rewards us. Money that is not subjected to immoral taxation, and inflation.
Well, now we have seen how fiat currency is a poor store of value in the long-term so why not switch back gold instead?
Well, the whole point of the fiat currency was to make the money scarce, transactable, and portable. It is heavy, can be easily faked, very risky to transfer or keep and cannot be transferred digitally. We live in the digital age, where we want to transfer funds instantly. To send remittances to our family back home or order a piece of clothing from another country, we need to transfer money digitally.
It is not easily divisible. You cannot break it down into smaller pieces without help from a professional goldsmith. If you cut the bars on your own, the resulting two pieces won’t be identical or of the same weight.
Also, gold is not decentralized. The central banks control the gold, and they have thousands of tons of gold reserves lying in their vaults. Following a list of countries that have the largest gold reserves in the world.