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Money is simply stored value. Its power is in its ability to exchange regardless of the material used to exchange for the money, or what the money is being exchanged for. It represents a more ‘ambiguous’ or ‘universal’ version of value.

Imagine a neighbor needs assistance installing a fence to protect his property, and in this case he needs help digging a couple post holes. Let’s say you help him for a hour or two to finish the project up. Now that you’ve created value for him (beneficial utility), you deserve compensation. Let’s say he helped a friend who owns a cafe, but the cafe owner couldn’t give him anything that your friend saw as useful at the moment.

So your friend writes a note saying “my friend here helped me with something, if you give him a meal, we’ll call our debt settled”. That note then becomes a representation of labor performed; or also known as money. Money is based off created value and labor already performed.

Since money is stored value you can use it to exchange for other forms of value (things already created). Again, money’s value lies in its usefulness, just as its usefulness lies in its value. For example if you’re hungry, you can take some of the labor you performed earlier in the day, and exchange it for food.

A good ‘money’ material is something that’s very useful. And the more people who also find it useful, the more useful it becomes (it compounds virally). Gold and silver got their start as money because of their unique and intrinsically useful properties.

Currencies however are different from money, because even though they allow the exchange of value, it’s only the representation of money. Currency got its primary start through goldsmiths, who would hold the gold (money) of their patrons, and issue a slip of paper saying how much gold they had stored at this place and any other relevant figures. Then the patron could take their ‘note’ (currency), which represented the money, and trade it with someone else for maybe some tools.

The merchant could then go to the goldsmith and redeem their note (currency), for gold (money). Notice how the currency was a representation of the money? Now of course some goldsmiths got into some bad stuff like fractional reserve lending among other things, but that system prevented a huge majority of fraud (especially at a large scale like today’s banks perform). This is why good currencies are backed by a resource of some kind that has intrinsic value. Usually gold or silver because of their one-of-a-kind properties.

Now take dollars for example. Currently this specific currency is a simulation of money rather than representation because it isn’t based on work completed (value), it’s based on the promise of future value creation (which is what debt is). The dollar used to be money (intrinsically valuable) in the early 1900’s before things like the “Bretton Woods Agreement” (and more), because it was backed by gold.

Banks make loans not on work you’ve done in the past, but on work you’ll do in the future (of which they’ll receive a piece). Your ability to perform that labor and create that level of value is how risky you are to loan money to. Because if you can’t create that level of value and have to default (“fail to fulfill an obligation”), they lose principle and their profit (in the form of interest).

‘Fiat’ currencies (fiat more or less means “because we said so”), are based on promises of future labor (debt) because the government has said “we promise this will be worth something”.  But If you’ve heard the story of the “Boy Who Cried Wolf“, you know you can make all sorts of promises and say all sorts of things, but the Speed of Trust will only last so long! That’s what we’re currently seeing happen with Greece (and eventually the USA if this trajectory continues). It’s constant talk of “No, we’re good for it! Trust us!” But ultimately if they can’t create enough value (in the form of Gross Domestic Product), they won’t be able to pay their debt or even the interest.

More on money, currency, and fiat here.