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Money — What It Is, What It Isn’t, and Where It’s Headed

Aristotle, over 3,000 years ago, held that for something to be money, it must have three functions: it’s medium of exchange, a unit of account, and a store of value.

Medium of Exchange

For something to be a medium of exchange, it must be accepted for the purchase, and sale, of goods and services. That is, you or I can buy something from a vendor and pay with something acceptable to the vendor.

That something was physical currency for centuries. In the 20th century came the idea of the credit card, and then the debit card. Cash has become the drunken uncle everyone puts up with because they have to.

Two examples illustrate that analogy.

Visa, the payment processing service, started offering discounts on fees to vendors who stopped accepting cash in their stores. If you wanted to shop there, you used a credit card or a debit card, or you went elsewhere.

In 2018, there was a mad rush by Swedes to have a microchip inserted into their wrists, so they could pay for everything by swiping near a card reader. No more having to carry cash, or even credit cards or debit cards.

Sweden’s goal was to get rid of cash. After the experiment was running for a while, they realized that physical money still had a place in their economy.

Unit of Account

That term is economic-speak for a measure of value. The U.S. dollar (and all other monetary units) has value for three reasons:

  • people and businesses accept that it has value
  • they can and do use it to settle payments and debts
  • the U.S. government requires that taxes be paid in it

That last reason is the one that sets the bar for the other two. If the government didn’t force people to use the USD to pay their taxes, they’d be free to use anything else as money (such as Bitcoin).

Which is what El Salvador announced in 2021 that it would start doing. It now accepts Bitcoin as legal tender for all purchases. At this time (early 2022), acceptance by Salvadoran people and businesses is low.

Store of Value

For something to be a store of value, it must still have some buying power months or years in the future. You and I must be able to save it.

Ecuadorians discovered in the early 2000s that this is the weakest leg of the tripod. After the country’s sucre dropped from 8 to the USD to about 2,500 to the USD, the government shut down all banks.

The country then switched to USD as its money and its currency. Millions of people had their savings wiped out. Twenty years later, many still use hard assets as their store of value.

The country is dotted with unfinished homes. People would rather start building a home and add to it whenever they have extra money than leave it in a bank or credit union.

Money’s Seven Properties

In addition to its three functions, money has seven properties:

  • Divisible – It can be divided into small units.
  • Fungible – Each unit can replace any other unit.
  • Durable – It can be used over and over again without wearing out.
  • Portable – It’s easy to carry and transport.
  • Acceptable – People accept it for payments.
  • Uniform – All units of a particular denomination have the same value.
  • Limited in supply – The number of units in circulation must have a set limit.

Unfortunately, fiat money (USD, CAD, GBP, etc.) is no longer limited in supply. Governments and central banks are printing (on paper or digitally) vast sums of money.

The U.S. government and its central bank, the Federal Reserve, “printed” about 80% of all the USD money ever in existence since the beginning of 2020. The store of value function of the USD isn’t working too well either.

Since 2013, when the Federal Reserve began its operations, the USD has lost 98% of its value.

And the government has no plans to stop printing money.

To be fair, no other country that controls its own money/currency has plans to stop either. And those that don’t control their own (like Ecuador) keep borrowing more and more.

Each new dollar makes those already in existence a bit less valuable. That is the accurate definition of inflation. Higher prices are the symptom.

Zimbabwe inflated its money supply so much that it eventually printed 100 trillion dollar notes, which were still worth nothing.

Zimbabwe $100 trillion noteZimbabwe's $100 trillion note, worth more now as a curiosity than it was as money.

Our current round of inflation also has the double-whammy of supply chain issues and, in the U.S., a self-induced worker shortage, which have resulted in empty shelves of just about everything.

When too much demand (people with money) meets too little supply, prices go up.

See this article for more about inflation.

Money vs. Currency

In Aristotle’s day, currency was money. These days, there’s a vast difference.

For the Greeks and the Romans, there was only metal. Gold and silver coins.

There was no way to simply “print” more gold and silver, so governments inflated the money supply by debasing the coins they minted with base metals.

Today, money is intangible. It’s only numbers. It’s what we have in our savings and checking accounts. It’s something that can be transferred digitally.

Currency is the tangible stuff — the bills and coins we use day to day. These require physical transfer.

The bills ($1, $5, etc.) are, in reality, promissory notes. In the U.S., the Federal Reserve promises to exchange a piece of cotton in your wallet with… another piece of cotton with the same numbers printed on it.

When the U.S. was on the gold standard, each strip of cotton could be redeemed for the equivalent value in gold.

That promise went bye-bye in 1972, when Richard Nixon took the U.S. off the gold standard. Other countries did the same soon after.

Money has intrinsic value. Currency has no intrinsic value (other than the value of the metal in a coin, but that value would be considered money).

Money is a measure of value. Currency is used to quote the price of that value.

In other words, the value of something could be said to have a price of $100 USD, while that same value might be $125 when quoted in CAD.

Fiat Money

Fiat money is money created by decree.

The U.S. government says that it backs everything from the penny to the $100 bill. It used to back $500 and $1,000 bills, but stopped backing them, and took them out of circulation, due to money-laundering issues decades ago.

This support, along with the requirement that all taxes must be paid using U.S. money, gives the money its value.

If the U.S. government announced that on January 1, 2024, Dubble Bubble bubblegum would become the money of the land, it would be. Simply be decree, and by forcing everyone to pay their taxes using pieces of gum.

The Future of Money

What’s more likely is that the U.S. will create a central bank digital currency (CBDC). It will be blockchain-based, but unlike Bitcoin and other cryptocurrencies, the Federal Reserve will control every aspect of it.

More importantly, it won’t be transparent, and it won’t be anonymous, as cash is now.

So they’ll know everything you and I spend our money on. And knowing that, they’ll be able to restrict where we spend our money. We won’t be free to spend it where we want.

If the government of the day decides that it doesn’t like what a certain group or business is saying or doing, it can simply stop everyone from being able to support that group or buy that business’s products.

1984 is getting closer and closer, at least when it comes to money.

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