Money: How It Started & How Its Going
The fall of the dollar? The rise of Bitcoin? WTF is going on with our monetary system?
“Some people are so poor, all they have is money.” - Bob Marley
If one of our hunter-gatherer ancestors from thousands of years ago visited a westernised country today, they would no doubt look around in jaw-dropping awe at the effortless survival we’ve secured for ourselves. Their awe would extend to the abundance of our items, the ease at which these items appear upon demand and possibly most of all; the disregard with which their modern descendants seem to appreciate their state of prosperity.
To achieve the same level of awe from a modern human, you need only show them a large bank balance. Our bodies would be almost indistinguishable from each other - our basic needs for survival and satisfaction have not changed - yet what our ancestors valued most in life is fundamentally different from what we value today.
It begs the question - how did money, which started out as a medium of exchange, suddenly become the only objective of our pursuits? When Bob Marley gets it whilst most of our economists don’t, I think some explaining might be needed.
As much as we like facts, us humans much prefer stories, so I’m going to explain this conundrum with a fact-filled story. This story begins when our species first discovered money, ending as we face the possible demise of our monetary system. For those:
Reading to understand: I hope this fills in some blanks. My article is hopefully a simple way to understand this dilemma but I encourage you to listen to others far more knowledgable on the topic (Ray Dalio is a good place to start)
Pro Bitcoin/Crypto: You’ll experience a change from dopamine to cortisol pumping through your body approximately half way through but I hope you continue on to the end. I welcome respectful and constructive debate
Anti Bitcoin/Crypto: Try empathise with the other side. Bitcoin bro’s (the ones with good intentions) are simply fighting for control and equality of wealth, something Mr Buffett himself has gone “Ackman-level” activist on. We should care too and #endthefed isn’t such a bad idea
Introduction:
The complexity of our modern world can sometimes make simplicity seem preposterous, but all too often this is used as a ploy by people who benefit from complexity and are exposed by simplicity. 5000 years of debt cycles, the evolution of money from coins to digits, the monstrosity of our monetary system and globalised trade – these are complex subjects which have challenged the most intelligent minds, past and present, and have intimidated everyone else in between.
I truly believe simplicity is the key to unlock understanding and improvement can’t help but follow. So how can we understand these gargantuan systems simply? You’re definitely going to get tired of me repeating this but in honour of Mr Munger – Invert, always invert! Let’s go back to the beginning to try and understand this thing we now call money.
How did money start?
The earliest concept of money is believed to have first originated with our early ancestors as a transaction medium in place of their traded goods. Instead of trading say, bananas to fish? They traded ‘money’ for bananas or ‘money’ for fish. Money could have been represented by an item such as shells, beads or something pretty/shiny, or it could have simply been a ledger or record of debt.
This concept began a new agreement whereby you could trade different products with ease, over time, and trust that debts will be repaid in future. Conventional wisdom and reason teaches us that money is simply an ancient communication tool of trust to enable collaboration between groups for their shared survival and growth.
Money framed our perception of value.
Our ancestors originally compared products based entirely on their quality (good to good) to determine their value. This required them to think about how much work went into producing each product and how useful it really was to them.
But through the medium of money, products came to be represented by coins making their value already determined with a price. Instead of calculating your own value with critical thinking and assessing what it is worth to you, you were presented with a price based on quantity and compared it to other items based on quantity (price to price or coins to coins).
If your valuation differed, extra effort and haggling was required on your part.
Why is this change in perception important?
Calculating value is a valuable skill.
Our ancestors would have been naturals at calculating value. Securing food would have taken considerable toil for them, costing energy for the sake of their life - they knew the worth of a piece of meat. This skill was used less and less, the greater we relied on prices and not real value.
We still had an inkling for calculating value as recent as 100 years ago, back when sliced bread had just became the greatest thing. My great grandmother knew the value in a hot chicken as she would slaughter her own if the price got too high, even by 5 cents. But today when the ingredients in our average loaf of bread have travelled the world for 3 months, calculating the real worth in your trolley becomes quite the herculean task.
How do we calculate value today? We tap on a screen, open our door and unpack our food into the fridge, then feel annoyed about the expensive items and feel good about the discounts. Which leaves little surprise that we value dollars so greatly, if all we care about are price tags.
Sadly, this rare skill of calculating value has not just been lost in our supermarkets but also some of our largest financial markets on Earth.
Ok so maybe we struggle to value things, but doesn’t money have value itself?
If you wish to create anything substantial in life or in business, trust with whom we collaborate with must be based off words and deeds. Similarly, our communication tool for trust needed a value both symbolic and real.
As such, money began to be represented by finite metals painfully mined from natures depths to create silver/gold coins, symbolising trust and retaining real value (real/tangible/intrinsic value).
This changed our use case for money.
Money now had its own worth. The intrinsic value within its raw material made it a candidate as a storehold of wealth to be stockpiled as a rival to gold whilst still using it as a transaction medium – win, win! If only the evolution of money stopped there, alas, it did not:
Through credit (or debt) – the value of money is diluted
Credit really is as old as money itself, it seems humans of every era were suckers for expedient growth. Credit creation dilutes the value of money until the debt is repaid, but the dilution is permanent if the debt never gets repaid
Through Nixon – all money became de-coupled from gold
There’s a fair share of blame to be scattered all throughout history, but Nixon firmly set us on our current path. By terminating the Bretton Woods agreement Nixon stopped the convertibility of US dollars into gold, meaning the US dollar was no longer backed by anything. With the US dollar being the reserve world currency and such, all currencies followed suit and became backed by nothing (or fiat currencies)
This effectively removed the intrinsic value from our currencies required at the very start, and some feel that it removed the symbolic trust as well.
So WTF is our money now?
Our money is now paper money with no tangible value plus any perceived value has been significantly diluted by credit (which may or may never be repaid).
We also play a game of trading money to make more money, sometimes irrespective of the goods or asset entirely. You would not be remiss to think that money today actually symbolises the very opposite of its original purpose - a symbol of distrust and a tool to defraud, not collaborate.
In the eyes of our ancestor, this would appear as if our tribe has ceased productive work to go out collecting shells. This would seem very silly to our ancestor. If we depend on another tribe to supply our items for survival whilst we spend all our time collecting shells to buy those items with, we run the risk that one day our shells are exposed to be completely worthless - leaving us lacking in our means to provide our tribe with what we need to survive.
How have we survived up until now?
We are reliant on a fair marketplace to provide fair pricing for the functioning of our system. The general theory is that supply could be priced by the seller, the buyer could negotiate with demand, and fair competition within the natural limits of consumption and production would dictate an organic marketplace. If supply and demand are not equal, prices will get too high or too low and correction will ensue.
But this system breaks down when corrections are ‘snoozed’, and this is exactly what Nixon-esque style money management and current central banking policy has done. These ‘snooze’ functions work by artificially synthesising demand through increasing the money supply or artificially cheapening supply by price controls and subsidies - killing price discovery in the process.
This has effectively created a market with prices untethered from reality. Our market participants seem incompetent at calculating reasonable valuations or worse, are incentivised to speculate and untether prices from reality even further. Not to mention that little old thing running this machine, now known as fiat money or more simply, paper.
This is what inspired ‘Satoshi Nakamoto’ in 2007 to invent a solution known today as the de-centralised finance movement and create the worlds first digital and decentralised currency - Bitcoin.
This is where we find ourselves today.
Have a breather if you need, that was heavy. Here is a video if you need a minute to chill, of a chimpanzee sharing an apple with a tortoise. Brilliant.
Dear lord - is there hope?
Let’s not lose sight that money is just a tool which has proven to be effective at creating things we need and want, even when it is just made of paper.
The human connection behind the money and the quality of what we’re producing should be our focus. Unless you collect tools - the storing up of money is stored potential, not wealth.
What is our potential?
Humans at the outset had a goal, even if the goal was skewed to impatient growth, to pool resources in a civilised manner and collaborate in an effort to secure our survival in a lasting and meaningful way. Trade is still superior to war and sadly wars are not a thing of the past.
But, we still need a tool to work together
Here is where the story diverts, with one camp championing the cause to create our own powerful tool separate from the system. Hello De-fi!
Upon realising the state of our money woes, a growing group has bought Bitcoin or crypto as protection against a currency collapse. A second group have noticed religious fervour behind this new asset class and couldn’t deny their FOMO. I won’t comment on the third.
The first and second groups are propelling each other, giving the third group a larger hunting ground to catch prey. It would all be justifiable (and probably quite vocally by me) if Bitcoin or crypto actually solves our problem, but does it?
Let’s summarise what our problems are:
Debasement: central banks printing more money and lending too much credit, devaluing our money
No Tangible Value: Our money is not backed to any asset with tangible value for risk protection when worst case scenarios occur
Bitcoin / Crypto only solves half the problem
Debasement gets solved but we get no tangible value. Basically, it stops tribe leaders from printing more shells by getting all the tribe members to believe in invisible shells that can’t get duplicated. This leaves the tribe members open to scammers, theft, power outage, internet outage, losing a password, the tribe leaders banning your invisible shells or the biggest death blow of all, tribe members losing their faith.
Collective faith offers no tangible value which unfortunately can’t be proven until tested. In the meantime you are storing potential which could be put to better use.
What solves the whole problem?
Backing our currencies to something with tangible value again, like we once did with gold, solves the entire problem at once. The tangible value of gold:
Has been esteemed by humans for thousands of years
Is not only valuable but useful
Takes severe effort to create more of which acts as a limiter for bad credit
Central banks money printing will be restricted according to how much actual wealth they hold in gold. Plus, everyone in the world already uses our existing currencies with the payment systems already in place. Win, win, win.
Simple? Easy? No way. This option would require cleaning up a significant amount of bad debt which means hard work and pain, but nothing worth doing has ever been easy. In biblical times they had a similar thing called a Jubilee. Again, humans haven’t changed that much.
In Closing
Not all is lost if you still have a tribe who are aware that shells aren’t really the objective, and are willing and skilled enough to get back to productive work. If we have a tribe who think the answer is joining a church to promote belief in invisible shells, we really are in trouble.
A search to find blame is so often our human tendency. We gain immense satisfaction from a pursuit for justice, which often results in punishments of the past but lacking solutions for the future.
A search to understand why each one of us on an individual level views money as intrinsically valuable, above all else, with the sole objective to grow it is much more helpful - if you wish to solve the problem.
Should you ask a fellow human, what are you growing towards? How much growth is enough? Is ever-growing GDP an accurate measure of success? Blank stares and furrowed brows would likely follow.
The lack of critical thinking, at the deepest level, is what I am compelled to understand in an effort to restore common sense to our financial world again. If we remember institutions are simply humans in collective form, improvement of the individual means improvement of institutions, effortlessly.
If you made it this far - thank you and well done, it was a long read! As mentioned, I welcome respectful and constructive debate. Got any ideas? I’d love to hear them.
I enjoyed reading this article ... many points to think about.