From trading cows to ones and zeros, Pablo Escobar's money eating rats, and how our money is all debt based currency

Finance & Fury Podcast

Hi everyone and welcome to Finance and Fury! Today we’re going to look at our current monetary system; what is considered money, and also the future of our monetary system.

Today’s episode will be a fairly quick episode, and will be an introduction to a series of Furious Friday episodes that we’ll be doing over the coming weeks.

Our current monetary system is actually debt-based fiat currency. This means that every dollar that you have is a debt obligation by a central bank to eventually repay.

This is pretty important to look at, because unfortunately this won’t last forever. It’s only been around for 40 years, and we can already see the signs of this system struggling to keep up with the never-ending ability to create ‘money’ out of thin air.

Money is created with 1s and 0s – for every $1 there is a debt obligation to the central bank to repay this. Every dollar that you have is backed by some form of debt, whether it be debt created from a commercial bank (fractal banking reserve) or when it is issued and bonds are created and traded in exchange.

The three functions of money

1. Store of value – can I hold on to the money and spend it at a later date knowing that it will hold its value until tomorrow, next week, or even next year?
2. Unit of account – You can think of money as a yardstick; the device we use to measure value in economic transactions.
3. Medium of exchange – Is widely accepted as a method of payment

Major characteristics of money

These vary between options and are why some forms of currency are adopted preferably over others.

1. Durability – Will it last? Can it be stored easily?
   • Technically cash durability isn’t as good as gold – Pablo Escobar and his money eating rats
2. Portability – can you carry it around easily? Gold bars are pretty heavy.
3. Divisibility – Similar to unit of account where you can break the units down into smaller levels
4. Uniformity – is every unit the same?
   • Can it be debased/devalued?
   • Coins are not immune
5. Limited Supply –
   • Counterfeiting
   • Who is creating it? Gold is better than fiat currency from this perspective
6. Acceptability –
   • Barter is hard
   • Fiat became easier and became a legal tender by decree

The combination of all of these characteristics + how we value it = what we adopt as money. This comes back to a thing called ‘subjective value’. Do we think we will be able to use it in the future? (Money riots of the past)

Money may take a physical form, as in coins and notes, or may exist as a written or electronic account. It may have intrinsic value (commodity money), be legally exchangeable for something with intrinsic value (representative money), or only have nominal value (fiat money).

The Mesopotamian civilization developed a large-scale economy based on commodity money. The shekel was the unit of weight and currency, first recorded c. 3000 BC, referring to a specific weight of barley, and equivalent amounts of silver, bronze, copper etc. The Babylonians and their neighbouring city states later developed the earliest system of economics as we think of it today, in terms of rules on debt, legal contracts and law codes relating to business practices and private property. Money was not only an emergence; it was a necessity.

Money can be a number of things

1. Cows, sheep, grain – used in barter economy
2. Shells – Ancient China, Africa, and India
3. Golden coins – Goldsmith bankers
4. Paper with gold/silk backing it
5. Debt based Fiat

Some of the things we’ll be looking at in the upcoming episodes;

1. The way we currently do it (debt-based fiat) and inflationary targets
2. Bitcoin, and also crypto currency in general
3. Gold – the old school way
4. What will happen once the debt bubble breaks, and the rise of SDRs (Special Drawing Rights) which I believe will be a form of global reserve currency in the future. They have been around since 1969, and are used as a global currency reserve, but you can’t own them – only the IMF can! This is going to be a VERY interesting topic so stay tuned!