The Truth About Money

Money — we all love to have it, and we all have to use it. Often, though, we don’t talk about it, which leads to so many of the misconceptions circulating today. The majority of us exchange our time for money, and don’t really know what that means. In order to be able to talk about and use money efficiently, best practice is to understand what money truly is.

A Brief History of Money

Before we had what is the current accepted form of money, people bartered with one another. Farmers had crops, hunters had game, and so on and so forth. When an individual needed a resource they couldn’t produce on their own, they would trade their product or skill for whatever they needed. This free exchange was great…unless the trades were one-sided. If a shepherd needed fish to eat, he might be looking to trade some of his wool. But what if the fisherman had no use for wool? The trade likely wouldn’t take place.

Free trade can only take people so far. Instead, groups of people began to create a medium of exchange in their towns, cities, tribes, etc. The medium need only be easily accessible, yet able to be regulated — seashells, salt, tally sticks, and other items came first. Trading was no longer a game of chance — ”Do I have what they want?” It instead became one of accumulation. Later came gold and silver.

Aristotle was a huge proponent of gold. In his opinion, the four main characteristics of gold made it so acceptable as a form of currency.

1. Gold is durable. It doesn’t rot or erode, which makes it great for repeated use.

2. It can be easily transported. Putting gold in a pouch is much easier than herding a flock of sheep to market for trading.

3. Divisibility — gold can be split into smaller pieces. It can also be weighed and manipulated into coins of roughly equal size. It was therefore easier to ensure a specific value.

4. And lastly, gold is intrinsically valuable because of the time and effort needed to mine the gold. The value is amplified by the limited supply (in part due to the tremendous effort of collecting it).

Gold became the foundation, at least in the beginning, for money as we know it today — paper money and coins. Paper money was first documented in China, as a certificate. The certificates were a derivative or declaration of the gold and silver. Only slightly farther in history, came paper money that was partially backed by gold and silver. This means money could be redeemed for the commodity of gold if one so desired.

Banking and Modern Currency

In the early years of the United States, central banking was introduced. Before the Federal Reserve was created in 1913, there were two central banks responsible for the regulation of money. Afterwards, the Federal Reserve became the entity in charge of controlling the nation’s money supply.

At the end of the Second World War, the world was devastated and decimated. This called for a new outlook on the monetary system as many large nations understood. The Bretton Woods meeting of 1944 saw new rules and standards for the major economies of the world, in order to create stability after uncertain times. Thus, the Gold Standard was born. The U.S. dollar was established as the reserve currency for the whole world. As such, all currencies were backed against the dollar, and the dollar backed against gold.

The Gold Standard lasted a while, but was ultimately abandoned in 1971 by Richard Nixon. He was alarmed at the rate at which U.S. dollars were being converted into gold, so decided that the U.S. would no longer support the conversions. This became the birth of Fiat currency, or currency that was not backed by anything. In some ways, reminiscent of the original trading medium of shells or salt — it had meaning because a group said it had meaning. The money, then, started being issued by the government when necessary, rather than as a specific representation of gold. So money began with the free markets, and was monopolized by governments over time.

So, Why Fiat Currency?

If you’re thinking, why would someone accept Fiat currency if it’s not backed by something, there are two reasons. Fiat currency, in part, works because of the stability of a country like the United States.

The second reason is due to the Federal Reserve’s system of currency. The Reserve lends money to the commercial banks, which pay interest to the Reserve. The banks then spread the money to the public. For the Federal Reserve, that money is an asset (yet a liability for the commercial banks). When money is lent out, the collateral is the ability of that person to pay their debt back.

When debts are created, interest is owed and paid. The bank assumes risk in order to make money, which they multiply by making additional loans. Debt makes money, which is part of what makes Fiat currency effective for the Federal Reserves.

Bitcoin works in a similar way. In 2009, someone created Bitcoin out of “thin air.” This currency was backed only by data, and created an intricate system parallel to investing. It was a way of creating money, of creating value, in a similar way. Fiat currency, in a way, opened up these opportunities.

Can You Print Money?

In the technical sense no, but theoretically, that’s exactly what you can do…if you are your greatest asset. When you position yourself in such a way, there aren’t many limits to what you can do to create wealth. Your imagination and drive will either limit you or enable you. And if you’ve assessed yourself as a liability? Turn yourself into an asset by learning about yourself, developing strategies, and by nixing bad habits. When you do so, you create opportunity.

The Bottom Line

Money, as we know it today, is a representation of value. When you produce and create more than you consume, you’re left with a surplus of money. What you do afterwards with that value you’ve accumulated is very important. Do you save it, do you reinvest it into your business or assets, do you spend it? Your choices can affect not only what is left over, but the impact of taxes.

If you produce and create, the representation of that value is money. And if you can deploy that money in ways that creates more value for others, guess what? Through cash flow investments and assets, and through correctly playing the tax game, you get to keep more of the money that you produce and create.

Money has value now, not because it’s backed by gold, but because what it represents of our contributions. It represents value and is a medium of exchange — and that’s super important because, if we don’t trade freely and fairly with one another, what do we do? We revert to our most animal instincts, like violence.

Like anything, money is a tool, and represents a way to place value on and trade freely for the things we need and want. It is not inherently evil, but is capable of amplifying who and what you are. Like any tool, it’s all in how you use it.

You can listen to the podcast episode I recorded on my new show, Cashflow Investing Secrets here.

Live your Freedom, Live Your Legacy, On Your Own Terms,

M.C.

M.C. Laubscher is a husband, dad, podcaster & Cashflow Specialist. He helps business owners and investors create, recover, warehouse & multiply cashflow. You can learn more about exclusive cash flow strategies in M.C.’s new video series at https://www.yourownbankingsystem.com/