Evolution of Money

Bartering

Money originates from the concept of bartering, where commodities such as salt, cattle, sugar, grain, wood, cocoa, were exchanged. For a modern day equivalent this would be similar to prison life where money is restricted and toiletries and cigarettes assume a value of monetary quality. Originally money was a unit used to define a specific weight of a given commodity, so a shekel was a specific weight of barley, a koka was a unit weight of rice. Ancient China, India and Africa used cowrie shells as money, before graduating to punched metal discs. As coins evolved over time they ceased to be a unit of weight but served to denote a specific value.

Gradually gold and silver became the most common form of money, and early transactions would involve taking clippings to effect small denominations of exchange. However Europeans preferred gold whereas Asia preferred silver. BCE 1760 the Babylonians established the earliest system of economics and their laws formalised the role of money in society. The earliest form of paper money can be traced back to the Song Dynasty in the eleventh century, arising as merchants wanted to get around the problem of hauling around sacks of heavy metal coins. The Spice trade predated modern money systems. Merchants and traders were at the forefront of money creation from developing Bills of Exchange as an early form of credit, to the Deposits and Receipts traded by the money lenders and goldsmiths in London, who became the fore runners of the British banking system.

Banks, Banknotes and Bankruptcies

“It is not the man who has too little, but the man who craves more who is poor” – Seneca

In Europe in the twelfth century notched sticks were used to denote taxes due to the crown – these were known as Tally Sticks and they could be exchanged for gold and silver coins. The treasury subsequently realised that it could issue Tallies not backed by any specific tax but rather backed implicitly by trust in the monarchy to honour the value. The first European bank notes were issued in Sweden in 1661 by Stockholms Banco, as a form of representative money exchangeable for gold and silver kept on deposit. However the bank ran out of coins to redeem the notes it had issued and it ceased operating.

A more consensual and reliable mechanism of exchange and value came into the system when national banks guaranteed to exchange money into gold at a promised date, and they replaced individual private commercial banks, thus the bank notes in circulation gradually became authorised and controlled by governments.

Money has three broad characteristics:

1) As a unit of account
2) As a medium of exchange
3) As a store of value.

Credit Cards

Credit cards were invented in 1958 and in just over half a century they have virtually replaced cash, one in three of all transactions and most on line use credit cards. Plastic rules the world. Cheap credit keeps the wheels turning. In 2007 the debt levels in US households reached peak levels:

Car loans, student loans, mortgages, credit card debt all rolled up.

Way back when we worked and saved, now we have national tsunamis of debt. Predictably the central banks tried to solve the problem of debt – with more debt. In the last credit crash every major bank and investment firm would have gone broke if the Federal Reserve hadn’t intervened. Central banks are promiscuously printing money, it is new electronic money the central banks use to buy government issued bonds and other financial assets in an attempt to stimulate the economy. They call this Quantitative Easing, which is really an unconventional way of pumping more credit into the system. This causes asset prices – real estate and the stock markets for instance to artificially rise [inflate]. Hence the Titanic stays afloat, and the folks on board have dry feet.. for now.

Meanwhile money is disappearing as fast as good manners. Global economies are being kept alive but on a life support machine. Central banks love credit, but they hate cash. They can monitor, control and tax credit but not cash. Bank cashiers are instructed to fill out Suspicious Activity reports for large deposits/withdrawals of cash. In France it is illegal to pay bills with more than one thousand euros in cash, and worryingly banks are starting to charge simply for holding your cash.

Today’s money won’t even help you start a camp fire since its credit not paper.

Sovereign Money Systems

“He who loses money, loses much, he who loses a friend loses more, he who loses faith, loses all.” – Elenor Roosevelt

The sovereign money systems that we have today gives the state the unchecked power to print money, indeed controlling money has allowed governments to control the apparatus of power. Money funds governments, bureaucracies and agencies whose employees put their survival above all else. Nowadays a considerable number of ordinary people live from pay check to pay check. Once upon a time being a commercial bank employee in New York was a dream job, now as automation sweeps in and human-to-human interface is reduced, the same now part time bank employee in the world’s financial capital is in need of Government financial aid to survive.

This is a sign of the times.

By changing the rate of interest banks can influence borrowing, lending, saving and spending. A reduction in interest rates makes saving less attractive, borrowing more attractive which is supposed to stimulate spending. The opposite occurs when the rates are increased. Changes in bank interest rates also affect exchange rates and asset prices. Low interest rates can increase the price of stocks/shares/houses, such higher prices tend to increase the feeling of a household’s wealth. With regards to exchange rates an increase in interest rates tends to make assets more attractive to foreign investors, if the currency rate of exchange rises as a consequence of increased interest rates [it is not always that straight forward or predictable] that tends to make imports less expensive and exports more expensive. Theoretically the reverse is true if the currency exchange rate drops – a weaker currency is generally better for exports which become cheaper abroad, whilst imports become more expensive.

Major economies are shackled to a ball and chain of debt, and debt is growing faster than income and the means to pay it back. The typical US household now gets more in handouts than it pays in tax, the population is aging which again means potentially less income tax is generated. Post the 2007 global financial crisis the average incomes have remained static, people are not spending. They feel impoverished, under threat, and worse off, and that’s hardly surprising since: after all the hard working savers and tax payers stand to lose most.

Every credit expansion is followed sooner or later by a credit contraction.

Real money can stop circulating – people can hoard it under their mattresses, but it doesn’t disappear. However credit money doesn’t just stop circulating it vanishes! A bank loan which appears as an asset on the balance sheet can be written off to zero, a $100,000 stock portfolio can have zero value in a matter of days.

The USA has debt in excess of $17 trillion, if interest rates went up to 7% the interest alone would be a catastrophic $1 trillion pa. The ship would get sucked into a deflationary whirlpool, stock prices would nose dive, real estate markets would spiral down, global trade could grind to halt, while the international banking system collapses again.

The US, Europe, China, Russia and Japan are similarly afflicted and similarly vulnerable to a potential credit crisis, and the global markets are so intertwined that there is a high risk of contagion:

“America sneezes, the rest of the world catches a cold”
“A disillusioned British butterfly flapped its wings, and the global financial system goes into convulsions” [BREXIT]

Crypto Currencies

Crypto currencies represent the latest development in the world of money. The first crypto [electronic] currency was Bitcoin and it was created by an elusive lone software programmer known as Satoshi Nakamoto and then devolved, upgraded and maintained by a small core of globally based “geeks in gumboots.” It uses cryptology to ensure trust and fungability. It is an electronic payment system based on mathematical proof created digitally or “mined” by computers owned and operated by “miners.” All Bitcoins have a long string of computer code protected by a personal # key, which provides ownership and security on a giant ledger known as Blockchain.

A block of transactions is created, miners computers put it through a process to validate and create a new # by adding what’s known as a nonce. In theory the Blockchain ledger is tamperproof. In essence Bitcoin is more akin to the Tally Stick ledger based system than money per-se.

Crypto currencies such as Bitcoin are different from the “Fiat” money in our banking systems and modern economy, or the older, conventional money based on silver and gold. Bitcoin is based on maths and software. Central banks can print ad-lib amounts of money whereas only 21 million Bitcoins can ever be produced, although they can be divided into smaller denominations called Satoshis.

Bitcoin Compared to Fiat Money

‌•  Decentralised  •  Anonymous  •  Easy to set up [unlike bank accounts]  •  Transparent  •  Limited circulation  •  Encryption based  •  Lower transaction costs  •  Accessible

It is hoped that crypto currencies will revolutionise payments and lower costs: Typical international bank transfers cost $10-$15. Merchants using Paypal are charged with a 2.7% fee, credit card companies also charge businesses. Plus give people without bank accounts access to money via cheap Smart phones.

Perhaps ultimately money is defined not by what it is, but by how it is used.

Credit Crisis

“A nickel ain’t worth a dime anymore.” – Yogi Berra

Anger across the developed world has increased over the last 20-30 years. In the 2007 financial crisis people lost their job, pensions, homes, companies went to the wall, but the government bailed out banks, other countries anyone but you and I. They claim that the economy is expanding that employment is increasing but incomes are largely static, and $11.7 trillion of sovereign debt is trading with negative interest rates. Greece borrowed to pay for lots of things they couldn’t afford. Generally speaking people are only too happy to accept money that’s beyond their ability to re-pay. Perhaps it’s time to take a stand, to say “no” we are turning this money away, giving it back because it’s not good for our spiritual or other development to live beyond our means at someone else’s expense.

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