Money!! Do we know enough about it?
Weekend is here and it’s time to learn something new. Since its Laxmi Pujan, lets deep dive more into Money.
Past couple of weeks I have been watching YT videos about money. Here are the some of them I watched: How The Economic Machine Works by Ray Dalio , Hidden Secrets of Money
I recommend them going through, worth spending the time. Here are my notes.
What is money: It is anything which follows following properties.
- Medium of Exchange: Should be able to trade easily, like coins are easy to trade than Oil.
- Unit of Account: Should be able to be numbered and counted
- Durable: Should sustain for usable amount of time.
- Divisible: You should be able to get change of it.
- Portable
- Fungible: Units should be replaceable, meaning 1USD with me should be same as 1USD with you.
- Store of Value: Should be able to retain its purchasing power over a long time.
If this is money then what is Currency ? Well currency is money except the last property “Store of Value”. What you were able to buy with 1 USD in 1950, you can’t buy the same thing with it now. i.e USD is currency not money.
If we go in history we will realise how gold and silver are the Money we have seen. They follow all the properties of money. It has been used since the time of Greeks.
Now we know money and currency, how the current world deals with it?
In 1900 the USD (currency) was backed by gold(money), meaning X amount of USD note was a check to the people, when they submit this check to the bank they will get Y amount of gold.
In 1944 a new world monetary system came to the Bretton Woods system, where each currency was backed by USD, which was then backed by gold. Hence everything was backed by gold.
1971, USA removed direct convertibility of the USD to gold. Hence USD was no longer backed by gold, hence all the currencies in the world are not backed by gold.
So that means currencies are based on faith, unlike previously where they were backed by gold. This is know as Fiat currency. History tells us all the Fiat currency goes to zero!!!
USA example of how it makes currency:
- For political agendas, politicians spend more money than they earn, this is called deficit spending.
- To pay this deficit, the Gov borrowed currency by issuing a bond.
- Bond: A contract which says, give me X amount of currency and I will pay principle and interest in future,
- Bond auction makes large banks buy part of national debt and take advantage of interest.
- When the bank sends this bond to the federal reserve its signs a check .
- But the federal reserve writes checks there are no bank deposits, on which money is drawn and hence when the federal reserve writes a check it is creating money.
- Now banks are taking checks and buying more bonds.
- 92–96% of all existing currency is not created by the government but by the banking system.
- When you put 100USD in a bank, say 10% is reserve ratio, the bank can loan out 90USD of it. This 90 USD then again goes to market and some person can again put this in the bank and 10% it will be reserved and again same things will happen. So just by original 100$ banks have created more money.
So that’s everything I got from these documentaries. There is a ton of info present in the documentary which you should go and check out. If I might have missed something or written something incorrect(I am just a beginner in this topic), please correct me.
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