Prepare to Survive

In Part two we looked at how an isolated community may establish a currency, in this blog we look historically at money.

Many countries in olden times had chosen gold or silver as coinage, the reasoning being that the rare metals held their own value in weight. One down side of this was that people chipped away sections of the coins as part payment and even some governments would do the same as a way of collecting taxes.

As time went on many started to replace their gold / silver coins with cheaper metals (known as debasement). One of the concerns was that the coins no longer held the actual physical value in precious metals, so how could they be trusted in trade with other countries?

It was the International Merchants that noticed that one person’s debt held value and could be traded or transferred as paper money, an IOU or promise to pay. Merchant families became clearing houses, the trusted middle man, so rather than gold coins being physically moved between traders and countries, the paper IOU’s could be moved easily instead. Overtime this made these families very wealthy and very powerful, hobnobbing with royalty and governments.

The goldsmiths saw this happening and wanted in on the action. The goldsmiths who held the gold coins on behalf of the people, realised that they could loan out the coins to those who wanted them, so long as the coin owners had a note to state that their coins were safe and secured with the goldsmiths, they were free to issue notes of loan to others based upon this held value. Early forms of Banks were also getting on board and competing with the Merchant notes.

The rulers of the countries started to lose grip steadily as this function passed to the banks, so much so that Wars were being funded by the banks and merchants in the form of government bonds creating sovereign / country debt.

1694, The Bank of England was born, like many banks of the time the issued notes were backed up by the Gold held in the countries coffers. After the world wars and the Wall street crash, the US issued an order to buy up the people’s gold at a low set cost and started to buy up other countries gold distributing $’s worldwide. The $ becoming the world stable currency with other countries pegging their currencies against the $ as it was now backed by ½ of the worlds gold reserve!

In the 1960’s countries started to debase their currencies, foreign nations had had enough of the US printing excessive $ discovering that they held more dollars than the US had in gold, so they started to demand their $ value in Gold.

In a move to halt this Nixon severed the US currency from the gold standard, backing the $ now against Trust!

The inflationary model of currency devalues money every year, year on year, the US $ has devalued 96% of its original value!

Money held in the bank becomes the banks property to what they want, e.g. you deposit $100 into the bank, they can then lend out $97 to someone else based upon their promise to pay it back, the money stays in digital form in the bank. $94.09 of this can be loaned out, and again, and again, so the $100 turns into $3333? Money is magically generated based upon debt and trust to repay, known as fractional reserve banking.

If everyone wanted their money out there is only 3% of their money physically held in the bank, as such there wouldn’t be enough cash available. Scary hey!

In Part 4 we will finally start to look at Crypto currencies.

Part 1 doesn’t still doesn’t really explain money though?

So, let’s look at this another way, hypothetically if we took a small group of people, 1000 or so, and dumped them on an island (always my go to when trying to understand something!), where they each had their own area of land to settle, some were livestock farmers, some food growers, tradesmen & equipment manufacturers, etc. but there was no existing currency or monetary system in place.

They would need to develop a trade system, so that the tradesmen could eat and the farmers / people could have equipment made and maintained. This could be done simply by bartering goods for an agreed value, two chickens might be equivalent to a bag of potatoes, that may be equal to a small Knife, etc. So, money in this case is an “agreed value of exchange”, the value of the money is “backed by the worth of the item being traded”.

This works fine to point, however not in every case would both parties need the item that was on offer for trade, then it gets a little more complicated, the farmer might not need a bag of potatoes but he does need a knife, the blacksmith needs some potatoes so the farmer takes them from the Grower in exchange for chickens so he can trade for a knife with the blacksmith! Phew!

So, the group may decide to introduce a form of currency that can be traded on the island, this needs to again be backed with the value of the islands goods and services as agreed according to them. The considerations for the physical form of exchange (Money) needs to consider, durability – it’s no good if the money gets destroyed easily as once it’s gone – it’s gone! Also, it’s no good if the money can be easily copied otherwise people would just make their own, however there is a certain amount of trust assumed in a small group.

This is nothing new, past civilisations have used salt, yak dung, leather, shells, minted coins, and even prisons develop their own system of coinage like cigarettes.

For arguments sake let’s assume that the islanders have their blacksmith knock up some basic coinage, 5 sizes of coin and they have commissioned, 1000 – Size 5, 800 –  Size 4, 2000 –  size 3, 4000 – size 2, and 4000 – size 1.

The islanders may decide that the value for the coins is to be based upon the value of the potato? Perhaps, if 1 bag of potatoes is equal to 2 chickens or one small knife, and one bag contains 200 potatoes, and it takes 1 minute to dig 6 potatoes, therefore 360 potatoes could be dug in one hour. So, 360 potatoes = 1 hour’s work, and basing their smallest denomination upon 1 minute of work and deciding that 1 minutes work = 1 small coin. They may also decide that;

• 5 – size 1 coins = 1 – Size 2 coin
• 2 – size 2 coins = 1 – size 3 coin
• 10 size 3 coins = 1 – size 4 coin
• 10 size 4 coins = 1 – size 5 coin

So in total we have

• Size 1 – 4000 = 4000 coins
• Size 2 – 4000 = 20,000 coins
• Size 3 – 2000 = 20,000 coins
• Size 4 – 800 = 80,000 coins
• Size 5 – 1000 = 1,000,000 coins

Total value of coins = 1,124,000 – for short I’ll call these #’s – therefore #1,124,000 worth for the island which equates to 5620 bags of potatoes, 18,733 hours of work, 11,240 Chickens, etc.

This probably has many flaws but it’s a start and we’ll revisit this later.

In part 3 we will analyse our societies and how our money has progressed to modern day.