Ben Sinclair

Ben Sinclair

CTO @ Tithe.ly

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What is money?

The last 2 years have been a whirlwind for me and my family with our baby girl being born 14 weeks early (she’s doing well 16 months on), the ongoing health crisis, and all the mental battles that come along with a crazy life. But I’m back baby and wanted to share something a little different. Today’s topic is money.

Photo by Kier In Sight on Unsplash Photo by Kier In Sight on Unsplash

In 2021 I went down the rabbit hole and learned A LOT about the history of money and what money looks like today. We have an Australian All-in meet-up coming up in November and we plan to have some quick lightning talks on any subject other than work. I started writing my lightning talk on the subject of money so I figured I may as well document it here.

It’s brief and a lot of credit goes to Saifedean Ammous and his book The Bitcoin Standard as well as Robert Breedlove and his What is Money podcast. Super thankful for people like them who desire to help educate people like myself who grew up in the current system and thought it was just how things are.

TL;DR

  • There have been many different forms of money over thousands of years.
  • There was always someone trying to make more of it to benefit themselves.
  • All forms of money to date have eventually failed.
  • The world needs hard/sound money that no one can control the supply of.
  • Stock-to-flow ratio is a great way to determine the scarcity/abundance of something.

Definition of money in 2022

A current medium of exchange in the form of coins and banknotes; coins and banknotes collectively.

Before money

Humans have bartered pretty much forever. Bartering is the direct exchange of valuable goods with one another.

This form of exchange works great in a small community where a butcher can trade some meat for some firewood. Both parties stay warm and can cook meat.

But when you need to scale to a large number of people, an orchid owner trading 1,000,000 apples for a house isn’t going to work.

Primitive money

Early on, items like glass beads were used as a form of monetary exchange in Africa. Glass making was hard and expensive in Africa making more wasn’t easy. It worked well.

When the Europeans arrived and realized they could make the glass beads easily, they went back to their home countries generated more of the glass beads, and flooded the market back in Africa. Soon the Europeans bought up everything, the value of the glass beads dropped and it eventually contributed to the slavery situation in Europe and North America.

Monetary metals

Eventually, money was moved to metals which were again harder to produce. It started with metals like iron and copper but over time, rarer metals like silver and gold eventually became minted into coins.

Governments and counterfeiters reduced the metal content in coins and again ruined the system and devalued the currency.

The gold standard

Eventually, the world started centralizing the gold in banks and handing out coins and banknotes that were backed by the gold they held. If there was a billion dollars worth of gold in the bank, there would be a billion dollars in coins and banknotes in circulation.

In 1944, the US dollar became the world reserve currency and they stored the gold to back it.

Government money

In 1979, to help fund things like wars, the US took the US dollar off the gold standard which allowed them to print infinite money. No longer was money sound or backed by anything.

And that’s where we are today. You can see how broken the system is with debt, inflation, financial crises, etc. The global health situation and recent inflation events have opened the eyes of people who would never have thought twice about how money works.

Sound money

Sound money is money not subject to sudden appreciation or depreciation in value. Another way to put it is hard or stable money. It’s a store of value, something that should hopefully keep or appreciate in value over a long period of time.

Gold is a great example of a store of value. It’s hard to produce however, most of it is controlled mostly by central banks. Nowadays, Bitcoin is becoming a digital store of value that no one can control which excites me.

Here’s an example of how much government money sucks and why we need sound money. In 1978, an average house in the USA cost 242 ounces of gold. In 2021, that same house would cost 216 ounces. Houses have become less expensive when valued in gold. However, in 1978 an average house in the USA cost $59,000 but in 2021, it now costs more than 7 times the price at $423,000.

That’s a BIG eye opener of how money loses its value because it just gets inflated away. Saving all your wealth as money in the bank like our grandparents told us is financial suicide.

Stock to Flow

The Stock to Flow (S2F) is something that measures the scarcity/abundance of something.

Gold, for example, has a S2F ratio of 62. If you owned all the gold in the world today, in 62 years, you’d only own half the gold. So as great as it is, humans can create more.

Silver has a S2F ratio of 22 whereas copper has a S2F of 1.

Bitcoin is currently sitting around 57 but it increases every 4 years based on how it is programmed. One day it will have a S2F of infinity because it has been programmed to stop generating new coins once 21 million coins have been mined.

What now?

That was a lot to take in. I hope it whets your appetite to know more. Before you go out and buy up different investments, invest in your knowledge and understanding. There are tonnes of great books, podcasts, advisors, and more out there who can help you better understand how money works and how to set yourself up in the future. And you don’t need to be wealthy to start investing in your future.

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