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Saturday, June 5, 2010

What is Money

When we talk about financial crisis really what we are talking about is money.In order to explain as simply as possible the causes of the financial crisis we really need to look at what is money. So lets go back thousands of years to a time when people bartered so understand where money came from.

Lets imagine I am a Chicken Farmer 

Lets also imagine that I have a friend Dave who is a Potato Farmer

And another friend called Tom who makes Cart Wheels

Now I like to have potatoes with my chickens and Dave likes to have chicken with his potatoes so we come to arrangement that whenever Dave wants to have a chicken I will swap him one for a bag of potatoes.

Equally I need a new wheel from time to time so I come to an arrangement with Tom that every time I need a new wheel I swap him 2 chickens and get my new wheel.

The problem arises when Dave needs a new wheel for his cart because Tom does not like potatoes they have no value for him. Dave has nothing to offer in exchange for a new wheel so we have a breakdown of the barter system.

So this is where money came in. Communities, societies, countries would find something that was commonly agreed had value and use this as a means of exchange. This has most commonly been gold and silver but tobacco leaves, shells and salt have also been used as a form of currency because they were all perceived as having value. So instead of swapping his potatoes for my chickens Dave could get gold or silver from me and then give that to Tom for a new wheel.

Note this that money is supposed to act as a store of value. I create value by raising chickens but may not wish to immediately exchange that value for other items of value (potatoes or wheels) so the money that we use is therefore used to store that value to be used at a later date. The money itself is not the value, I create value through my work and labor, I am the money, not the pieces of paper.

As time went by people got tired of carrying bags of gold and silver around so they would deposit this with a goldsmith who would then give them a receipt for their gold or silver which they could then use to buy things. This is how the modern banking system developed and even up until the late 1960s you could walk into a bank in the USA and exchange your dollars for gold. The money was considered "as good as gold" because it was redeemable in gold.

Today wherever you live in the world: Europe USA, Australia, Japan, Switzerland, your money is backed by nothing. It is printed out of thin air by governments, it only has value because they tell us it does - and we believe them. The only thing supporting the money is our belief and confidence in governments and the financial system, take away this confidence and the money is worthless.

You could say that it does not matter that they are just worthless bits of paper as long as everyone agrees that this is the method that will be used to do trade. That as long as you only create more paper when I raise another chicken, or Dave grows some more potatoes then everything should work fine.

The reality is is that money is not just worthless bits of paper, it is not just created every time someone creates more value.The fact is all money is debt - it is just a piece of paper saying that someone owes money to someone else

To explain what I mean about this we need to look at how money is created. Which we will go into more detail about in the next part.

In Gold We Trust in an online Coin Bullion and Scrap Gold Calculator giving up to the minute Scrap Gold Prices, Values of Silver Dollars and other Junk Silver Coins


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