Good Money vs Bad Money

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Why we use the actual form of money?

It's extremely hard to thrive if you operate in a mindset of scarcity and fear, so having money is very important.

In the past, people each had an occupation. They were usually hunters or farmers and their wealth was exactly what they managed to produce: wheat, sheep, bread, cheese, fish and so on.

The fisherman also needed the oysters and bread to survive. His only option was to go to the market with the fish he caught and trade it for other goods. Imagine them going to the market with two buckets of anchovies to buy a loaf of bread and a piece of cheese. There was no money, so they resorted to this exchange of goods, which we call barter.

Only this exchange didn't always work. For example, a sheep farmer couldn't give up a sheep to buy a sheep skin. The sheep was worth more than the sheepskins and he couldn't cut the sheep just to give the sheepskinner a leg. He was left with the rest of the sheep and maybe the baker didn't eat sheep so he didn't want to trade sheep for bread.

That's why the need arose for a means of exchange that was of equal value to everyone. I give the sheep for 100 coins and then the 100 coins I can divide: 10 to the shepherd, 5 to the baker, 20 to the fisherman and so on...

Coins were not always made of metal like gold and silver. Over the millennia people have used animal skins, shells, salt, mirrors and all sorts of other alternatives. How did we get from shells to gold to paper money?                                                                                                                                  The characteristics of good money...

Over time, the characteristics of good money have become more concrete; what makes money valuable:

 1. Divisibility

As we explained earlier, it was difficult to divide a sheep into a sheep farmer, a baker and a fisherman. The sheep was difficult to divide in order to trade with it. It took time, it was complicated.

That's why the exchange unit had to be easy to divide into smaller measures. Today, dollars can be divided into submultiples such as 10 pence, but also into multiples, i.e. $10, $50, $100, etc... Whatever you want to buy, you can pay for it right down to the last penny.

2. Portability

If the sheep was alive, it walked by itself. If you had to give it in pieces, it was harder to carry. If the market was in a neighbouring village and you didn't have a cart, it was even more complicated. Thus the need for small, easy-to-carry coins. That's how it evolved then, but over time it turned out that coins were not easy to transport either. How would you prefer I give you $1,000? In coins or in paper bills?

3. Limited quantity

If I had taken a kilo of bananas to a mountain sheep village, I might have been able to bargain a sheep for the exotic fruit. In a place where everyone has sheep, and no one has bananas, bananas are worth more. On the other hand, if I had gone to India where they have a lot of bananas, with an Eastern European sheep, maybe I could have traded 20 kilos of bananas for one sheep. In a place where everybody has bananas, and nobody has sheep, the sheep is more valuable.

Globally, gold is harder to find, in limited quantities, compared to silver, bronze, shells or salt. You'll soon understand why gold has become the most important currency.

4. Durability

If the sheep dies, you can't exchange it. If you sell it in pieces, you'll have to find a buyer before the meat spoils. Paper money can easily catch fire. Over thousands of years, gold has proven to be the most durable metal of all. This is the most important characteristic of gold, which makes it so valuable. Gold does not oxidize, does not degrade, does not break down over time. Throughout the wars, buildings have been destroyed, land has been destroyed, fires have been set, wells have been poisoned, and many other misfortunes have occurred. But despite all this, gold has been recovered. That's why gold was also the reason for many wars, even most of them.

5. Social acceptance

Returning to the example of the sheep in India, there was no point in going to sell a sheep in India if it was of no interest to them. Yes, perhaps a Barbary sheep would be unique in India, but if nobody had any use for it, it would have no value there. Before gold was recognized as a precious metal, you could have tons of gold because it was worthless. As the world began to accept the value of gold worldwide, it became more valuable. Go leave a $200 tip in Dubai. You may feel generous, but to the person receiving it, it won't be worth much.

These are the 5 most important characteristics of good money. Remember that money is a tool of exchange, not currency: pounds, euros or dollars. These are just examples of money. Good money must be divisible, portable, limited in quantity, durable and accepted by those you exchange with.                                                                                                                                                                 The best form of money?

You may have already noticed that today's banknotes and coins don't meet these criteria very well. Even gold is not perfect. Not even bitcoin is ( although investing in it is extremely good ).

Gold is in limited supply because it is known how much gold there is in the world, and on average 2% more is processed every year. It is predictable. If more gold were discovered, its value would drop significantly.

As already mentioned, gold is the most durable metal, it cannot be damaged. Also, 10 gold coins are easier to transport than a sheep and it is easier to share 10 coins with other people than a sheep. So gold has evolved to be the world's most valuable currency. It meets all the criteria of good money.

Although it meets all the criteria of good money, gold is not perfect.

Imagine you have a gold coin nowadays and you want to buy an ice cream. The gold coin is worth $1,000 and the ice cream is worth only $5. How do you divide your coin so you can enjoy the ice cream but keep the rest of the gold? It's no longer divisible enough. It fulfilled its debt when it traded easily with such coins, but today it is no longer an option.

Also, how easy are 10 gold coins to transport? How about 100? 1000? Caravans of merchants were often attacked by thieves to steal their money. Coins may be easy to transport, but not as easy as paper.

Thus the need for banknotes. In English the term banknote tells you exactly what it is: bank-note. A note, a note from the bank.

Instead of carrying your gold coins around and becoming easy prey for robbers, the banker keeps the gold safe for you.

He keeps your gold safe in his vault and in return you get a paper showing that you have gold in his custody. So you could travel without worrying about your money, go to the market or to another continent, with just a paper stating that you had gold kept safe in a safe.

But a single piece of paper that proves you have money in the bank is not divisible. You can't go and buy an ice cream with a paper saying you have a gold coin in the bank. And that's how banknotes came about: $1, $5, $10 and so on.

So banknotes appeared to prove that you have gold in the bank. Whoever held these banknotes could recover the gold from the banker.

But banknotes are just paper, they have no value. It's not good money. Banknotes are not durable. Although they are now made of plastic and not paper, they can still be easily destroyed.

But they were a good substitute for gold as long as they met the other criteria:

- higher divisibility than gold

- much better portability

- limited supply - there could not be more banknotes than gold in the bank. If you exchanged paper for gold, the banknote was destroyed, it was worthless.

- social acceptance - as long as people trusted the banker who produced the banknotes, people agreed to use them as a tool of exchange.

At the country level, it is the state that keeps the gold safe and produces the paperwork to prove how much gold it has in its account. We accept dollars, we agree to exchange $5, $10, $100 with each other because we trust that the state has gold in its account, on the basis of which these papers exist. So instead of getting paid in gold, you get the countervalue of it in paper, so it's easier to trade. If you go to the bank with the papers, you can get gold instead, and the papers are destroyed.

At least, that's the way it's supposed to work. Except nowadays banknotes don't have that value anymore. For decades now, banknotes have not been generated from gold reserves. Thanks to Richard Nixon, but that's another story.

Now we use banknotes because the government says so. The state tells us that plastic banknotes have value and to keep using them because they make sure the economy works properly. There are now more banknotes in circulation than gold in the state's reserves. These banknotes based on debt and loans, have no real value. You can't go to the bank to exchange paper for gold because they don't exchange it anymore.

States are 'printing' more and more of this kind of paper in the hope of controlling the economy, but the more of it there is, the less value it has.

If you're confused and don't understand any more, you have a right to be. It makes no sense that states have decided to stop using gold as the standard. This is not just the case for America but for most countries on Earth.

I told you before, this printed money is called fiat money. That is, money that has value only because the government says so. The pound, the dollar and the euro are all fiat money.

You could live your life in peace without knowing these things. But you can't have financial freedom if you don't understand what money is and how it works. Now you're one step closer to that understanding, and you have to appreciate yourself for it. I'm glad I can share this knowledge with you and I hope you're glad you're here too.

You can finally understand why Bitcoin has value.

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