Our money exists to transport products and services through space and time. It is not meant to preserve their value
We can conduct our economic affairs in three ways:
1. Without means of payment
One exchanges concurrently and in case of time-delayed exchange by means of credit (I build a boat with you, in return I get fish from you in the future). This is how it was happening about 5,000 years ago, when people still lived in manageable associations. Social coercion guaranteed that borrowers would always pay their debts. Works very elegantly, but prevents the emergence of cities.
In larger associations, human relationships are more abstract. So you need a substitute for reliance on social coercion. Since at that time, and until a few hundred years ago, there was no state structure, accompanied by a appropriate legal system, that everyone wanted to trust, trust had to be replaced with facts.
2. With means of payment which themselves have an (intrinsic) value
If trust cannot be relied upon, credit transactions must be transformed into concurrent transactions. This works best by interposing an „agent“. This agent had to be seen as valuable by all parties involved, and it also had to be as easy to divide and transport as possible, as well as easy to store. In the beginning, this was all sorts of things; for the Sumerians, about 5,000 years ago, it was barley. Pretty soon it was precious metals, until finally gold prevailed.
The essential advantage of such an agent is that through him one could trade any product with anyone, even supra-regionally. Not only did one not have to trust each other, one did not even have to be sympathetic.
Its main disadvantage was that it made a process one dimension more complex. And whenever something becomes more complex, it also becomes more unstable. Problems resulting from this lability always troubled people, but they were never so great as to outweigh the advantages until a few hundred years ago. Only when something happened that had never happened before in human history (or could never happen because the necessary means of payment was missing) did this „agent“ reach its limits.
From the end of the Middle Ages, the economy expanded enormously and exploded with the onset of the Industrial Revolution. Very roughly calculated, the global economy grew only fourfold in the first 1,700 years of our era, i.e. imperceptibly. The situation was different when it grew tenfold in the following 300 years, and became untenable when it finally grew tenfold again in the 20th century. For the „agent“ was practically fixed. It had to be limited because that was precisely why it was considered valuable.
Theoretically, the „agent“ could have been maintained, but practically, a major problem, among many other problems in a wide variety of areas, made itself evident: If an economy grows, but its means of payment is fixed, then people become richer simply by not spending their money, but saving it. In other words, they don’t invest in real estate, securities or other assets that benefit people, but actually put it aside. And the better this works, the greater the incentive not to use the „agent“ but to put it aside, i.e. to save.
This can only have been right for those who owned many of these „agents“, i.e. gold. All others will have recognized soon that this is neither the point, nor can it be the purpose of a means of payment and is certainly not fair.
Fortunately, by the beginning of the 20th century, people were already sufficienty civilized to no longer have to circumvent the trust in social coercion with an „agent“, but to replace it with a trust in something different.
3. With means of payment which have no (intrinsic) value of their own
This differnt something is the modern state system alongsinde with the corresponding legal system. Of course, it is not perfect. Just as the trust in social coercion was not perfect. But it is powers more efficient and effective than money, which refers to another value (barley, silver, gold, shells, whatever).
Because it offers all the advantages of a means of payment, i.e., it serves as a unit of account and can transport value over time and distance, practically for free. But without the disadvantages of commodity money, which derives its value from an underlying value.
The essential mistake in thinking that is generally made is that money today is worth nothing because it is not backed by any real values. As already mentioned, means of payment are particularly good when they have no value of their own. The fact that they had one for thousands of years was not an advantage, but a necessary evil. An evil that was small enough as long as the economy did not grow.
The misguided conclusions that arise from this error in thinking are such as
We are forced to believe in an abstract value. (often followed by: as soon as sufficiently many people no longer believe in it, the monetary system collapses)
On the contrary, one must believe in abstract values, such as that of gold (or art, bitcoins, or NFTs). Admittedly, the belief in gold is very deeply rooted among us, will not disappear anytime soon and, because it is belief, cannot be invalidated with factual arguments. We do not need to believe in the value of our money today, because it has no value and should not have any. Money is supposed to make our economies possible, and to do that we have to trust that our institutions are built stably and run effectively. At its core, this means that debtors will pay their debts. Admittedly, trust can never be as robust as faith, but it is open to factual arguments. The structures and processes can be monitored, criticized and improved.
And what if things do go wrong? Then of course there will be a shock wave (which no one wants to know about), but it won’t be the end of the world. In brave moments I even dare to assert that the shock waves may have ebbed away after months. Half of the population will not even suffer a loss of wealth because they have no financial assets at all. In any case, whenever rulers were endowed with sufficient power (or ignorance), they were always desperate enough to pull „money“ out of a hat in some way. They didn’t need a modern credit system to do so, and they were never prevented from doing so by a strict gold currency. Our advantage today is that power has never been so decentralized.
We have money forced upon us that is purposefully (or unintentionally, because central banks are simply incompetent) continually losing value, and dramatically so. This is outrageous covert expropriation.
Money is supposed to enable our economy, not to preserve or even increase wealth. There are oodles of other options for that, such as precious metals, gems, art, collectibles and, most recently, Bitcoins1Etherum and similar currencies, as well as so-called „shitcoins“ are not addressed. The former, because blockchain technology is at the forefront of these, the latter, for reasons. and NFTs. Should digital assets actually prove their worth, there is a lot to be said for them compared to other, long-established, alternatives. As a store of value and a nest egg, but not as a means of payment.
If one nevertheless decides in favor of the most liquid safety cushion, namely cash, then one pays for this „abuse“, or for wanting to hold on to the advantages of liquidity, in the form of inflation.
The government should stay out of the monetary system. It gives it an unreasonable amount of power, and besides, it can’t hanlde it anyway
True, monetary affairs involve a lot of power, but by the same logic one would have to demand that the state basically stay out of our lives, and also give up its monopoly on power. Moreover, if the state gives up that power, someone will take it over. Someone who can provide the best money, and who that will be will be a surprise. We are fortunate today that this power is decentralized and controlled. The real question, which is far too rarely addressed, is another: How can it be that such great power, possibly greater than that of governments and parliaments, can be exercised by institutions that are not democratically elected?
Whether the state is capable indeed is questionable. It is a bit of an exaggeration, At most, to claim that monetary science and experience is at a stage that is comparable with the stage that medicine was in the Middle Ages. The alternative, namely „commodity money,“ is nevertheless associated with far greater disadvantages in comparison. In any case, more intensive education of both the elected decision-makers and the general population is desirable in this respect.
Finally, for the sake of argument, if one happens to be jubilant about the introduction of Bitcoins as a national currency, as happened in El Salvador on Nov. 7, 2021, then one has not understood the functions and tasks of money sufficiently. It is not the start of a new era of monetary system, but the official announcement of the collapse of the state system. Bitcoin can be very helpful in such situations, but it testifies to the relapse into dark eras and is truly no reason for celebrations.