[Notes] The future of currency

Summary of the book "The Future of Money"

In the face of time, the eternal dilemma of human beings is how to store the value they produce. Human life is finite, everything else is infinite, and more of these things can be produced with more human time invested.

currency

Regarding the inscription, I think it is a good description of one of the functions of currency, which is to store the value we create very well. Some people create material products such as houses and computers, and some people create non-material products such as knowledge theories. Others are willing to use the things they create in exchange for the things we create, but the things we create do not exist all the time, so we can Convert it into currency so that we can later exchange it for something created by someone else.

The above is explained from the perspective of stored value. The author explains the problem of exchange coupling from the perspective of exchange at the beginning: value scale, time mismatch, space mismatch. The solution is to barter indirectly, so the transaction intermediary is The ultimate function of money. From this perspective, money is never a consumer product or an investment product, but a pure intermediary. The most important qualities of this exchange intermediary are marketability, as mentioned above, divisibility, time marketability (the value does not change with time), and spatial marketability (the value does not change due to regional changes).

So the author put forward this concept:

Stock-increment ratio : It can indicate the hardness of a certain commodity as currency. A low stock-increment ratio of money supply will rapidly increase and dilute the wealth of the saver, while a high one will maintain its own value through time, which is expressed in time. of marketability.

Once any item is used as a carrier of value storage, it will increase supply. Any item whose supply can increase significantly will begin to depreciate after becoming currency. The impact of hard and soft money on society and individuals is far more profound than financial gains and losses.

original currency

In the following examples, the common reason why an item becomes currency is a high stock-to-increment ratio, but the reason for losing its currency status is also the reduction of the stock-to-increment ratio after the introduction of external forces (such as modern technology) :

The difference between the story of West African glass beads and that of Yap is that West Africa has a larger population and smaller glass beads, so it is a slower, more hidden process in which the wealth of Africans is gradually transferred to Europeans.

Other similar currencies such as shells, livestock, salt, etc. have similar results. Once the currency loses its supply limit, the holder's wealth will quickly evaporate, so metal currency is slowly produced.

metal currency

There are two disadvantages of metal currency:

1. Two or three types of metals that serve as currency standards will cause price fluctuations due to changes in supply and demand, which will in turn cause economic problems. For example, silver coins have experienced a decline in their own value due to an increase in production and a decrease in demand;
2. The government and those who minted money privately would reduce the content of precious metals in the currency, and part of it purchased would be secretly transferred to them;

And gold has maintained its currency role in the long term:

1. Excellent chemical stability;
2. Output is minimal, and the gold stock has grown at an annual rate of 1.5% over the past 70 years;

Silver is close to gold, but nowhere near as good:

1. Silver can be corroded and consumed by industry;
2. The earth's crust contains more gold than gold and is easy to purify. The annual supply growth rate is 5-10%, which is about 20% in modern times;

In the 1970s, the Hunt brothers decided to re-monetize silver, believing that rising prices would attract more people to buy silver, which in turn would drive prices up further. The process was similar to the copper example below, but no matter how much they bought Silver was unable to keep up with the continued shipments by miners and holders, and they ended up losing about $1 billion.

Why can’t other precious metals serve as a store of value?

Assuming that the annual demand for copper is 2000W tons and the price is 5000 US dollars/ton, the total value is about 100 billion US dollars. If a rich man wants to use copper to store his 10 billion US dollars of wealth, then 10% of the purchase volume will inevitably cause As prices rise, more capital and labor will be invested in the copper mine business, and more copper will be produced. Assume that 2 million tons of copper are newly produced and the price rises to US$6,000/ton. The millionaire's money was spent.

At this time, the demand has subsided, the market has returned to the original supply and demand level, and the price will fall back to US$5,000/ton or even lower (supply increases), and the rich man's assets will be significantly reduced (most of the copper he purchased is located in Above US$5,000/ton).

To sum up, increased demand causes prices to rise, which in turn brings more demand to further stimulate prices. Producers can expand production capacity after increasing their income, which means that increased supply causes prices to fall.

Other cases

government currency

1. Although both are issued by governments, there are significant differences between gold-convertible and non-gold currencies:
2. Fiat currency originally gained marketability by being redeemable for gold, and gold’s monetary status was not conferred by the government;

After the start of the First World War, the major belligerents stopped the convertibility of paper money into gold. After leaving the gold standard, the government could use all the people's wealth. So four years later, the currency of the defeated countries depreciated much more than that of the victors. In order to reduce Due to the harm caused by currency devaluation, various countries have begun to implement monetary nationalism.

The author points out that the Federal Reserve's inflationary policy caused huge bubbles in the U.S. stock market and real estate market. Roosevelt's New Deal was also an enlarged version of Hoover's economic intervention policy. After Roosevelt banned private holdings of gold, the U.S. dollar devalued by 41%, which also enabled the United States to obtain the capital to participate in World War II. . World War II came as countries competed to devalue their currencies and trade barriers grew higher.

After the establishment of the Bretton Woods system, monetary expansionism became the new global norm. The U.S. government could obtain seigniorage by expanding the supply of U.S. dollars and did not have to worry about international balance of payments deficits. Therefore, almost every president since then has increased government spending and witnessed the national debt. growth and the decline in the purchasing power of the dollar.

The above chapters first analyze the characteristics of currency from the perspective of its functions, and propose the concept of stock-increment ratio, and then describe the history and evaluation of some currencies' development and demise.

time preference

Sound money :

1. It can maintain value for a long time, so that people have more energy and motivation to think about the future and reduce their time preference;
2. Base trade on stable units of account, promote market development, and free trade from government control and coercion;
3. A necessary condition for individual freedom from tyranny and oppression, the ability to create money would give the state apparatus excessive power over the people;

Time preference : refers to an individual’s comparison of current value and future value.

The more currency can maintain its own value, the more it will motivate people to delay consumption and use resources for future production, and the lower people's time preference will be; but if you live in a war-torn area, individuals may lose their lives at any time, so they will prefer In order to enjoy the present, the time preference will be higher. In addition, taxes will also have an impact. If the tax is higher, the individual will retain less income and save less for the future. Therefore, taxes will have a greater impact to some extent. Save rather than spend.

The same is true for the decline in the purchasing power of money. The nominal value remains unchanged but the real value declines. Low interest rates will promote borrowing and investment, but will also reduce the returns of savers and investors. Therefore, people will save less and borrow more. Assume that money compounds on average every year. If the growth rate is 10%, then your assets will double approximately every 6 years. If not, it means that others have used leverage to take away your money (example from BeatleNews).

The following content is to continue to explore the difference between sound currency and unsound currency from various angles, and analyze the possible impacts. Maybe I didn’t think deeply enough. I personally think that the foothold of the various arguments behind is still time preference and the minter. Embezzlement may also be because the author is from Lebanon, and the changes in the country have given him a unique view of the Keynesian economic system; in short, the author shows us a new but persuasive monetary view from the perspective of the Austrian School of Economics, giving us Inspiration - Try not to store your assets with items with a high stock-to-increment ratio.