Money
Money is the medium of exchange. It pulls you out of the difficulties of barter. With money, you do not need the complicated duplication of want, especially in this global economy. Money is supposed to store the value you placed when you sold your products or services. When Gold was the medium of exchange, the value of money usually went up, i.e., you could gain value just by holding on to the money or just by saving the money. The constant increases in the value of money encouraged savings, which were, in most cases, ultimately used in investments. So, there was a continuous and ever-increasing money supply for investments because saved money was constantly growing. Investments with money that had real value and that came from the complex process of earning and saving were carefully made after a lot of scrutiny.
So, the chances of malinvestments were low, and most projects financed had a real potential for creativity, innovation, invention, entrepreneurship, competitive edge, and profits. In the early days of America, this phenomenon made the magic possible. America, the first known society built from the bottom up, was the best. America created the world’s largest and richest economy, most significant and richest middle class, and fastest declines in poverty rates ever within two hundred years, like in a blink of an eye in human history. Solid and honest money was one of the foundations for this miracle. Besides everything else, real money provides stability and predictability, encouraging the wildest ventures and risk-taking possible.
When money was replaced by currency, i.e., notes backed up by genuine Gold and silver reserves, the portability and safety of funds were significantly improved, which turned out to be even more beneficial for the economy and raised the standards of living even more and faster. Like real money, Gold, and silver coins, the currency was initially mainly issued by private banks and jewelers. There was competition in the money and currency markets, which kept the issuers mostly in line. Over time, the issuance of currency and notes made bankers realize that a tiny proportion of gold and silver reserves used to be claimed at any given time. So, they started issuing loans on reserves at interest. Initially, it was a secret, dishonest, and criminal act violating their contracts with depositors.
Sooner or later, the secret would get revealed and would cause a run on the bank. The bank would run out of gold and silver and default. This would also ruin the bank’s reputation, which in most cases would lead to its bankruptcy. Later on, banks came up with a better alternative. They offered a proportion of interest earned on loans to the depositors instead of charging a fee for the deposits if depositors would allow them to issue loans on reserves. This was not a bad deal for many depositors. Some still preferred to deposit for a fee in banks with 100% reserves. The first option made more sense for smaller and larger depositors, while the mid-level depositors would mostly prefer 100% percent reserves. Bank runs would still happen less frequently if a bank issues too many loans and would keep a smaller proportion as reserves or become unsound for any reason.
Then, governments started playing the card of standardization. “Well, many different types of money and currency from many sources make valuation and pricing hard. Plus, not all issuers are very reliable regarding the Gold and silver in issued coins and claimed reserves for the notes issued. So, the king issued official money or currency to have a uniform standard and reliable currency that supposedly made commerce and trade easy. Private banks could still issue competing currencies.
In most cases, the government could not compete with private issuers regarding standardization and reliability. So, they started developing laws leading to the government’s monopolization of money. For example, you could pay taxes only in the official currency.
As long as the coercive authority of the government exists, there are only two sure things: death and taxes. So, if you live in that territory, you must pay taxes; to pay taxes, you must have government-issued currency. These laws provided an unfair advantage to the government currencies, and only highly reputable private currencies could exist, which kept decreasing in size and numbers as the coercive taxes kept increasing in variety and size. Still, private currencies were competing until recently, when private currencies were outlawed entirely in many territories. Also, as expected, neither government-issued money nor currencies were standardized or reliable, at least in the long run. Soon, governments started debasing money by shaving the edges of the coins to fund warfare and welfare.
This went so far that people stopped using many largely debased currencies, and governments had to introduce coins with corrugated edges to assure people they were not shaved. A similar thing happened with currencies. Fractional reserves replaced the 100% gold reserves. Fractional reserves would encourage inflation, cronyism, warfare, and welfare.
Even this was not enough for the government’s ever-growing appetite for power and control. So, in 1971, Nixon abandoned the gold standard and went on to have 100% fiat money, i.e., unlimited amounts of money printed out of thin air at will. The world quickly followed suit. This pretty much took all the barriers off. Central bank printing presses around the world started running faster and faster, devaluing the currencies and causing incredible inflation, resulting in larger and larger boom and bust cycles. Cheap money results in huge malinvestments and long-term investments, which ultimately fail because of uncertainty caused by inflation, causing a bust. In a natural economy based on real commodity money, this causes shrinkage in the supply of money because interest rates increase due to increased risk until the solid demand increases the supply of goods and services in demand, making the employment conditions better. Bust also decreases spending and encourages savings, providing an impetus for investments. However, the exact opposite happens when central banks regulate interest rates completely arbitrarily. Stupid central bankers think that the bust occurred due to the shrunk money supply, which in reality was the consequence, not the cause, and try to improve the situation by supplying even more money, hence making an even bigger bubble, ready to be popped again while bringing even more devastation.