The Money Functionality 2min read
Wealth flows from energy and ideas -- William Feather
In its most basic form, the purpose (functionality) of money is to be a medium of exchange across space and time.
Since the days of Aristotle, we have understood the specific properties required for money to fulfil its purpose. Specifically money needs to be:
- Divisible: Easily divisible into smaller amounts for exchange
- Durable: Able to stand the test of time and maintain its properties
- Recognisable: Easily verified as authentic by those using it
- Portable: Easily carried securely in your pocket
- Scarce: Challenging to manufacture, requiring time and effort to source and thus be resistant to supply inflation and manipulation
Old friends and old wine and old gold are best. – Romanian Proverb
Historically the free market self-selected precious metals, and in particular Gold as it's prefered money. However, Gold has three limitations that paper money evolved to fix. Gold suffers from:
- Pour recognisability, that requires costly verification during exchanges
- Being heavy when accumulated, making it a challenge to transport and hard to secure.
- Having a high value to weight ratio, making it difficult to divide into smaller amounts.
Silver went part of the way to solving the value to weight ratio and was used as a division of Gold. But ultimately with the use of telegrams banks were able to verify settlement of exchange across space/geography, people started using trusted third parties to verify and secure their Gold. The trusted third parties inturned issued promissory notes of varying values and checks as mediums of exchange. Solving Golds limitations, but ultimately the promissory notes where backed by Gold stored by the banks.
Over time trusted third parties became banks, and ultimately banks become central banks. And promissory notes became government-backed currencies[^1].
The US Central banks started pushing out the currency to gold ratio, putting more USD into circulation. This created a problem that surfaced when large holders of USD (nation-states) begun calling on the USD promissory for Gold. The US Central bank didn't have enough GOLD storage for the USD in circulation. So the peg was broken. Ending the errior of the free economy and ushering managed economies.