Is Money Spending Its Final Years?

The Era of Aging Money

Money is something everyone tirelessly pursues day and night, yet only a few truly understand its nature. If you seek to acquire wealth, your first need is to comprehend what money actually is. Without this understanding, you may spend your entire life struggling to make ends meet with no tangible results from your efforts. In this article, we aim to explore what money is, where it originated, and how it can be effectively utilized—an essential topic that cannot be overlooked.

The content presented in this article is adapted from the book Broken Money by Lyn Alden, a macroeconomic analyst. It was also featured in a video titled Money is Broken by “Guy” on his YouTube channel. This piece is undoubtedly worth reading.

The Declining Value

Lyn Alden states in her book: “There are over 160 currencies in the world today, most of which are monopolized by governments. Except for a select few, the majority of these currencies rapidly lose value over time and are rarely accepted outside their respective countries. While energy production and electronic innovation have consistently advanced, improving human welfare over the years, the global financial system has not improved and continues to hinder economic productivity.”

Although this reality is more evident in developing countries, the lack of fiscal restraint and the rising debt and deficits in developed nations have exposed the same issues there. Across the globe, countries are engaging in trade amid waves of inflation and bank collapses.

The question arises: where does the fault lie, and what causes this economic decay?

The answer is that the connection between money and currency has been completely severed. Currencies like the euro and the dollar, once backed by tangible assets like gold, now have no such backing.

When the gold standard was officially abandoned in 1971, money and currency acquired entirely different definitions.

From that point on, governments and central banks were free to produce currency in unlimited quantities—one of the primary causes of inflation and inequality.

The unfortunate part is that we continued to believe that transactions in conventional currencies were equivalent to trading in gold, whereas that has not been true for 50 years. Thus, it can be said that none of us has earned money since 1970; we’ve only earned currency, which diminishes in value daily.

Understanding this leads to two fundamental questions: What exactly is money? How can one earn money when income is received in conventional currencies?

Stay with us until the end of this article to find answers to these crucial questions.

Game Theory

In discussing the definition of money, Lyn Alden dismisses the notion that money started with shells, coins, or similar items. She argues that money began with ledgers—records summarizing transactions and tracking ownership.

Alden believes ledgers likely existed since the dawn of human civilization. She provides evidence to support this claim:

In tribal societies, people tended to record the favors they did for one another. For instance, a hunter who shared part of his catch with another hunter who hadn’t been successful expected the favor to be repaid in the future.

Interestingly, such exchanges occurred only among people who trusted each other. Transactions were never conducted with strangers or those who were unlikely to be seen again.

The reason was simple: those familiar with one another would eventually repay favors, while strangers were less likely to do so.

An intriguing fact is that when people knew they wouldn’t encounter someone again, they often behaved deceptively. This belief suggests that the drastic increase in population and the shift from tribal to urban living amplified antisocial behavior due to a reduced likelihood of repeated interactions.

In ancient times, when people knew they were unlikely to see someone again, they often exhibited deceptive behavior. It is believed that the sharp increase in population and the shift from rural tribal communities to urban living heightened antisocial behavior due to the reduced likelihood of encountering the same individuals again.

This lack of trust among people in larger societies is closely linked to a broader field of study known as game theory.

Money and Status

Ledgers came with their own set of challenges, leading to the advent of barter systems. Tribes exchanged surplus goods with one another. However, these surplus items were not always mutually needed. To facilitate trade, universally needed goods or services were required.

Lyn Alden explains that seashells were used as a common medium of exchange (money) because they were scarce and challenging to collect. They were easy to carry and could also serve as ornaments. Most importantly, unlike other goods, shells did not perish or decay.

Certain types of shells were traded across continents, such as in North America, Africa, and Asia. The oldest traded shells found in South Africa are snail shells dating back 75,000 years.

In tribal communities, someone with an abundance of shells was seen as having rendered significant services to many people and was thus regarded highly. Alden views shell-based trade as a clear example of the link between money and status.

Technological Advancement and the Decline of Shells

The concept of ledgers and transaction summaries—tracking ownership—dates back 75,000 years.

Since shells were naturally occurring, their use in trade reflected a system entirely governed by nature. Nature determined the supply of shells and their allocation.

What happens as technology advances and trade expands beyond tribal communities to cities and other tribes? The value of shells declines, ultimately rendering them worthless. Consequently, people needed better alternatives for trade.

The Evolution of Commodities Used as Money

Since seashells could not permanently fulfill humanity’s needs as money, they were replaced by other money-like commodities that possessed more characteristics aligning with the properties of money.

Lyn Alden’s Seven Criteria

Lyn Alden identifies seven criteria for selecting something capable of serving as money:

1. Divisibility: The ability to divide it into smaller parts.
2. Portability: Ease of carrying, transporting, or transferring it.
3. Durability: Resistance to wear and decay.
4. Fungibility: Each unit being equal and interchangeable with another.
5. Verifiability: The ability to easily authenticate it and detect counterfeits.
6. Scarcity: Difficulty in increasing its supply.
7. Utility: Its usability and functionality.

Thus, ideal money is divisible, verifiable, scarce, functional, portable, and highly durable. Despite these criteria, tribes worldwide, without explicit consideration of these seven attributes, universally concluded that the best medium to serve as money was gold.

Gold does not rust, decay, or transform over time. However, it was inconvenient for small purchases. Consequently, humans turned to other precious metals like silver and copper, which were also used as money.

The Misconception About the Concept of Money

Lyn highlights a critical point in her book: you cannot arbitrarily designate anything as money and integrate it into the economy. If the wrong item is used as money, its value quickly approaches zero because a few individuals, motivated by self-interest, manipulate its supply. As a result, real forms of money like gold and silver inevitably resurface as proper alternatives.

After examining various forms of money throughout history—each eventually devaluing to zero—Lyn attributes gold’s ultimate victory to its limited supply.

Since the beginning of recorded history, gold’s supply has grown at an average annual rate of 2%. In contrast, other precious metals, with higher supply rates, have appreciated less in value compared to gold.

Some metals, despite being less scarce than gold, became valuable due to their utility—for example, iron and aluminum in construction.

Interestingly, even gold coins haven’t been immune to manipulation by governments and central banks. Authorities would shave the edges of gold coins, reducing their size to produce more coins from the trimmed pieces, effectively devaluing the coins.

This process was slow and subtle. Lyn uses the example of Roman denarius coins, whose gold purity declined from 95% to 5% over 500 years. This gradual devaluation was so slow that most people in society didn’t notice it.

Devaluing gold coins in ancient times occurred at a slow pace, such that reducing the purity of Roman denarius coins from 95% to 5% took 500 years.

Why Gold Triumphed Over Silver

Two main reasons explain gold’s definitive triumph over silver:

Isaac Newton’s Decision: In 1714, while overseeing the mint at the Bank of England, Newton set the gold-to-silver value ratio very low (15.5 ounces of silver to 1 ounce of gold). This prompted most nations to adopt the gold standard, following Britain’s lead.

Technological Advancements: The advent of paper money backed by gold eliminated the need for silver as currency. Silver’s lower value and better divisibility made it suitable for smaller transactions, but the shift to gold-backed banknotes reduced its monetary use.

As a result, gold transitioned from being everyday money to becoming an ancient store of value.

A subtle point Lyn mentions in her book is that if you travel anywhere in the world with gold coins or jewelry, you can easily sell them at a fair price relative to the local currency.

In the fourth part of her book, Lyn discusses the differences between the Commodity Theory of Money and the Credit Theory of Money. She proposes a Unified Theory of Money, viewing money as inherently a ledger. From her perspective, money combines the properties of both commodity money and credit money, representing a seamless integration of the two.

Banking and Remittance Systems

The history of bank remittance systems dates back thousands of years. These systems involved networks of trusted merchants providing banking services along the Silk Road. A simplified example of this system is described below:

Imagine Person A wants to send 10 gold coins to Person B, who resides in another city. Instead of physically transporting the 10 coins to City B, Person A gives the coins to Merchant A, a trusted figure who knows a counterpart in City B (Merchant B).

In this arrangement, instead of physically transferring the coins, Merchant A sends a letter to Merchant B, requesting that 10 gold coins be given to Person B.

Merchant B delivers the coins to Person B with the understanding that the original amount will be settled later between the merchants. If Merchant B breaches the agreement, Merchant A severs ties with them, excluding them from the remittance network. However, if the coins are delivered without discrepancies and the transactions remain mutually beneficial, the merchants never actually need to exchange gold.

This innovative system of remittance and ledger-based settlement eliminated the need for physically transporting gold, leading to faster and more secure transactions.

In 1494, Italy introduced a revolutionary financial concept called Double-Entry Bookkeeping, dividing accounting ledgers into assets and liabilities.

For example, when 10 gold coins are paid by a bank to Person B, the bank records the coins as an asset, while Person B is held accountable as the debtor. This model laid the foundation for the modern banking system.

Similar to the remittance system, double-entry bookkeeping enhanced security, efficiency, and reduced the need for traditional physical transfers.

The advent of bank-issued paper money gave rise to bearer assets and documents that allowed the holder to claim gold from the bank. This system significantly accelerated trade between individuals and paved the way for modern financial systems.

The Perils of Greed: Banks and the Public

The increasing use of banknotes or paper money eventually led to the realization that only a small percentage of people redeemed the physical gold backing these notes. This resulted in fractional reserves within the banking system.

Contrary to popular belief that banker greed was solely responsible for this gap, Lyn argues that public greed also played a role. Under traditional remittance systems and double-entry bookkeeping, banks charged fees for transactions, storage, and gold-backed guarantees. However, with the widespread circulation of paper money, the public effectively avoided these fees, leading to a shift in financial dynamics.

Meanwhile, banks later began charging small fees for transactions, guaranteeing security, and ensuring the transferability of customers’ assets—with the key difference being that they realized they could lend out a portion of the gold reserves to earn additional profit.

The net profit from providing banking services using customers’ gold was so substantial that banks initially attracted more customers by offering services with zero fees and later by proposing profit-sharing agreements from their banking revenues.

At first, banks only lent out 10% of their stored gold to earn more profit than from regular banking fees. Fortunately or unfortunately, it didn’t take long for banks to realize that they could attract more capital by sharing their profits with customers and offering interest on deposits.

With this strategy, banks reduced their gold reserves to 80%. This allowed them to cover operational costs, increase profits, and share a portion of these profits with their customers. As a result, the number of customers and the inflow of capital and gold grew steadily. Over time, the gold reserves diminished, and the circulation of paper money increased significantly.

This system worked well as long as people didn’t demand their physical gold. However, as you may have heard, there were periods in history when people suddenly rushed to banks to withdraw their gold deposits—sometimes simply to confirm that their entrusted gold was still there—only to discover that nearly all the gold had been loaned out.

One of the most famous instances of this occurred in the 1970s. At the time, the U.S. government, facing a budget deficit caused by the Vietnam War, the moon landing project, and other factors, began printing dollars without gold backing. It didn’t take long for central banks of other countries, suspicious of this excessive dollar printing, to rush to U.S. banks and demand physical gold equivalent to their stored dollar reserves.

To prevent further outflow of gold, in 1971, the U.S. government issued an order halting gold exports. Instead, the government decided to offer bonds to the global community in place of gold. These bonds served as proof of U.S. debt to banks, with financial institutions from other countries being offered interest payments in exchange for accepting them. This marked the beginning of global inflation caused by the severing of ties between world currencies and gold backing—a trend that continues to this day.

A comprehensive article on this topic, “How Money Lost Its Value, ” was published in Issue 8 of the research newsletter. It is highly recommended that you read it.

Where Does the Value of Money Come From?

In modern times, instead of fractional reserve banking based on gold, we now have fractional reserve banking based on fiat currencies—currencies that derive their value solely because governments declare them to be valuable.

Consider a scenario where banks are required to retain only 10% of customer deposits. If $100 is deposited into a bank, the bank can lend $90 to another bank, which can then lend $80 of that $90 to yet another bank, and so on, until only $10 remains as reserves.

This process significantly increases the supply of currency without any backing by real money or assets, leading to a sharp rise in inflation. This inflation disproportionately impacts the middle class, making it difficult for them to keep up, while those who can borrow the most from these fractional reserves grow wealthier.

Since the COVID-19 pandemic in 2020, U.S. banks have no longer been required to maintain reserves to back their currency holdings. Additionally, fractional reserve banking has moved away from dealing with physical fiat currencies. As a result, bank reserves now exist merely as numbers recorded in ledgers.

According to calculations by Lyn Alden based on official data, by the end of 2022, U.S. bank reserves totaled $22 trillion, backed by only $100 billion in physical assets—22 times the actual amount of physical dollars.

What Can Be Done?

Focus on accumulating real money rather than striving to acquire fiat currency, focus on collecting and storing forms of real money. This does not refer only to gold but also includes tangible assets like real estate, which are considered forms of money.

Interestingly, Lyn Alden also regards Bitcoin as a form of money, as it possesses gold-like qualities and meets Alden’s seven criteria for money. Moreover, Bitcoin enables decentralized and highly secure banking transactions.

Recognize the true inflation rate the actual rate of inflation is much higher than officially reported figures, primarily due to the unchecked printing of fiat currencies.

While the growth rate of money supply recently turned negative for the first time in decades—due to central banks increasing interest rates—this is likely a temporary phenomenon. If interest rate hikes continue, they will further enrich industry tycoons with massive assets, something banks are unlikely to allow because it threatens their power.

In other words, the U.S. government must print money daily to fill the pockets of investors, and it will do whatever it takes to curb real inflation.

The government meticulously analyzes household expenses on a weekly and monthly basis and adjusts interest rates based on these periodic reports.

These reports are now so crucial that traders worldwide monitor them daily, as they directly and indirectly influence financial markets.

Final Thoughts

A simple observation reveals that countries reliant on the U.S. dollar face higher inflation due to the dollar’s declining intrinsic value. Therefore, focusing on income closely tied to the U.S. dollar makes sense. Once sufficient funds are accumulated, investing in real assets becomes a priority. The U.S. dollar itself is doomed to decline, serving merely as a temporary vehicle to slow the erosion of asset value.

The irony is that central bank currencies derive their value solely from public demand. As more people realize their lack of intrinsic value and shift toward real assets, the devaluation of fiat currencies, including the dollar, will accelerate—until a day arrives when a $100 bill is worth no more than a seashell.