It is a two-part article series diving into the modern monetary system which will help you in learning various aspects of the money. The first part deals with historic incidents that lead to today’s monetary system and provides a glimpse of its working nowadays.
The concept of money always fascinates me. Money is so powerful that over the years it had made and destroyed many empires. Even today money is ruling the world and we cannot find an alternative to it. The unique characteristics of money are what give the money this much power.
Money is
A Medium of Exchange,
A unit of Account,
Portable,
Durable,
Divisible and
Fungible. ( Each unit is same as the next unit)
From the barter system, where we exchanged a good with another good, to today’s digital world of money we have come a long way. Now money is so much intertwined in our lives that life without it will be impossible. Money with its superb characteristics always overpowers any other medium of transaction. But on the other hand, it causes all the sufferings of human lives. On the one end of the world, there are people who are sitting on piles of money while on the other end people are starving because of the lack of money. The concept of money in itself cause wealth inequality.
How can a single piece of paper govern your entire life?
Why is it so necessary to live on this planet?
Where does it come from?
Who is responsible for printing this piece of paper?
Who determines the value of the money?
These questions always intrigued me and might have intrigued you as well and I am sure that the answers to these questions will leave you startled like me. The concept of money is flawed, and it is deliberately made to benefit the rich. How? Let’s find out.
History of Modern Money
In 1694, Britain was continuously fighting the war for the past 50 years and needed loans to fund its operation. By the help of Scottish banker, William Patterson, they decided it to establish a privately owned bank that can issue money to the government out of thin air. It was the first example of the modern banking system in the world and now there are very few minor countries without a central bank.
Bretton Woods System
Fast forward to 1944, just before the end of world war II, world major countries decided that they need a new financial system to avoid future world wars and created a three-legged structure of institutions, International Monetary Fund, World Bank and World Trade Organization to guide the post-war world. The US, which held the two-third gold reserve of the world after the war, was the most influential among all the countries and ultimately all the currency ended up linked to dollar and dollar to the gold. This system came to know as the Bretton Woods System. Even today the central bank of the United States, Federal Reserve, is one of the most powerful entities in the world.
Post world war, as the dollar was exchangeable to the gold and world currencies are pegged by it, the overall currencies respective to each other were stable. Until 1971, when due to the US-Vietnam war and the falling dollar, President of US, Nixon took off the dollar from the gold standard. After that and till now the US Dollar is backed by nothing but the currencies are still backed by the US Dollar. World currencies are backed by nothing tangible but only on the trust in the US economy. Doesn’t it seem flawed?
Fiat Currency
This flawed currency, which is backed by nothing, is called Fiat Currency. Fiat a Latin word meaning ‘Let it be done’. If the government says it is money, so it is. The economy today is solely dependent on the faith, the faith that you can buy goods and services from the money you hold. This faith prevails because many of us don’t know the fact that where the money is actually coming from.
It is the Central Bank responsibility to maintain the supply of money in the economy, but a large part of the money creation is done by the commercial bank through debt. Most of the money these days is created digitally out of the thin air. This is as simple as entering a number into your computer.
More about money creation by the central and commercial banks, how this entire system is deeply flawed and exists only to benefit the rich and how you yourself can benefit by knowing the rules set up by them? In the second part of this article this Sunday.
Note - This is my last article on LinkedIn articles and I will share my further articles (2nd part of this article also) and other important stuff on my blog www.shivamnag.com. I am trying to build an investment community over there where we can learn together about investments, markets and financial planning. Sorry for the inconvenience as right now the site is not working properly and I am working upon it. It will be complete by this Sunday with all of my previous articles and a member’s login page. Remember to check-in this Sunday. Thank you.
Comments