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You are forgiven if you think you should study medicine to understand how humans really are. Or languages to figure out how they communicate. Learning about money will teach you more about both.

Money is a language, a universal and most powerful one. Money allows us to express appreciation, misgiving, and any type of preferences. It helps us to get around … and a lot of what we want.

Stranded in a country with a foreign language, the absence of language skills will not doom you. After all, you could always hire a translator. But a total lack of money will.

You may not agree with Voltaire who elevated money to a religion that everybody subscribes to. But you will likely agree with him that money certainly makes people strikingly honest. Often more so than when they express themselves with words. Words are cheap, money isn’t. Studies indicate that the market for predictions backed up with real money, i.e. the betting markets, are generally more accurate forecasters than polls.

Money has the effect of dropping food into an aquarium: Creatures move. Stuff happens.

Big money makes big stuff happen. It puts soccer stadiums and ski domes into the desert, tanks and mercenaries into the battlefield and big egos into space. It’s the blood that flows in the veins of the economy. It acts like a physical force that can change the trajectory not just of objects but of opinions. The influence of money may form, warp or destroy friendships, lead elections to an unlikely result, and decide the outcome of wars.

Like it or not. There is deep truth in the saying that money rules the world – and always has. There is no understanding of history without looking at money’s crucial role in shaping it.  You want to understand what’s happened in the past, what is happening around you now and what will happen in the future – you’ve got to follow the money!

This blog will reaffirm the case that history is more the product of big money than big men.

So what is money? The economics textbook circumscribes it as something that meets three requirements: In order to qualify as money that “something” must serve as a

  1.  medium of exchange

  2.  store of value, and

  3.  unit of account

 

This means people are willing to accept it in exchange for goods and services, and are fine to hold it since they have trust in its capacity to keep its value. Money must also enable the expression of the value of other assets in its “units”, so that the value of all sorts of items on a balance sheet and income statement, for instance, can be expressed in the monetary unit.

And crucially, money is also that “thing” that is accepted for the repayment of debt! As a matter of fact, the root of the term “finance” refers to settling (“finer”) debt.

Oh boy … and girl. There has never been more debt out there waiting to be repaid. Particularly, debt accumulated on your and your forebears’ behalf at the courtesy of your government. Anybody anywhere, particularly in the developed world, enters the world with tons of debt on their tiny baby shoulders these days.

The following table makes the point – arguably a bit mischievously. The table shows how much existing debt by the respective central government is sitting out there in relation to new babies born in a given year. Of course, it's not just one year cohort of babies that must service the existing debt but all taxpayers at large. Nevertheless, looking at debt in conjunction with a demographic variable (births) is sensible to see whether the debt burden is growing or shrinking per person. After all, today’s babies are tomorrow’s taxpayers.


Debt of Central Government (constant 2015 USD) per New-Born in the respective year                                              

 


 

 

 

 

 

 

 

Source: IMF, World Bank, UN Population Prospects 2022, own table
 

You may think - no wonder babies cry when born. They probably feel the weight of the giant debt placed on their shoulders.

Governments decide on the type of “money” that this and further debt will have to be repaid in. Whatever “money” the government says you owe your taxes in is to be money by default. If they decide that you owe your taxes in a particular kind of token, or tampons, or Toblerone chocolate bars, then that would be money. Of course, if the government adopted any of these or another one, it would immediately legislate the monopoly of producing it and put counterfeiting under heavy punishment.

In short, governments decide what constitutes money. It’s their key privilege. Governments derive their power from their monopoly to tax and to determine in what money these taxes are owed.

Don’t expect governments to give up the power to declare what constitutes money. It would be foolish for them. They are more dependent on this power than ever. Allowing people to freely decide on what money is or introduce parallel currencies would hugely curtail their power. So if you are dabbling in private cryptocurrencies, be warned! They constitute a threat to state power! Governments will not allow the full substitution of their money, it’s a matter of life and death for them.

That leaves us with money in the currencies we all know: foremost the US dollar, the Chinese Renminbi, the Euro and the whole garden variety of currencies populating the globe.

In order to understand the present (spoiler alert “crazy”) monetary system, we must first look at money’s evolution. That will help us see where the trajectory of “money” is heading and how we can position ourselves to be in alignment and not conflict with the trajectory. The latter would be foolish. In the next chapter we will do the shortest of short tours of the history of money. With a focus on the US dollar.

Chapter 3 - Money

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