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Ringos

What is Money?

Let's start by going over some common sense, so you can see how money has evolved over the course of natural market processes.

For a simple example, say I have corn and you have cows, and we would like to perform an exchange. How much corn would I need to provide you for one cow? If that was the only exchange we ever made, we might be able to agree on an exchange rate. However, as society got more complex, it required a better medium of exchange which is where we landed on money. This money needed to meet three criteria:

  1. Store of value. A way to store purchasing power, and it should maintain it's valued over a certain period of time.
  2. Medium of exchange. Something we all accept and are willing to exchange. Its value needs to be collectively understood.
  3. Unit of account. When we exchange, we need to be able to keep track of the transaction. In modern-day, this is called accounting standards.

Some of the earliest mentions of money, Hammurabi code in the 1700s BC, had a sophisticated financial system with lending, crop financing, derivatives, and more. They spoke of money as a weight of silver. The concept of weight is very important because if you take different weights, pound or ounces, you can easily interchange them with simple math, translateable notions.

The word spend, comes from a shortening of Latin expendere "to weigh out money, pay down"

Many things have been tried, but gold & silver has emerged as the preferred money. It has been valuable for as long as civilization has been developed. Across the globe, great ancient civilizations, like the Maya, Egyptian, and Indian, have all revered gold as valuable, completely independently of each other.

The reason gold became money is because of its chemical properties, divisibility, lasting nature, workability, universal value, scarcity.

Scarcity is important. Let's give an example where the United States prints enough money to give everyone a check for a million dollars. Sounds wonderful, everyone would be rich. Everyone would go take this money and want to buy goods and services with the money. But if we think practically, what do you think would happen to the price of all these goods and services? There is a limit on the supply of these items, so it's clear the dollar would lose it's purchasing power dramatically.

This demonstrates the point that the gold standard puts scarcity on money. It's what makes money valuable and what prevents value inflation. When a currency has a gold standard it creates a constraint on spending the money in which you do not have.

This demonstrates the point that the gold standard puts scarcity on money. It's what makes money valuable and what prevents value inflation. When a currency has a gold standard it creates a constraint on spending the money in which you do not have.

Over the past 2000 years, there were two periods where there were no gold standard or gold coins circulating the economy, one was between 950–1250, the darkest of the dark ages, and the next is the past 49 years. That should give you some context on the importance of gold and where we could be headed.

Ray Dalio, a man known for rationality, once said, "If you don't own gold, you know neither history nor economics." He made the case that, when you strip away the emotion, it's just another currency.

Simplicity is the ultimate sophistication