Hello again everyone! Today I will be a writing part 3 of my 10-part discussion on the topic on Achieving Personal Financial Freedom, titled: Money is no longer Real money. As this is a very long post, I will be splitting the post to 3 parts for easier reading. This will be part 1 of the post.
In this post I am going to share about the incredible tales of what money really is, and to educate every reader on the valuation of money.
Before I go on, it is important that everyone understands the most important economics law of all, the Law of Supply & Demand.
In very layman terms, the law of supply and demand means that the amount of supply for any product, service, or even person is only so limited. And combined with the demand for the product, service or person is theoretically unlimited, until a certain threshold. The combination of supply & demand means that there is an exact price point that someone is willing to pay to buy, in exchange for the item being sold – called the Equilibirum.
The idea of exchanging, trading of goods & services came only rather recently from our ancestors, where evolution actually taught humans (using the dangers of nature and other predators) that it is always better to co-exist as a group, instead of being a top hunter and being all alone, or to be dumb enough to just follow the herd. And one of the criteria of co-existing as a group involves trading.
According to Wikipedia:
Trade, or commerce, involves the transfer of goods and/or services from one person or entity to another, often in exchange for money. A network that allows trade is called a market.
Trade is actually built upon trust. Groups of historical humans trade time and food between each other as far back as 150,000 BC, where one member of the tribe will watch out for any predators during the night while the others sleep. And usually each of the tribe members take turn to do so, therefore the term of trading of time. Hunters also trade food with their spouses, in return for the spouses taking care of their offspring. Such practices has existed for a long time since the dawn of civilization.
Moving forward to 6000 BC, when the human population grew and humans started on learning how to do farming, and various tribes own certain unique items or services that only the tribes themselves can produce, barter trade began to flourish.
According to Wikipedia:
Barter is a system of exchange where goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money.
With a barter system, humans began to see the benefits of capitalism and the striving forces of cooperation among other tribes through trade meant that the human population overall started to become the dominant species on Earth.
There was a problem identified with barter trade whereby items as large as a rare white elephant for example has to be traded for 3000 bags of wheat. These 2 individuals have to meet and then inspect each other’s goods at a central location (think of markets and the silk road) and accept the trade, and then trade and return to their individual homes.
Traders start appearing, whereby they acquire certain items from a seller, and then travel great distances to meet buyers, in exchange for a certain profit/commission from the act of this trade.
Therefore with the power of the human mind, a solution was formed by creating a medium (like an escrow), by using precious rare stones, gems, livestock and anything that was in very high demand OR very low supply. This concept is much more efficient, as rare stones are technically, very rare, and are not as heavy as carrying 30 bags of wheat around each time people want to trade. By using a medium, the physical act of buying can be separated from the physical act of selling or even earning.
Note the key point is the term, rare. During this instance, trade thrived and tribes began to grow into factions, states and countries. Then these precious stones turn into gold and silver coins, for an even more flexible trade.
Yet another problem was identified about the above solution. Because of using a medium such as precious stones, some smart people decided that they can actually make fake precious stones. Some others try to cheat by merging real and fake ones together, making it larger than it actually is. Some are even smarter, by shaving a little part off the sides of a gold coin, gradually they are able to create another coin. I believe that’s where the term “cut corners” came from.
Note that all these are even done in today’s time, where we humans are supposedly getting more civilized. We now play with accounting frauds and fake paperwork, scams and theft, bribery and other funny things people do to take advantage of other people’s hard earned work.
With that, humans came up with an even better solution, which is to create bank notes (paper money). This was actually invented by the Chinese by the Han Dynasty in 118 BC.
The benefits of this invention is that the physical medium of trade becomes even more convenient (as the volume of trade increases from commercial businesses). This created opportunities for traders to turn into commercial bankers (bankers, stock brokers are simply high-end traders after all..), with the job of issuing a piece of paper that represents certain quantity of an item, in exchange for another type of item, large distances away. A producer or a buyer no longer needs to carry their items to sell or carry large crates of gold and silver to buy items.
This solution relies on trust toward the bankers, however this solution inadvertently tips the scale of power from the buyers & sellers towards the bankers. With this power, the bankers can effectively force buyers and sellers to accept the terms of the value of the bank note set out by themselves.
During this period, extremely powerful and influential traders are born. Players such as J.P. Morgan comes to mind. Every ultra-rich people and ultra large economies during the recent history of human civilization involved with people in the business of trade.
By this period, bankers(traders) can start playing games on the trading medium called now called money by manipulating the value of the medium through increasing and decreasing, and even trading the medium by itself (Imagine, you don’t even need to trade the original item that was supposed to be bought or sold!). This entire game is called Finance.
Please read the next part for a continuation of this article! Thanks for reading!