Have you ever wondered where the money you use every day came from?
The other day I found myself thinking about how it came to be that a piece of paper was a fair trade for something as big and useful as, say, a house or a car. Who came up with that idea?
Is money something that just doesn’t make a lot of sense to you? Do you sometimes feel disconnected from your finances or find it hard to save money even though you make enough of it?
If you do, you’re not alone. The money system that we use today is not intuitive. It disconnects us from the resources that made it valuable to begin with.
A quick look at how the system developed shows how the path we’ve taken removes what we really find valuable from money and can have a real negative effect on you, me and, as a result, our environment.
The Barter System
Before we established governments, currencies, and trade systems, if you wanted something that someone else owned, you had to have something of equal or greater value to trade for it. If you raised pigs and needed a carriage for transportation, you had to barter with a carriage maker.
The carriage maker knew exactly how much work it took to build his carriage and how much food he needed in return if he were to sell it and build another.
You knew exactly what it took to raise a pig. This was central to your way of life.
But what if the carriage maker didn’t need a pig? What if he needed a cow? You’d have to go barter your pigs with a cattle farmer and then trade your cow for a carriage.
The value we placed on the things we traded were extremely intrinsic, but also highly inefficient.
So, we found a precious metal, gold, that was coveted for it’s rarity and began using it as a broker for transactions.
The Gold Standard
Gold turned out to be a pretty good medium for facilitating trade. Everyone wanted it, so you knew if you had some, you could trade it for something you needed.
Even if someone didn’t want it, they’d accept it anyway because they knew they could quickly trade it with someone else that did.
So now we have gold as a worldwide currency. Rock on.
However, as population grew and transporting large masses of gold became more difficult, we came up with a clever idea.
We didn’t need to actually carry all that weight around. We could just make certificates that represented the gold and our lives would be much easier.
The government would guarantee that this paper used as payment could be traded for a specific amount of gold whenever necessary.
Problem solved! All that gold could sit in banks and we’d just carry around some paper to trade for the stuff we needed.
Now, we don’t really know how much these pieces of paper are worth, but we know we can trade it for gold anytime we want and gold is really valuable.
Well, at least we know those pigs we’re raising are worth bit of it. How many degrees of separation is that?
But now population is growing substantially. This gold that backs up our currency is getting scarcer and scarcer as more people compete for it.
Poverty is creating misery, we can’t mine enough gold to keep up, and we need more money to keep those Commies from turning our great nation all red!
So forget the gold! We don’t need it anymore!
Somewhere down the line, we decided that if we couldn’t accumulate enough precious metals to back up all the money we needed, we’d just abandon it all together and start printing more of it.
Now all that’s left is a piece of paper. But don’t worry, your government will put it’s money where it’s mouth is and let you pay your taxes with it.
Today, we live in a world of fiat currency. What this means is that the pieces of paper that we pay our debts with has value because (and only because) the government says it does. There is no physical object that it’s related to anymore. No gold. No nothing. Just the proverbial handshake of Uncle Sam.
If we decide that more money is needed to benefit our economy, we just print more. If there’s too much, we can collect and destroy it.
All of a sudden, the value of our currency is decided on by a select group of people who make decisions about how much of it should be in circulation.
When they decide to print more money, each bit becomes less valuable through dilution. When they decide to print more, the opposite is true.
Your Finances & The Environment
So what effect does all this confusion of a fiat currency have on your finances and how is it affecting our environment?
It seems to make it more difficult to decide how much we should be paying for something.
We still know how much our pigs are worth and we have an idea of how much that carriage we need is, but the vehicle we use to exchange them can now fluctuate wildly on the whim of a few people, making it harder for us to gauge how many dollars (or whatever unit of currency) should be needed to make that transaction happen.
Since a fiat currency system relies on the general principle that we’ll slowly but steadily add more money to the system to keep it growing and thriving, money loses value over time, requiring more of it to buy the same thing later.
This is called inflation and it rewards spenders while punishing savers.
Why save money when what you’re saving for will just be more expensive once you think you’re ready to buy it?
Inflation existed when gold was the currency of the world, but to a much lesser extent since mining more of it quite a lot harder than just cutting down more trees to print more money.
There’s a finite amount of gold to be found on this planet, whereas, we can always plant more trees to print more money.
This is where the credit industry has made a killing.
When used wisely, credit can be a great tool in a fiat money system to buy something now and pay for it later at a lesser realized expense to you.
However, credit is easily abused and many people thinking they need something now find themselves in a tangle when they don’t realize they couldn’t afford it.
It goes without saying that this “gotta have it now” mentality that is fostered by a money system like this is incredibly damaging to our environment as people attempt to collect more and more now to hedge against higher future prices only to end up bankrupt, starting over again.
And an apparently unending supply of money provides the fuel of this vicious cycle.
I am all about maintaining a mindset of abundance, but based on the cycle that we seem to be set on, a lot of people appear to be doing it wrong.
What do you think? Is it too late to go back to a gold secured currency? What else could be used to connect our money with what the Earth has to provide?
Connect with me on Twitter: @FrugallyGreen
Monopoly money image by rutty