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Nov 30

How Funny Money Trashes the Planet

monopoly-moneyHave 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!

Fiat Currency

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?

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Monopoly money image by rutty

10 comments

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  1. Jackie

    I do think it’s too late to go back to a gold-backed currency, and I’m not sure that even gold is concrete enough to connect money with what the earth has to provide. Most people (myself included) have no idea what’s involved with mining gold or the resources that doing so uses. I think we have to go back to an even more basic level, like growing food. It’s not until you spend months caring for some plants that may or may not produce what you’ve hoped for that you start to have some idea of the work involved. Maybe equating money with the hours needed to earn it would be a place to start.

  2. Michael Thomas

    Jackie,

    Thanks for the thoughtful response. I think you raise an interesting point when you talk about “equating money with the hours needed to earn it.”

    Of course, the hours needed to earn a certain amount of money is different for each person, but it’s a useful thought process when evaluating purchases. However, it’s a process we’re easily decoupled from with credit and bank cards.

    Each technological advancement makes it easier and easier to manage the flow of our money, but also seems to remove a layer of the connection to what we actually do to earn it.

  3. ConsciouslyFrugal

    I’ve written a bit about alternative currencies and I’m a huge fan of finding ways in which to detach from the standard economic machine. Time Banks (timebanks.org) are an excellent resource that folks can start in their own communities. Time Banks don’t value certain professions more than others (e.g., an attorney’s hourly fee is higher than a teacher’s in the standard economy). It’s an excellent type of bartering system that doesn’t allow for classist hierarchies.

    Also, Switzerland and Brazil have set up amazing formalized business to business bartering systems.

    Anyhoo, I agree with Jackie–we need to equate life energy with money. I also think we need to incorporate alternative currencies into the current dominant structure. We seem to have a cultural mentality of “all or nothing” of one thing, where some of multiple things is usually the most balanced response.

  4. Michael Thomas

    Aldra,

    Thanks for the reference to Timebanks. I’m checking it out right now. I’m also interested in knowing more about these b2b bartering systems you’re talking about. Looking forward to checking that out as well.

    As for the “all or nothing” mentality of our culture, I think that’s something we tend to do for simplicity’s sake in accounting and managing large systems. I think we realize that there is no single answer to all of our problems and finding one that suits most of us is “good enough.”

    I don’t like that “good enough” response either and am interested in learning more about how to efficiently manage various complex systems.

  5. Kevin M

    The government may be able to print money, but each individual can’t. Indirectly they could I guess, by choosing to work more hours or make more widgets.

    I think the best concept, and one I use, is to value a purchase on the time it took for me to earn that money and how much use I’ll get from the purchase. I was looking at buying an Ipod for myself this morning. Thinking about it in terms of hours worked made me think twice (still considering it, btw).

  6. ConsciouslyFrugal

    Tyler, I think I read about the b2b networks in Bill McKibbon’s “Durable Economies” although I have seen it referenced online as well. If I can find the book in my mess of an apartment, I’ll let you know the name of the network. McKibbon’s book is a great read.

    He actually even addresses Kevin’s point–there are communities that have created their own currencies through collectives similar to Time Banks. Fascinating stuff!

  7. Michael Thomas

    My readers are awesome. Thanks for all the great stuff everyone.

  8. Andrew

    This is brilliant. Further removed is another step, we don’t even use the ‘worthless’ paper anymore, credit cards, we’re not even playing with real money. We don’t equate our 40 hours a week at work with $x. If you had to build your furniture by hand, you wouldn’t throw it out and replace it next year to match your new decor. Everyone worldwide needs to wise up, stop keeping up with the jones’s, and the ‘value’ needs to return to society. Value for money, budgetting, the works, i could go on and on!

    Loving reading this site, keep it up please.

  9. Andrew

    @Kevin M, I went through a phase of putting my dollar value to products and services, say as an example, brown bagging to work versus making my lunch. If I earn $50/hr at work, and it takes me half an hour to make my lunch, my ‘brownbag’ cost me $25. With that logic you’d buy it everytime.

    We need to return to a simpler time, needing/wanting less, living frugally/sustainably.

  10. Michael Thomas

    Thanks for adding to the conversation, Andrew. Nice to have you around!

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