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The Concept of Money: What is Money Anyway?

With the advent of cryptocurrency, people are starting to see a change in how we view money. Bitcoin and other currencies arose in response to the 2008 market crash. When the US Federal Reserve elected to bail out large financial institutions, many people cried foul and became leery of centralized control over monetary policy. Especially since it seemed to only serve the interest of a handful of large corporations. Cryptocurrencies like Bitcoin seemed to answer the call for a democratic, decentralized creator of value. They are designed to follow the dictates of transparent programming with value that’s tied to free markets.

It was slow to get started, but after 10 years since the establishment of Bitcoin, cryptocurrency is taking off as an improved model of money. It appears to be paving the way for a new economy. It is absolutely changing the way we perceive money and wealth. The abstract and often misunderstood nature of cryptocurrencies have caused us to revisit the old question: ‘What is money?”

When asked about what constitutes money, most economists might offer the standard academic answer: Money is an agreed upon medium of exchange, a store of value, and a unit of account. Okay then. But who decides the medium? How is value assigned? Is the process fair? Let’s go a little deeper into the concept of money.

Societies have always relied on trade to survive. Exchanging goods was preferable to theft. In mainly agrarian systems, vegetables would be traded for livestock. However, those early farmers were limited. If you grow potatoes, and exchange with a neighbor who raises cattle and another villager who has peas, pretty soon you’ve run out of options for trading to supply a variety of needs. The system is limited. Some form of token to denote value had to be developed and agreed upon. This was the concept of money – a medium of exchange that is needed to enable trade and prosperity.

Early forms of monetary tokens consisted of wood or stone, and eventually precious metals. But with expanded trade, the scarce precious metals themselves became a limiting medium. So paper bills and coins were created. They were originally backed by those same precious metals. But as world economies expanded, the limitations of money pegged to some commodity became apparent. The result: currency came to be based on the common agreement that it is worth something “because we say so.” It is usually established by central banks or governments and is created by printing money or entering numbers into a computer. This Fiat money is backed by the stability of the issuing body. And it can literally be created out of thin air.

Without a doubt, the invention of money has been an important development for the whole world. It has enhanced our survival and pushed forward much of the innovations that improve all our lives. It has forged a thriving civilization. And since money can be collected and retained, it has brought wealth to many people. Thus arose the use of money as a means of accounting.

So here we are, living with managed economies – governments and centralized authorities controlling the flow of money, banks fighting for deregulation, boom and bust markets, and a growing gap between rich and poor. Would Adam Smith approve? Would Karl Marx be puzzled by modern economies or would he say “Told you so”? It doesn’t matter. They’re not here and you’re trying to save for retirement while paying your bills. What do you think?

No matter where they are on the political spectrum, most people have developed a deep mistrust of centralized control. It seems undemocratic. Especially when it comes to issues and policies that affect your economic situation. The policies of central banks and governments affect the value of the money in your pocket. Most cryptocurrencies are not controlled at a central point. They derive value from consensus.

Of course there are downsides. So far, cryptos like Bitcoin have seen some wild fluctuations. And since there is no authority, they are sometimes used by criminals. As with anything, the early stages of the crytpo-economy is in its “wild west” phase. It will take some time to work out all the kinks. There are definitely problems to be fixed. But whatever the solution, it will be democratic and transparent – just as money should be.


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