What is Money (Currency)? And Why Should I Care?

Photo by Sharon McCutcheon on Unsplash

I recently started reading The Creature from Jekyll Island by G Edward Griffin. It's an incredibly informative book that I recommend every investor read. However, it's quite long, and no small undertaking to read in its entirety. In fact, I am only 30% into the book, but I have already learned so much, that I felt compelled to share the topics with the BP community.

Have you ever stopped to consider, what is money? How is it created? What is its history? We all get caught up in the mechanics of investing in many different asset classes, but we are potentially standing on the precipice of what could be a fundamental shift in global money supply & policy.

I first started to think about this topic during the crypto craze at the end of 2017. People would say to me something along the lines of: "I don't understand why people would pay for Bitcoin. Why does it have any value?" To which I would reply, "Why does the US dollar have any value?" Which brings us to the question - what is money? Is gold money? Historically, it was for hundreds of years. Is bitcoin money? You can spend it at a growing number of places. We know fiat money, including the Dollar, is money because the federal government declares it so - but that's really the only reason. There's no other inherent value in the dollar, unlike gold. Allow me to illustrate the point further with a quote from the book:

In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper. Deposits are merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face amount. What, then, makes these instruments—checks, paper money, and coins—acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and real goods and services whenever they choose to do so. This partly is a matter of law; currency has been designated "legal tender" by the government—that is, it must be accepted.

Gold is still used as a store of value, and as a hedge against inflation or currency instability. You can't really spend it anywhere. However, there are many folks out there who keep some of their net worth in gold. Bitcoin could end up serving the same purpose, and it's much more efficient than gold. However, gold has inherent value, Bitcoin does not.

Back to the subject of money. To answer the original question - all of our money comes from debt. Debt mainly originates from 2 sources in the US, the federal government, and private banks. When you deposit $100 at your bank, that bank turns around and loans $80 - $90 of that original $100 out to other customers. In doing so, they expand the money supply. You can withdraw your money at any time, even though it has been loaned out to someone else. This all works well, as long as there is no run on the bank. Similarly, the US government can issue new treasury bonds at their discretion. And the Federal Reserve is free to print new money with which to buy these bonds. The hidden cost of this activity to citizens is inflation. Now for some more quotes:

It is difficult for Americans to come to grips with the fact that their total money supply is backed by nothing but debt, and it is even more mind boggling to visualize that, if everyone paid back all that was borrowed, there would be no money left in existence. That's right, there would be not one penny in circulation—all coins and all paper currency would be returned to bank vaults—and there would be not one dollar in any one's checking account. In short, all money would disappear.

That's pretty perplexing, isn't it? Makes you wonder how we got into this situation in the first place, but that's a much longer story. The Federal Reserve has been open about this policy in the past, but many people still are not aware of it. Consider the following:

Marriner Eccles was the Governor of the Federal Reserve System in 1941. On September 30 of that year, Eccles was asked to give testimony before the House Committee on Banking and Currency. The purpose of the hearing was to obtain information regarding the role of the Federal Reserve in creating conditions that led to the depression of the 1930s. Congressman Wright Patman, who was Chairman of that committee, asked how the Fed got the money to purchase two billion dollars’ worth of government bonds in 1933. This is the exchange that followed. Eccles: We created it. Patman: Out of what? Eccles: Out of the right to issue credit money. Patman: And there is nothing behind it, is there, except our government's credit? Eccles: That is what our money system is. If there were no debts in our money system, there wouldn't be any money.

When thinking about this a little deeper, we can start to understand why Robert Kiyosaki says that debt and taxes are the main two things that separate the rich and the poor. Debt powers our entire economy, and it's one of the most valuable tools we have as investors. Of course, with great power comes great responsibility. Ray Dalio talks a lot about debt cycles, and how we may be approaching the top of the long term and short term debt cycles. One thing we know for sure, is that global debt is, and has been, increasing at an increasing rate for some time. No one can know the eventual impact of that, or the scale, but it's definitely something to keep in mind as you look to the future.

What are your thoughts on debt and the future of the economy?