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  December 19, 2014
Understanding Money...

 


"I don’t care too much about money... ’cause money can’t buy me love’ "
                                             ~The Beatles

This past week, I once again found myself traveling outside the country as I needed to venture off to the Far East for an important but quick meeting.

The quick trip meant that I probably would not have much time to adjust to the time difference so I decided early on to take the red-eye flight from Los Angeles and arrive in Taipei very early Monday morning (about 5 am local time).

This plan was great except for one very minor flaw... I had no way of getting to the hotel since I arrived much earlier than the first shuttle of the morning. 

With no other means of transportation, I would need to take a taxi over to the hotel.

This also meant that I would need to exchange some U.S. dollars for Taiwanese dollars to pay the taxi driver... maybe about $20 worth which would be approximately $620 NT at today’s exchange rate.

I was already in the taxi when I began to think about the idea of why there were different currencies in the world and why does the exchange rates change.

It the earliest of civilizations, there was no monetary system.  People basically grew or hunted what they needed to survive.  It was a more or less a socialistic society where each tribe divided the tasks it took to provide basic necessities like food, water, shelter, clothing and security.  There was no need for money because whatever they had... belonged to the entire tribe.

As civilizations grew, it soon became apparent that perhaps one tribe might have an excess of one thing and not enough of another so a trade was conducted whereas one traded something of value for something else of value.

Bartering is somewhat of an inefficient system.  If you had an extra chicken to part with, and you wanted instead some clay pot, you would need to find someone with a clay pot who wanted a chicken otherwise a deal could not be struck.

Around 12,000 BC, civilizations began to use pretty black stones (obsidian) with no real utilitarian use  as a form of early currency. 

People could now trade their chicken to one person for obsidian stones, and then could trade the stones with another person for a clay pot. 

The stones themselves didn’t have much value; it really is about what the stones represented that gave the stone value.

People would mine these stones in the mountains and then introduce them into the monetary system insuring that there would be enough stones to go around as the society began growing.  

But after a while, all of the stones were mined so very few new stones were being introduced into the market.

At one time a farmer could trade one chicken and receive 10 stones, but now due to the scarcity of the stones, the farmer might now only receive 5 stones for that same chicken. 

This also meant that the person with 10 stones could now trade for 2 chickens (at 5 stones each).  So the miners now had twice the purchasing power than before.

After some time, a new source of stones was discovered and stones became overly plentiful... now stones were everywhere.  Since there was an overabundance of stones with very little demand, now the farmers demanded 20 stones for each chicken.

As societies grew, some people decided that chicken farming might not be right them... so they decided instead to trade their labor directly for stones for which they could use to trade for basic necessities.

Additionally, there were other societies that had no access to shiny black stones, so they began mining shiny metal such as gold, silver, tin and bronze and melting the metals into coins with different denominations (something that couldn’t be done with rocks).

As long as the community used their own currency to trade, then there were not any problems... but after some time, people from neighboring places wanted trade between themselves... but there was an inherent issue... one society used black rocks to define value whereas the other society used bronze coins.

The issue was solved going back to the essence of the initial exchange.  If 1 chicken was worth 10 black rocks in one place and 1 bronze coin in another place then 10 black rocks must equal 1 bronze coin.

This is the basic worldwide monetary system in a nutshell...

Different countries issue a national currency controlled by that country’s central bank in which the holders of this money can use to exchange for goods and services. 

The exchange rate between different currencies is dependent upon how much money the government of a particular country actually creates and the internal value of that money within the given country.

Now enter a new form of currency called digital currency or sometimes Bitcoinreferred to as "crypto currency".  There are several types of digital currency but the most popular appears to be Bitcoin.

Unlike other types of currency, Bitcoin (as well as other digital currencies) is not issued by a central bank of a sovereign government but rather by a decentralized computer network. 

Like in the ancient times with black rocks and bronze used for coins, Bitcoins are mined by highly sophisticated computer networks solving highly complex problems.  The reward of a successful miner for solving a problem is 25 Bitcoins.

The Bitcoins are then traded for merchandise in the same way a farmer would trade a chicken for black rocks.  Bitcoin can also be traded in open exchanges for other hard currencies such as U.S. dollars, euros, Japanese yen or Mexican pesos.

The difference between Bitcoin and other hard currencies is that Bitcoin is only digital whereas with other hard money can be minted or printed in the form of coins and paper money.  

However, one needs to realize that most of the hard money in the world is also in a digital form such as checks and bank account balances.

When we get paid from our employer, that employer pays us in the form of a check that we deposit into a bank.  Later we can exchange a part or all of that balance into a hard currency, such as using an ATM, or we can transfer a part of our balance to others, as when we write check or wire transfer money... the balance sits in our accounts.

Bitcoin works in much the same way except that instead of keeping your money in a centralized banking system (such as what we have here in the U.S. or in other countries), Bitcoin is a ledger balance that is kept in a digital wallet that is duplicated by a vast network of synchronized computers (the synchronization is a part of the problems solved by the Bitcoin miners as referenced above).

Since there is no centralized banking system, there are no banking fees to pay in keeping or transferring your money, which makes Bitcoin very attractive to individuals residing in places where high banking fees are regularly charged.

More and more businesses are accepting Bitcoin as a form of payment including Amazon, Expedia, Target, Victoria’s Secret and CVS as more and more people turn to digital currency instead of using traditional banks and their high fees.

The world in which we live in is rapidly changing, but the basic principles of trade remain the same. 

People work hard to add some value by creating products or selling services.  They then trade those products and services for other products and services using a currency system as the means for easier transactions.

Everything else is just speculation... and I’ll leave that for Wall Street and another day...

Thank you for your support of OptiFuse where we give you the greatest value for your money.

Merry Christmas!



Jim Kalb
President

Email -  jimk@optifuse.com
Website - www.optifuse.com
Blog - www.optifuse.blogspot.com 

Twitter - @OptiFuse

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