What is Money: Forbidden Knowledge About the Dollar

If all roads led to Rome, then do all dollars lead to gold in the United States?

Recently I have been on this study journey of all things cryptocurrencies. And the more I learn about Bitcoin and the other altcoins and their utilities, the more my journey takes me back to the basics of the age-old question that I never asked: what is money?

I was born and raised in Mississippi. I just believed money was the almighty dollar. Money and the dollar were synonymous. And surely, I subconsciously believed the dollar was backed by something, I just never consciously thought about what that something was. And I thought the conversation, if there was one to be had about money, was simply about how I get more dollars.

But dollars aren’t money; dollars are just our generation’s iteration of money. A strong and powerful iteration but an iteration, nevertheless. When you can begin to see money not as the dollar but the dollar as an iteration of money, you begin to appreciate the creation, fascination, wealth redistribution possibilities, and exponential growth of cryptocurrencies.

Let’s begin with this word I keep using iteration. An iteration is a repetitive process that is used to generate an outcome or a sequence of outcomes.

People wanting to share their different talents and capabilities in a society want to recreate mediums of value exchanges so that one person can confidently exchange value with another person who can later in another location and time take that same value received and exchange that value with someone else for something else of equal or greater value.

In order to have these reliable exchanges of value, you need trust amongst the parties, and you need a medium of exchange to store that value. Trust for two major reasons: trust that what the parties say they are exchanging are of equivalent value and trust that the parties have some mode of enforcement of the mutual obligation.

The central government and other third-party intermediaries like a bank or a court system provide that trust. But you must have a medium of exchange that stores the value of the intended exchange of the parties. This is where money becomes important. Money or currency is where value is stored.

Money in this sense becomes a system-type that stores value for present and future uses. In a society amongst people trading each other’s evolving talents and capabilities, this system needs to be reliable and scalable in a repetitive way. And hopefully the store of value increases with time.

Money as a store of value needs to have 5 major characteristics to create longevity so as to be perpetually beneficial from generation to generation. Those 5 characteristics include durability, portability, divisibility, uniformity and acceptability.

Bartering as a main form of money exchange in small communities worked for a time but was limited in all five characteristics for iterating perpetual exchanges on a large scale basis. For example, Sally, my neighbor, may accept my milk as currency for her eggs in Mississippi, but I might not be able to take those same eggs and exchange them with John who lives in Texas for bananas.

First, because Sally and I are neighbors, there is a basis of trust between us with a convenient portability of location exchange. Neither Sally nor I want to develop the label of shyster so we both will ensure the milk and eggs are fresh upon exchange. However, John who is not my neighbor doesn’t get the benefit of neighborly trust or convenient exchange so the eggs and bananas as stores of values, i.e. currency, as between John and I, lack durability, portability, uniformity, divisibility, and acceptability.

By the time John’s Texas bananas make it to my Mississippi location, they might be brown and mushy. I don’t like my bananas that way. And my eggs might be cracked by the time they get to John. Without going further into detail, you can begin to see that as communities begin to grow and spread across different lands bartering as a reliable form of money without additional technologies and third-party intermediaries becomes extremely limited as a store of value.

And then came the use of gold and silver—bimetallic age of money. This is when humans used gold and/or silver as a medium of value exchange.

Bimetallic currencies solved some of the problems with bartering perishables or services as currency. Instead of selling her eggs to me for my milk, Sally can now ask for a certain amount of silver or gold in exchange for eggs. This allows Sally now to sale her eggs for something that is not perishable or consumable. Now she can store the value of her sold eggs in silver coins that she can later use to buy more chickens that will lay more eggs to sale. The use of bimetallics as stores of values made these currencies more divisible, acceptable, portable, durable and uniform.

And as evolving humans do, we evolved money even more. And in the United States we came up with the idea of the paper dollar. The dollar is literally paper weighing in at 1 gram and is . 0043 inches thick. The dollar is 2.61 inches wide and 6.14 inches long. Now the dollar is definitely portable, durable and mathematically divisible using bimetallic currencies as its standard backing.

Now us smart humans figured out a way on a large-scale basis to uniform currency not only in a super affordable way using cheap, easily reproducible, and portable paper, but also in a reliable way by backing the value of a dollar to a predetermined weight in gold and silver.

In the first coinage act, then treasury Secretary Alexander Hamilton, recommended that the dollar be defined as “371.25 grains of pure silver minted with alloy into a coin of 416 grains.” Under this same coinage act, gold coins were authorized to be minted in denominations of $10 coins called the “eagle” and $2.50 coins called the “quarter-eagle.” The “eagle” or $10 coin piece included 247.5 grains of pure gold to make a 270 grain coin. The “eagle” was equal to 247.5 grains of pure gold. Therefore, 24.75 grains of pure gold constitute a dollar. The government debased these bimetallic currencies over time by adding other metal alloys at different weights and reducing the purity of the gold or silver to control price.

Based on these denominations, however, for every dollar you possessed, you could reliably know that you could (if you wanted to) exchange every paper one-dollar bill you held for 24.75 grains of pure gold each. Most other countries in the world used some measure of gold and/or silver as universal stores of value as well. So, if necessary, you could go to the bank and exchange your dollars for gold and take your wealth with you to another country.

(Not sure about you but I had no idea how to calculate a grain, but thanks to asknumbers.com on Google, “1 Grain is equal to 0.00228571428 ounce (oz). To convert grains to ounces, multiply the grain value by 0.00228571428." Basically, you needed 437.5 grains of gold to equal 1 ounce of gold. A standard brick of gold weighed approximately 438.9 ounces.)

America had so confidently figured out how to uniform (and manipulate) gold value to something as valueless as a 2.61 inches wide and 6.14 inches long piece of paper that in the 1900, the government reaffirmed its gold standard commitment. The gold dollar was declared the standard unit of account. In these times, a dollar was as good as gold. For a period of time when the Bretton Woods Agreement was in effect, the dollar was used as the exchange rate for every other major country’s currency also. And the dollar was backed by gold. During this time, the dollar was the world’s reserve currency, and all dollars really did lead back to gold.

Checks as a sub-type for a dollar had become increasingly common in the 1900s. The innovations in transportation, communication, and the growth of clearinghouse associations made it possible to use checks in transactions between customers of different banks (interoperability). This made the use of checks more scalable for the average American.

Checks functioned similarly as banks notes in that they allowed people to conduct business with smaller amounts of legal tender. Only a fractional amount of funds deposited into checking accounts had to actually be kept on hand with clearing agents because most transactions were settled by canceling debits against credits (mere strokes of a pen on accounting entries).

But checks also suffered from the same major defect that bank notes had suffered earlier in the 1900s. Banks sometimes found that customers demanded all of their cash dollars from the checking accounts same as customers wanted all of their gold represented by bank notes.

Because banks only kept a limited supply of legal tender cash and/or gold on hand, these massive conversion demands by customers sometimes caused banks to fail. To resolve this problem, in 1913, the Federal Reserve System (Fed) was created. The Fed solved two major problems: (1) it provided a means by which banks could borrow to satisfy customer demands for cash and (2) it created a new form of money called Federal Reserve notes which could be expanded or contracted in quantity based on the banks’ needs for cash. Contrary to popular belief, the creation of the Fed had no effect on the gold standard. In fact, the Fed operated under the gold standard and was tasked to maintain the gold standard.

Under the Gold Reserve Act of 1934, the United States continued defining the dollar in terms of gold, but private individual ownership of gold was forbidden. Gold transactions were limited to international government transactions with other countries’ central banks and only those individuals who the government permitted to have licenses to hold gold. Despite Nixon not officially taking the dollar off the gold standard until 1971, the dollar starting in 1934, no longer represented a given quantity of gold in any meaningful sense for the American citizen.

So, what is it that gives the paper dollar value? What makes the dollar money?

The dollar for regular individuals like me became simply “fiat” currency. Fiat is Latin for “let it be done.” The dollars we hold are stores of value because the government says let it be money. Fiat currency basically is currency backed by force and fear. The force is the federal government of the United States, and the fear is our fears of the force of the federal government. The system created from this money is the games politicians play with our emotions.

Fiat currency in essence is the government’s promise to pay. Fiat money is a clever way to disguise a monarchial monetary system as free market democracy. It’s a promise to pay backed by a perpetual promise to pay.

The governments full promise to pay any debt in dollars in essence will never actually be paid as long as the traditional monetary system of the dollar is in place. And our fear of the government will never actually call upon the government to fulfill its promise to pay. And if we as the American people did, what actual value exchange would we ask the government to pay? More dollars.

We use the dollar to satisfy our financial obligations with each other, but many of us never create what we consider wealth in America. But in truth, the dollar creates a debt for somebody else with each usage, even while paying off a prior debt. This is why the wealthiest of people carry significant debt. They just carry more debt that create cash flows payable by third parties to pay debt down while creating a corresponding asset or other store of value type with it.

If you really think about it, the monetary system of the dollar could be comparable to a Ponzi scheme that cannot fail without the country failing. What makes it not a Ponzi scheme? Our fears and the governments’ force.

This reality is the very reason why the $28.9 trillion dollar debt that our powerful United States government owes to other nations will never fully get paid and will continue to increase despite the yearly congressional showman pretending to balance the budget and the presidential (no matter which party) dog and pony show every four years.

Those political acts are used to keep our emotional trust in their game and our eyes off the fact that our own wealth is decreasing in value despite our increasing accumulation of more dollars. Many of us make double triple or even quadruple or more in earnings than our parents but still barely have many dollars left over after basic living expenses. Instead of the dollar as a store of value that increases in value, the dollar may simply be a decreasing currency accompanied by perpetual debt.

And then came Bitcoin.