Sunday, December 13, 2009

What is MONEY?

If you have ever played the game "Monopoly" you understand that the paper money you use is worthless in the real world and is only relative to the game. If you think that the currency we use in our everyday lives is any different, then you are unfortunately mistaken.

The printed paper money that circulates throughout our society is nothing more than a receipt for your posessions that decreases in value everyday. This system was origially used when wealthy people would bring their gold to the bank to have it kept safe inside their vault. The bank would then issue a receipt that was redeemable for the gold. These receipts could be traded to others for goods and services. Essentially, what ended up happening over the last few centuries is the banks suddenly had all the gold and the worthless receipts that were being traded by the general public became the new "gold". Empty, hollow, receipts for gold. Now, lets say that 500 years ago that one dollar was worth one ounce of gold... as the goverment keeps printing more money, the ratio of gold to money suddenly becomes less, making it so that you need more money to redeem for the same amount of gold that you had first put into the bank.

Examine the following graph that depicts the price of gold in Euros and American Dollars.

(This graph is the total sales of gold that is shown as a blue line, the orange and gold dots are the respective prices):

Note that the price is higher in American Dollars because of their increasing debt. Its not that gold is more valuable now, its just that money is worth less. Its not that those who have lots of money are rich? It's just that they have less debt.

The following is a five-part video that describes this concept in much greater detail in terms that you don't need a business major in to understand.

Click to watch video on Youtube