"Finally, we want to return to the purposes to which technology and markets are put. They are simply tools. They have no more inherent wisdom or farsightedness or moderation or compassion than do the human bureaucracies that create them. The results they produce in the world depend upon who uses them and for what purposes. If they are used in pursuit of triviality, inequity, or violence, that is what they will produce. If they are asked to serve impossible goals, such as constant physical expansion on a finite planet, they will eventually fail. If they are called upon to serve feasible and sustainable goals, they can help bring about a sustainable society." - Limits to Growth by Donella Meadows, Jorgen Randers, Dennis Meadows
Numerous people in past societies strived to have free money. Venturing for the quest of alchemy, so far, no one has successfully reached the solution of creating gold at a cheap price. This quality of gold, of being constrained by the laws of physics prevents it's misuse. It's total outstanding amount is reasonably same. We can thus map reasonably well, every other things' value reasonably stably in terms of gold.
Paper money on the other hand is cheap to manufacture. Central banks have the tools to print as much money as they want. Digital money, is even cheaper to manufacture. One doesn't have to invest into sophisticated papers, printing equipments, etc. to create digimoney. On the other hand, with gold, no one can physically create money out of nothing.
Digital money is just a few digits on a memory devices managed by banks or central bank servers. You can wipe it off or change it extremely easily. Say, I have money as
$1 : I'm below the poverty line.
$500 : I'm a middle class man.
$1000000 : I'm a millionaire.
$999999999999 : I'm a billionaire!
$10000000000000000000000000000000000000000 : I'm richer than the whole rest of world combined!
Pretty simple huh! Such manipulation has next to no effort cost for a person controlling the server. If only I could've had more money than number of atoms in the universe!
In the above scenario, the case of going from $1 to $500 is pretty probable for a small chunk of people or $1 to $1000000 for a few people. If for a year, inflation is say, 2% of goods and services value generated overall by using such currency, 2% of such value can be seen to be distributed unfairly. Cryptocurrencies on the other hand pose computational cost to such creation but unsecure hardware and gigantic software sizes lead to bad protection of private keys. Additionally, as most people do not read code or updates to such software, it is very manipulatable. It is certainly better than current digital money reflected in bank apps.
Better reputed and richer people are always capable of exchanging their material for co-operation or generating co-operation in a cheaper way. They have resources to increase their resources. In nature, theft is the tool which corrects this accumulation of unwanted resources. A chimp with ample food resources will be robbed by a group of other chimps. Similarly, in gold based currency system, there's no substitute for bravery. If a person comes to rob your gold, it is your responsibility to protect it.
Paper and digital currency are not real money. People who can use the free created money in a manner that market will not perceive it would earn great benefits. If the public recognizes it, it results in inflation. In this system, the printers always win as if they distribute free money reasonably slowly. The public doesn't realize and keeps running like a hamster reaching nowhere. Such system of deteriorating money value, in turn forces people to invest their money in enterprises which earn money. As banks are institutions to specialize in allocating to such an enterprise, people are forced to keep their money in banks who give them interest to counter with inflation. Banks in turn are managed by management who are taught to map risks and rewards.
Who has less default risk in any system? The one who already has resources. The only issue is the rich don't need more money, especially money of relatively poor people who are forced to counter inflation which probably they don't realize as it is slow poison. The poor aren't meant to lend to the rich but it must be the other way round. The rich are to lend to poor and if defaults occur, well, the rich didn't need it anyway. Reputation of the poor suffered damage and borrowing would become more difficult for them.
The poor aren't meant to lend to the rich but it must be the other way round. The rich are to lend to poor and if defaults occur, well, the rich didn't need it anyway.
As in current banking, when interest rates are higher for the poor borrowers and lesser for the rich borrowers, the net result is money is allocated to the rich who don't need money.
To correct such a system, one can never make sure that central banks aren't printing or wouldn't print in future for free. One merely has to shift to physics constrained money instead of easily manipulatable money. With such change, even if one keeps it at home, it doesn't erode in value. A saver isn't forced to keep it in banks. If he owns very high amount of such stock (physically kept thing), it leads to theft risk and he would have to keep it in banks which can in turn in the same way as current banks do, earn interest on successful enterprises invested in. Inflation in gold is constrianed by mining which requires real purification efforts and is low. It certainly isn't cheap.
Currency is an exchange of value. For a stable economy, everyone needs to have a stock (physical keeping) of emergency money which doesn't erode over time, and a healthy flow of money in business. With current paper or digital money, 2nd component becomes much more important and stock kept at home erodes. There are links such as A to B to C to D which when pulled back create extreme imbalances since each link is associated with interest profit. It requires B, C and D all to behave well who in turn depend on many other people in their business quests. Links are like people to government taxes / banks, government to banks or banks to businesses, banks to insurances, insurances to reinsurances, etc.
There is no such thing as DEVELOPED economy, DEVELOPING economy or UNDEVELOPED economy. There is a general concensus accepting money which can be manipulated by a minority which favors them. GDP as a metric to be maximized fails while differentiating necessities and luxuries. An executive drinking tea in a 5-star restaurant for Rs. 1000 is seen as being better than 150 workers drinking tea worth Rs.6 in the street. This leads to extremely perverse distribution.
In 1930s, when the gold imbalance due to aftereffects World War I became prominent, currencies were pegged to gold at pre World War I paper money rates and subsequently, international trade failed due to few nations having a majority of gold. When money becomes concentrated in hands of rich in such non-inflationary gold system, poor have a few options like shifting to next best money like silver, resorting to barter, co-operating amongst each other to generate money and earn gold back from the richer nations. Evolution has a beautiful way of influencing species to shift back to it's earlier behavior characteristics. Everyone must spend on basic amenities and in such a system, rolling of basic needs like food, shelter, etc. becomes much more prominent than that of luxurious things, or wants. When people shift to lower valued currency, and earn back better currency which preserves value, the system rebalances itself out. In Kautilya's Arthashastra, there are numerous references to people paying back with grains or other commodities in case they weren't able to pay with gold. In cases where gold becomes scarce, in my view, shifting to next best exchange tool (eg. silver) is the only option.
Let us all understand how by accepting paper or a digital number as currency and keeping them with banks, we're becoming frog in the ponds and shift to gold (physical, not paper) which is the only true currency!
1st November 2022
Limits to Growth by Donella Meadows
The New Case for Gold by James Rickards
The Bitcoin Standard by Saifedean Ammous