Money is defined by Aristotle by three functions: unit of account, store of value, and medium of exchange.
I – What is money?
Medium of exchange: Medium of exchange function of money, unlike barter.
Store of value: Store of value function over time.
Unit of account: Function of a measuring instrument of value, for economic calculation or accounting.
This old definition persists and perhaps needs to be rectified because of the elimination of our fiat currencies (euros, dollars) with any reference to precious materials. That is to say, because of the infinite characteristic of the quantity of our printable fiat currencies.
Other definitions can be proposed, notably those of Pierre Noizat: << A currency is a technology for spending tomorrow a value that we have today or else A currency is a system for exchanging stocks and flows of energy in the form of physical or mathematical tokens >>.
For example, when we receive a salary, it corresponds to the energy dedicated to a job. Currency allows us to save this reserve of energy, which we can spend in the future to obtain an equivalent amount of work.
II – Commodity moneys
In the context of a value currency, like Bitcoin and gold, each value transfer is associated with a verifiable amount of energy. Miners have expended energy to mine a gram of gold, and the same principle applies to the Bitcoin network.
It can be said that Bitcoin, like gold, verifiably transfers past energy, the energy used to produce the coin, into the present of a transaction.
Generally speaking, currency-as-value is inelastic because the underlying asset (gold, Bitcoin, real estate, etc.) cannot be adjusted quickly and arbitrarily to meet a change in demand. Unlike debt-based currencies.
III – Debt-based currencies
In the context of debt-based currencies (euros, dollars), the association between monetary value and exchanged energy is ensured by law rather than by mathematics (Bitcoin) or physics (Gold).
To simplify, when a central bank (Definition: a public institution that manages a country's or a group of countries« currency and controls the money supply, i.e., the amount of money in circulation) prints a dollar, it costs it no energy (or a negligible amount), unlike miners who extract gold using energy and »sweat.".
By distributing money creation primarily to banks and holders of financial assets rather than to actors in the real economy, central banks introduce a distortion in price formation and in access to economic opportunities.
Furthermore, this increase in the amount of money issued creates a devaluation of debt-based currencies such as the euro or the dollar already in circulation.
To put it simply, here is a graph representing the purchasing power of a dollar from 1913 to 2008:
We can understand that in nearly 100 years, the purchasing power of one dollar has decreased by 95 %. That is to say, the purchasing power of a single dollar in 1913 corresponds to the purchasing power of a 20 $ bill in 2008. This model also works with the euro.
Let's now compare this with the purchasing power of gold over time from the year 0 to 2020: A cow in the year 0 cost about 31 grams of gold.
Today, 31 grams of gold are worth about 1500 euros. The average price of a cow is currently about 1500 euros. Therefore, 31 grams of gold still have the same purchasing power after 2000 years, which is about one cow.
The difference in purchasing power between a debt-based currency and a value-based currency over time is considerable. In order to preserve one's wealth over time, it is necessary to hold value-based currencies rather than debt-based currencies.
It is better to use debt-based currencies for these everyday expenses, and to use asset-backed currencies to preserve one's wealth.
IV – The hyperinflation of debt-based currencies
During exceptional crises such as the 1987 crash, but also the 2001-2002 stock market crash (the bursting of the dot-com bubble) as well as the 2008 crisis (the subprime crisis), central banks implement massive money-printing strategies using debt-based money. No energy or labor is needed to print these new banknotes, so the solution is very easy.
The massive increase in the number of new banknotes (euros, dollars, etc.), largely in the stock markets, creates currency inflation, and in extreme cases, hyperinflation such as that of Germany in 1923, Venezuela starting in 2013, and the Turkish lira still today.
This hyperinflation creates a rapid and brutal devaluation of the currency; this phenomenon destroys confidence in this currency. All wealth too exposed to a currency undergoing hyperinflation sees its purchasing power literally collapse within a few months/years.
Here is a chart of the Fed's money printing (the United States Federal Reserve, the equivalent of the central bank in Europe) since 1980:
Following the Covid-19 crisis, more than 20 % of US dollars in circulation were printed in 2020. We are in the exact same situation in Europe with the euro.
The central banks of the United States and Europe are carrying out the same strategies that the central banks of Germany carried out in the 1920s, as well as those of Venezuela and Turkey more recently.
Our central banks have no other choice than to continue the vicious circle of printing debt-based money, but this is only a short-term solution. Let us remember that the euro is merely an experiment that has only been in existence for 20 years.
As Albert Einstein used to say: « Insanity is doing the same thing over and over again and expecting a different result ».
Tristan
