I have two questions to test your “money literacy.”
Let’s see how you do answering them:
Question #1: Where did money come from and why was it created?
Question #2: How does money and the money system actually work?
So how did you do?
Did you know the answers?
Do you feel good about your answers?
Most of us have never learned the answers to these questions – which means that we’re trying to create financial success inside of a system that we don’t understand.
This is NO BUENO.
In today’s article, I want to make SURE you understand what money really is … so you can start playing the money “game” to WIN!
Alright, let’s get started …
Where Money Came From
What is money … REALLY?
Most people think money is something valuable. That intrinsically, it has value.
But the truth is, it isn’t.
At least, today it’s not.
Let me explain …
Back in the days before we had paper money, we would trade with each other.
So if I had 3 chickens and some fishing nets I wanted to trade for a spear and a pig, I’d bring them with me to the person who had the stuff I wanted. Then, I’d have to see if they wanted to strike a deal with me.
If they didn’t … then it totally sucked.
I’d have to go back and find someone who wanted my 3 chickens and fishing nets and ALSO had the stuff the guy who had the pig and spear wanted.
Once I made that trade, then I’d have to go back to the original guy, give him the stuff he wanted, all so that I could get my spear and pig.
VERY complicated and time-consuming.
That’s why as humans, we quickly realized it wasn’t all too convenient to walk around with chickens or cows to trade for the things we wanted.
It wasn’t practical.
We needed a standardized unit of trade.
Something simple, portable and valuable.
A “universal currency” that anyone could use or accept to “trade for” or purchase anything, pay off debts or lend.
So we created cash money.
Originally, currency – or money – was in the form of rare and special items. A particular type of shell that was rare and attractive. A type of carved stone that required a lot of work to create.
Now, with a universal currency like shells, I could sell my chickens and nets, then trade the shells directly for the pig and the spear I wanted.
Then, when we got good at things like farming and growing food, we began using things like grains for our “universal currency.” This was nice because if we couldn’t spend it, we could always eat it.
Eventually, we came across precious metals and the ultimate currency: GOLD
Gold was a great currency because it was rare, easy to carry around, didn’t corrode, and could be used for all kinds of things other than just money – which were very valuable. If you didn’t want to use your gold to buy things, you could make jewelry, make a tooth filling, use it in art, etc.
Silver is another “great” currency – for the same reasons.
In modern times, both silver and gold are valuable for many, many important processes in our lives. They are used throughout technology, science, medicine, and others – because they’re highly conductive, resist corrosion, form strong alloys with other elements, and are attractively shiny.
And the bottom line here is this:
Money itself used to be WORTH SOMETHING.
You could use it for something other than just trade.
There’s a special name for this when the currency has intrinsic value – and can be used for something.
It’s called “Commodity Money.”
The thing to remember about this Commodity Money, again, is that Commodity Money has value in and of itself. If you have grain that no one wants, you can eat it. If you have gold that no one wants, you can make jewelry, tooth fillings or even computer chips from it.
The next step in the evolution of money was creating money that wasn’t a commodity itself, but that acted as a promise of the commodity.
So we created paper notes that were backed by gold or silver.
This type of money is called “representative money” because the paper note you hold in your hand is just a representative of real value in the form of, say, gold or silver – that you can trade it for any time you’d like.
The note you had represented real, physical gold or silver that was in a vault somewhere.
The next step in this process – and a very controversial step – was to “disconnect” the paper notes from the gold or silver (and from the real world completely) – and print paper notes to use for money – but this time without anything “physical” to back them up.
That’s right. Nothing to connect them to the real world. Just a piece of paper with a promise.
This type of money is called “Fiat Money.”
Fiat Money (or Fiat Currency) is created when a government declares that the printed pieces of paper are legal tender to pay with and be paid with.
The word “fiat” means “let it be done.” A government says “let it be done” – and now paper is money.
Then the final “great leap” took place when we escaped from the “physical world” altogether – and money became numbers on a computer screen.
So what you need to know is this. Money has NO value in and of itself.
It is only a REPRESENTATION of value.
So chasing after money – and focusing on getting more money – is going after the wrong thing.
Value Vs. Money
Instead, you’ve got to focus on what CREATES money.
What creates money?
It’s just like Earl Nightingale used to say …
You can’t go to a wood-burning stove and demand to get heat.
FIRST, you have to put in the wood.
THEN, you can get the heat.
Money is the same way.
Because these days, at its core, money isn’t intrinsically worth anything.
So it’s wrong to chase money because it has ZERO value in and of itself.
Instead, you need to be focused on CREATING value.
If you do that, then the money will follow.
I’ll continue this conversation in a few more articles.
But for now, just know that it’s all about generating value.
Let me know in the comments what you think about today’s article!