In the world of investing, it's easy to get caught up in daily market movements and headlines. But sometimes, it's valuable to step back and examine the fundamental concepts that underpin our entire financial system. Let's explore the very nature of money and its journey through history, touching on ideas that are quite relevant to our understanding of today's economic landscape. I recently came across a conversation between podcaster Robert Breedlove and investor Lyn Alden and thought the perspectives discussed were worth sharing. I have linked the episode of the podcast at the bottom of the blog.
What is Money, Really? The "Ledger" Concept
Money isn't just a physical item or a number in a bank account. At its core, money is the best ledger we use to keep track of our savings and transactions. This perspective helps us understand both commodity money—like gold, where nature's inherent scarcity acts as the ledger keeper through physical possession—and the idea of credit, where promises and trust are central to tracking who owes what.
Historically, even in small, early communities, informal credit systems, or mental ledgers, helped people exchange goods and services. As societies grew, more formal ledgers emerged. Commodity monies, like gold and silver, became popular because they were naturally scarce, durable, and dense, making them effective for storing value over time and distance. Gold, in particular, became dominant due to its strong "stock-to-flow" ratio and resistance to debasement.
The Shift to Paper and Centralization
The story of money then introduces the abstraction of gold and silver into paper currency. This brought advantages like greater divisibility and speed. However, it also created a new dynamic. With technologies like the telegraph, information could travel instantly, but the actual, final movement of physical money remained slow.
This "speed mismatch" inadvertently gave immense power to intermediaries—first banks, then central banks. They became the coordinators of these new ledgers. While these centralized systems brought efficiency, they also introduced new vulnerabilities, such as the potential for debasement or what some call "opaque theft" of purchasing power through excessive money creation. Historical examples, such as the Bank of England during World War I, illustrate how this can play out.
The Complexities of Inflation
From this historical lens, inflation isn't just about rising prices. It's often viewed as a "dilution" of the money supply. When the amount of money in circulation grows faster than the economy's ability to produce goods and services, your existing money effectively buys less. This constant dilution can impact every contract in society, from your wages to business agreements. It can force shorter contract terms and increase administrative burdens as people struggle with the uncertain future value of money. This can even erode the "social contract" and lead to a "brain drain" in highly inflationary environments.
It's also worth considering that our common understanding of inflation might be skewed. If society continually becomes more productive (think about how much cheaper electronics get over time), prices should naturally fall in a stable monetary environment. So, even a seemingly modest 2% inflation target, from this viewpoint, represents a higher rate of monetary expansion and dilution beyond any gains from productivity.
Bitcoin: An Emerging Alternative to Centralization
Looking ahead, some believe Bitcoin offers a potential answer to many of these historical and ongoing monetary challenges. This perspective suggests Bitcoin is a breakthrough in achieving "fast final settlement" without relying on centralized intermediaries or promises that can be broken.
Gold, for all its merits, struggled to scale efficiently across a global, interconnected world without introducing promises (like paper gold certificates). Bitcoin, by contrast, aims to offer a digital, peer-to-peer system that allows for efficient, fast settlement with significantly reduced reliance on third parties. Its "fixed units" and "open source" nature are seen as core attributes that differentiate it from traditional central bank-controlled systems, which often involve "mandated trust." The optionality it provides, allowing individuals to choose their level of trust and self-custody, is considered a fundamental shift.
This concept is sometimes compared to how the automobile revolutionized transportation by offering individual freedom. Just as you can choose to maintain your own car or use a service, Bitcoin is seen as offering a spectrum of custody options, from self-managed multi-signature setups to more traditional custodial services.
What does all this mean for you, the investor?
This deep dive into the philosophy and history of money, including the emergence of digital assets like Bitcoin, provides a crucial framework for understanding the ongoing evolution of global finance. It encourages us to consider the long-term implications of monetary policy and technological innovation.
While these are complex, theoretical discussions, they underscore the importance of a well-informed and adaptable approach to your wealth. Understanding the various perspectives on money and its future can help you navigate economic cycles with greater clarity.
If these concepts spark further questions about how the broader economic evolution might impact your personal financial goals, or if you're looking to solidify your long-term financial strategy with a wealth advisor, please feel free to reach out. We're here to help you stay grounded and focused on your financial future.