In order to understand why scarce money has value we need to address time. Time, after all, is the most valuable thing we have. Some people are blessed with many years, whilst others are not so lucky. It is the one resource we all have in limited supply. Rich, poor, black or white, when we enter this world our clock starts. Time does not discriminate.
Time is valuable because it is scarce. At some point we will all run out of it. If someone had the ability to easily increase the amount of time they have on this planet we would equate it to a god-like power. If everyone had the ability to increase the amount of available time it would render times value completely obsolete.
Just imagine the way you would live your life if time wasn’t important. If at the flick of a switch you could increase your time, would each minute, hour or day be more or less valuable? How would your behaviour change? How would you utilise your infinite time?
The relationship between time and money
Money, a common medium of exchange was created to solve the limitations of barter. At some point in human history, we decided that swopping three goats for two chickens, half a rabbit and a quarter of a pig wasn’t exactly efficient. Money made these transactions seamless and alleviated the frustrations and inefficiencies of trying to reach an agreement on any given exchange.
Money has changed shape and form many times throughout history. However, the longest-standing forms of it have been successful at storing purchasing power between generations. These monies have been successful due to two underlying properties, unforgeable scarcity and a supply that cannot be adjusted significantly to match current demand. Gold is the most obvious example that comes to mind. Its value is derived by the fact that it is exceptionally difficult and expensive to dramatically increase its supply.
Historically, gold inflates annually by around 1.5%. Even if there is a substantial increase in the demand for gold and miners consequently decide to double the rate at which they mine, they will only increase its supply by 3%. This is not a damaging supply dilution for current holders. Compare this with the ease at which monies backed by nothing can be inflated.
“How can $1 have value, if its supply can be increased by the stroke of a keyboard, at no cost?”
The purchasing power of $100 in 1913 adjusted for inflation. Source: howmuch.net
Money is stored time
The bulk of society provides their time in exchange for money. Many people will perform this exchange for more than 30 years in the hope that the purchasing power that they delayed in their youth can be used for their retirement. In order to be successful in doing this they have two options.
1. They can study financial markets and make their own investments or,
2. They can trust in financial institutions and wealth managers to make investments on their behalf.
The ability to effectively manage your money is paramount in today’s society. This is due to our current fiat monetary system. With the money we earn today we are obliged to take risks in an attempt to preserve its purchasing power. When you walk into a bank and make a deposit you aren’t just storing your money there, you are providing them with an unsecured loan to lend as they please with the promise of returning you an interest rate greater than the rising cost of goods.
That’s the real catch with Keynesian economics. By letting your money sit idle and not taking risks, you will damage your purchasing power over time. The reality is that the majority of the population doesn’t understand these risks, yet they are forced to take them. However, it does not have to be this way and it wasn’t always like this.
There is an old Jewish proverb that goes like this, “keep a third of your wealth in money, a third in property and rest in your business.” Think about how this asset allocation has evolved. Holding a third of your wealth in the medium of exchange today would be a catastrophic mistake.
Fiat ≠ Money
Fiat = debt
Debt money needs inflation to reduce its burden. Every dollar is an IOU and has someone on the other end wanting to claim its value in a game of financial music chairs. Debt money works well in the beginning of its cycle but like all debt based economies we eventually over extend ourselves by consuming more today than we can produce in the future.
Debt money is comparable to burying cash in your garden and once a year someone in a grey suit comes and burns 2% of it. It is terrible at preserving purchasing power without taking on additional risk.
Money is used by the bulk of our population to store their time. Real money preserves purchasing power because it remains scarce relative to the changing supply of other goods and commodities in our economies. As human productivity increases and our output grows, we expand our purchasing power, the time we exchanged becomes more valuable as our collective output increases.
If you value your time, then why exchange it for something that doesn’t closely resemble times characteristics?