The true foundations of money and the lessons of historical currency crises

The history of the human economy is closely linked to the development of exchanges and monetary systems. Again and again, bad designs in finance led to devastating global crises that profoundly changed millions of people. The serious economic crisis of the past century, the causes of which without understanding theof the monetary order at that time cannot be fully understood. The way money is created, bounded and distributed, forms the invisible foundation of every modern civilization.

The fatal role of the Golden Monetary Order

In the past, the binding of national currencies to the precious metal has often proved to be a serious obstacle to necessary economic policy adjustments. In the 1920s, this rigid system created the conditions for global economic collapse by massively increasing the vulnerability of international financial markets. The mechanism of this ordermade sure that economic shocks from a certain country could spill over to all other nations unfiltered. Instead of cushioning the original shocks, the system acted like an amplifier for the spreading financial panic.

The captivates of political ability to act

Governing and central bankers were prevented from taking effective countermeasures against economic decline by the strict rules of this monetary order. The system acted as a rigid shackle that prevented those responsible from preventing the collapse of credit institutions or curbing the spread of fear in the markets. From exactly thisFor reasons, this international monetary order is considered the main trigger for the global economic catastrophe of that era. An economic recovery was only possible again when the states gave up this rigid connection to the precious metal and regained their monetary policy sovereignty.

The misunderstanding of absolute rarity

When looking at scarce money, the fallacy often arises that the mere absolute rarity of a good determines its suitability as a medium of exchange. If so, any spatially printed unique piece could be explained as the basis of the entire currency. Since such an object could be reproduced in almost any number of pieces by modern technology, it would quickly lose value of exchange, evenIf it only exists as a unique piece at first. This phenomenon is historically well documented, as the example of the Indian shell money, which was suddenly produced in large quantities by new types of tooling techniques, and thereby lost its value.

The true key figure of monetary stability

The decisive factor for the suitability as non-cash money is therefore not the pure total stock, but the ratio of the existing quantity to the annual new production. This key figure describes how many years it would take with the same production capacity to generate the current total stock again. The higher this value is, the slower and more predictable changesthe available amount of the good. Every ideal medium of exchange requires a high and constant value of this key figure in order to serve as a reliable value storage basis.

The dangers of fluctuating production quantities

If this key figure is too low, this can be propagated too quickly, which inevitably leads to a massive price drop and a devaluation. If, on the other hand, this value fluctuates greatly, future price developments are hardly predictable, which makes the good as a monetary basis unusable. This circumstance explains why most purely material goods are not suitable as money. For example, servesAn agricultural product as a currency basis, the money supply depends primarily on weather conditions and yields.

The incompatibility of agriculture and industry

In a purely agricultural society, such a coupling of the money supply to the harvest may still make sense. In a complex industrial society, however, this model is completely unsuitable because the need for circulation funds depends on completely different factors than the harvest quantity. In addition, the cultivation of this good would increasingly be primarily operated to increase money, whatwould in turn result in a strong devaluation of money. The precious metal with the yellow gloss, on the other hand, has a very high and extremely stable key figure, which only logically explains its historical role as money.

The physical benefits of the yellow precious metal

The use of this special metal as a means of payment is by no means a historical coincidence, but results directly from its unique physical properties. In comparison, the key figure for other precious metals such as white silver fluctuates significantly more, which makes it less suitable as a stable money. The historical shell money, on the other hand, had in the pastEpochs in the manufacturing methods of the time similar to stable properties as the yellow precious metal today. The physical nature thus largely determines the monetary suitability of a raw material.

The illusion of infinite scarcity

It is obvious to ask why you don’t just choose an estate whose new production is completely dry, which is absolutely unrepeatable. Theoretically, one could declare the famous painting of a surrealist master the sole monetary base and sell tiny, ideal parts of it. Such a procedure would be purely mathematically conceivable, but brings serious practicaldisadvantages with themselves. The most obvious error is in extreme centralization, since the total monetary value depends on a single physical object.

The need for decentralized distribution

If this one central object is lost or destroyed, the entire stock of human money is instantly destroyed. Every functioning monetary system requires a commodity that can be stored decentralized and in many different places at the same time. In addition, money lives from its broad spatial and social distribution. A centrally custodian work of artDevelops a completely different effect than small, randomly distributed pieces of precious metal that can circulate in many hands.

The Lessons for Modern Cryptocurrencies

These basic rules also show the design principles of modern digital currencies. These cryptocurrencies started with a low key figure of new production, which massively favored the rapid spread of the network. Over time, this production rate decreases steadily due to the design until it will completely cease in the distant future. The initially highNew production served as an important distribution tool, as it motivated many network participants at the same time to search for the digital units.

The incentive of decentralized creation

This decentralized compensation for new units creates a strong incentive to provide computing power for securing the network. The fact that success in finding new units depends on chance makes you search for them in countless places around the world at the same time. Basically, a remaining inflow of new units from a monetary point of view is to theeven advantageous in most cases. If there is a possibility of increasing material production to a limited extent, this happens exactly in the periods in which the exchange ratios are particularly high.

The self-regulation effect of the price level

If the money is confronted with a growing amount of real consumer goods, prices will first drop, expressed in this currency. This drop in prices increases the real value of money, which in turn creates an increased incentive to promote the money material. This increased production is causing goods prices to rise again and mitigates the price drop. In this way, aNatural self-regulation effect for the price level, at which the surrounding money supply automatically adapts to the real quantity of goods. This is especially true in phases of an overall growing economic area.

The misunderstanding of production costs

There is a direct connection between the inflow and the costs of the money production. Whenever the funds have a high exchange value, the incentive to create new money and increase the inflow increases. When viewed superficially, cause and effect is often confused by assuming that the money becomes more valuable through high funding costs alone. suchMindsets easily lead to the lunatics of Marxist theory of labor value, which deduces the value of the production effort.

The true causality of value and promotion

In fact, the mechanism works exactly the opposite: More money is simply being produced because its purchasing power has increased on the market. The precious metal is not more expensive by putting unprofitable mines into operation. Instead, operators only start mining these mines when the market prices for the metal have risen accordingly and theeffort worth it again. Purchasing power thus determines the funding effort and not the other way around. The consideration of these monetary-theoretical connections reveals how profoundly the physical and mathematical properties of exchange media influence the fate of entire nations. The historical errors of rigid monetary systems warn us to always critically consider the mechanisms of money creationto question. Whether through natural precious metals or through algorithmically controlled cryptocurrencies, the pursuit of a stable, non-manipulable value storage function remains the central challenge of every economic order. Ultimately, the quality of money largely determines the prosperity and freedom of the society that uses it.