The Hierarchy of Money

- Robert Kiyosaki..."Money is not the most important thing in life, but it does affect everything that is important"

At the earliest stages of life, it becomes obvious that money is very important. Without it, acquiring resources is increasingly difficult. It's the difference between living the life you want, and living the life you "have to". When it works we know it, when it doesn’t we know it even more. A common experience most children encounter is “we can’t afford it” and for adults, it is “how much does it pay?”

- Aristotle...“Money is a measure of everything of which has value”

A Short History of Money

Money is the language from which we 1) express value, 2) measure value, and 3) record value. It's a developing technology that enables value transfer across space and time. As money evolved from shells to coins, it allowed for faster, cheaper, and more efficient commerce (the trading of resources). Better commerce-enabled individuals and societies to access better tools, gadgets, and ideas. Ultimately, the harsh conditions of everyday life began to improve. Better living conditions plus technical innovation meant populations would grow at faster rates. The money would manifest in various forms: cattle, salt, aggry beads, Ria stones, shells, silver, and gold. Much like any rational person would base their beliefs on "sound principles," the world market was looking for " sound money." By the 18th century, gold emerged as the best form of money because of its superior properties.

Historical Money

Livestock

Livestock was used as money because it had nutritional value. Livestock failed as sound money because it could not be divided, recombined, or resist rot. Nutritional values such as fruit, livestock, and grain were exchangeable but lacked resistance to decay.

Ria Stones

Ria stones were a type of limestone used as money on the Yapi island. The process of converting limestone to Ria-stone took lots of time and labor, contributing to the properties of hardness and scarcity. Ria stones succeeded as a medium of exchange, store of value, and unit-of-account until it didn't. The lack of scarcity was exposed by an Irish American in 1871. David O'Keefe shipwrecked on the island of "Ria-stone-money" and quickly realized he could mass-produce Ria-stone's using European technology. David O'Keefe left and returned to the island with massive amounts of Ria-stone, exchanging the stone for the island resources. The ease of producing massive quantities of Ria-stone in a short period of time resulted in a transfer of wealth to the Europeans and a debasement of Ria-stone money to worthless. This is called "Inflation."

Aggry Beads

Aggry Beads were used as money for centuries in western Africa. Europeans were attracted to the rich resources of Western Africa and noticed aggry beads were used as money. Europeans began to mass-produce aggry beads then ship them to Africa and use them as money to buy up all of Western Africa's resources. Western African's believed they were becoming rich because they didn't understand their money's lack-of-hardness. They traded away most of their rich resources for aggry beads. Aggry beads failed because they were easily mass-produced, debasing the value. By modern terms, the inflated supply of aggry beads is called "Inflation."

Wampum Shells

Wampum Shells were used as money because they were both scarce, hard to find, and satisfied the functional-roles of money. As technology advanced in North America, the properties of Wampum Shells were exposed and could not satisfy "Hardness." The rise of Fossil-fuel-powered boats dramatically increased the supply of Wampum Shells. Again, history repeats itself, and the individuals who sold their resources for Shells slowly realized the shells were worthless.

Salt

Salt was a great medium of exchange and unit of account because it was so divisible, verifiable, and portable. The problem was that salt could be easily destroyed by water and eventually become inflated due to technologies that could mass-produce salt, collapsing it's buying power.

Silver Coin

Silver emerged as a better form of money than previous monies because it carried a lot of value in such a small size and was much harder to produce than cattle, salt, beads, stone, and shells. Of all the previous money before it, silver was superiorly divisible, portable, durable, and much harder to produce. It served as a better medium of exchange and unit of account. But, it also failed to satisfy the properties of hardness and verifiability. Governments began diluting the purity of silver coins with copper and bronze, a technique called "coin clipping." Recipients of silver had the illusion that they were receiving pure silver and when they learned of this devaluation tactic demand collapsed, ultimately destroying the trust of silver coins as money.

Gold Coin

Resistant to decay and virtually indestructible, Gold emerged as the best form of money. Although gold is not the best "medium of exchange," it's definitely the best "store of value." Gold is the most difficult form of money to find and produce, making it the hardest, scarcest, most predictable system of money. The creation of gold coins increased the ability to be exchanged (divisibility & portability). Coin-clipping persisted and Empires who diluted their gold coins always collapsed. Ultimately, gold lost it's medium of exchange status to Fiat-currencies but retained its status as the only true store-of-value. In the gold standard era, between 1790 and 1970, the world experienced the largest innovational period in history. When Gold was removed as money, the World saw the bloodiest centuries ever. 

Fiat Paper

Shipping large amounts of gold across vast distances was too costly, risky, and time-consuming. So Government-issued paper money, known as Fiat-currency. Backed by gold, Fiat was an extension of what gold failed to be, a scalable medium-of-exchange (divisibility, portability). Its value depended on the ability to redeem $35.00/USD for 1oz of gold. This was true between 1945 and 1971. Governments succumbed to the desire to over-print, creating an excess amount of fiat than gold available. Essentially abandoning the Gold-standard (defaulting on their promise to redeem) and declaring the Dollar-fiat-currency as the world reserve currency. Who could challenge the United States Military forces, technological advances, and political control? Credit cards, debit cards, and other electronic forms of payments such as "apple pay" are extensions of the fiat currency system.

Bitcoin

In the wake of the 2008 financial crisis, a new asset class was born. Created by Satoshi Nakamoto, Bitcoin was the beginning of a new decentralized system of money. Controlled by no "one" owned by "everyone" participating. Bitcoin is divisible by 100,000,000 unit's making it the most divisible money ever. Bitcoin can be instantly transferred in large amounts across the world making it superiorly portable. Bitcoin's network allows anyone to verify its supply while insuring privacy through a technique called cryptography. There will only ever be 21million bitcoins making it the scariest hardest asset ever created. Bitcoins can't be destroyed or erode over time ensuring superior durability. Bitcoin's largest weakness is that it lacks the proper on and off-ramps for entry much like the first car's lacked the infrastructure to drive on. Then it was built. The ingenuity of bitcoin creates a network effect that generates a new property, Censorship resistance.

Comparing Roles

Comparing Properties

Fiat vs Gold vs Bitcoin