Most of us may not remember our first interaction with money. But it should probably be going to a small shop to buy candy. I get candy. My mom or dad probably have paid ₹1 for it. Sooner it is simply accepted ₹ is a universal idea to buy and sell.
So I decided to dig into this universal idea. It obviously takes us to the era that we never lived. Let’s look at 4 hypothetical characters -- Arun, Ayesha, Teja, and Seetha
- Arun was a cheesemaker. Ayesha was a fisherwoman. Arun used to exchange cheese for fish. Both of them were happy.
- Soon Teja farmed carrots. Seetha has an amazing art of singing.
- Arun wanted both fish and enjoyed songs. Seetha wanted carrots and cheese. Teja wanted only cheese.
- Very quickly, the exchange process became a debate. Seetha needed to convince Arun singing is a rare art and worth trading a song for 500 grams of cheese. Similarly Arun, Ayesha, and Teja too.
- For each of them, it's a hard-earned effort to give away in exchange for want.
To solve this complexity all of them agreed to form a committee. Committee owns a concept called currency. It helps to measure the value of carrots, cheese, fishes (goods), and songs (services). For example, the committee finds gold to be less duplicate-able. So Teja sells 1 carrot for 5 gold coins, Ayesha sells 1 fish for 3 gold coins, or so on. What if no one wants a carrot anymore? Based on the demand (of the market) the number of gold coins valued for (a good/service) 1 carat may go down.
Similar happened to humankind,
- From the era of exchanging goods/services directly until using a currency like gold, silver, etc.,
- Very soon banks popped up with the promise of safeguarding, accounting gold, or even passing it on to further generations. (Activities theft, war, and invasion were prevalent those days.)
- Over decades people began to believe in banks. Put all their currency like gold in the bank.
- Countries soon shifted from gold to paper. The government would paper currency back to people in exchange for goods and services including gold.
That's how paper currency began in circulation slowly. To the most extent Banks did create economies, but with a huge economic inequality. Different brands of banks were born and they built trust with people based on how they operate.
Individual countries,
- Consider Japan, India, and the US.
- The US found a new, faster way to make bricks. They can afford to sell bricks.
- India was going through the rainy season. It buys 1 brick in exchange for 10 bags of rice.
- Japan was going through a drought season. Requests help from the US. In return for Rice, Japan offers US 10 clothes
- To manage this exchange process, the US comes up with a common currency. $1 equals 1 brick. India and Japan need to get $1 to buy stuff from the US.
- Left behind, India forms its currency Rupee(₹) and Japan forms Yen (¥)
- Meanwhile, the drought ends in Japan. They can don't need a lot of rice. Japan is now willing to offer only 5 clothes for 10 bags of rice.
- It means 1 brick = 5 clothes = 10 bags or rice
- In currency, ¥ 1 (10 clothes) = 20 bags of rice = $ 2
- Meanwhile, India has learned to the brick building itself. So they plan to buy fewer bricks from the US.
- It means 10 bags of rice = 3 bricks
- In currency ₹ 1 = $ 3
- It leaves the US with no option but to devalue their currency to accept the reality which is going to be $ 1 = ¥ 0.5 = ₹ 0.33 spurring US farmers and weavers being not able to afford rice and clothes from outside. So they are forced to get back to work.
Now you can imagine what $ 1 = ₹ 74 means. That tells us India imports more than what it produces.
The producers generally are companies who produce all goods and services of demand. After a certain growth stage of these companies, their own money is not enough to invest in order to produce more for the world/country. These companies will list themselves in Stock Exchange organizations which allows anyone to exchange a share of company ownership with money. That way company gets money right now to produce more in the future. Similarly, the person who owned gets a return amount of money the same company makes.
For example, if 100% of companies are listed on NASDAQ Stock Exchange in the US, the index that we see in the news as a 0.85% drop means the US isn't producing more today. And it does impact $. Different exchanges have different ways of measuring the same.
In retrospect, throughout the Industrial Age, the US produced more than abundant. It sold goods and services to various countries of the world. Around the early, ~1910s US citizens did not want a government-controlled central bank. There was a widespread opinion that central banks create wealth inequality.
- 7 bankers who controlled 1/4th of the world's wealth secretly met in Jaco Island for 9 days with the intent to create a central bank called the Federal Reserve System Bill.
- Same bankers in public spread fake news in public exclaiming that it would ruin their own riches. The average person reading the newspaper started thinking — It must be Act that's for good for the public since rich bankers cry.
This Bill gave powers to Federal Reserve Bank that it is not even accountable to the US government. They can print money (results in the workforce producing less for the world). The fact whether the US president has the power to fire the Federal Reserve chairman is debate-able to date. Federal Reserve System has the power and responsibility to give loans and interest rates to the US government in an arrangement that the US workforce produces more. Since a lot of countries trade with the US lens it impacts them too.
Cryptocurrency
When I was 6 years old, I used to trade ₹5 coins of my brother with ₹1 coin. I was able to fool him because he believes ₹1 looks bigger in size than ₹5. 😂
Likewise in the examples above,
- Arun, Ayesha, Teja, and Seetha had to believe in gold.
- US, India, and Japan had to believe in ₹, $, and ¥.
- US people had to believe in Federal Reserve Bank and Trust they don't mess up US Economy.
- Even a lot of us, looking at ₹10 Note in your purse. It's just Paper. You are believing in value.
- That ₹10,000 displayed in PhonePey or Net Banking. It's just a display on the screen with a beautiful user interface. You have to place trust and believe Banks isn’t messing up.
All the people who buy and sell goods and services should believe in whatever currency in order to value exchange to happen. Crypto is one form of currency. Bitcoin is a variant of crypto.
- All the transactions that are seen in your favorite banking app are simply fetched from a database. If Arun sends Ayesha ₹10 to buy fishes, it's the bank who owns the transaction updates a record in the database with own algorithm and programs.
- Blockchain is a synonym of a Database. If Arun sends Ayesha ₹10 to buy fishes the network appends a block to the chain existing information. Anyone who participates in a blockchain network can facilitate the transaction but doesn't have any control beyond that. The participant simply rents an algorithm and program to get a commission for facilitating the transaction.
- There is limited gold on this planet. Similarly, Bitcoin is limited to 21 million coins. Gold requires hydraulic machines to mine and Bitcoin requires computers to mine.
- Similar to how company shares are exchanged for ₹ (through banking apps), you can get ฿ for ₹ (through crypto wallets). One is called a shareholder the other is called a crypto hodler.
- When you buy stock on the stock market, the money goes to whoever owned that stock before you. If you're buying the stock at an IPO (initial public offering) the money goes to the company. When you buy bitcoin, you're paying money to whoever holds it - generally the BTC exchange (for eg. coinbase) itself. When a BTC is first "mined" it's given to the person whose computer first verifies the block added to the chain is authentic. So the exchange (like WazirX) essentially gives ฿ for ₹.
- The value of BTC goes up and down based on demand and supply based on future probability. Bitcoin might be impossible to hack, exchanges are not.
The more you learn about Bitcoin and Blockchain especially the technical happenings, the you get to choose if you should believe this system or not. Other currencies did not give that option in the first place. Some people treat Bitcoin like shares and few don't. The crypto hodlers are participating only to trade.
Federal Reserve says it's mostly a substitute for gold rather than for the $.
It seems true. What if gold was transferrable like $ over the internet?