We want to help people in developing countries become free.
THE NATURE AND EVOLUTION OF MONEY
The processes of globalization of the world economy and the development of human civilization are "flattening" the differences between the economies of different countries by integrating them into a single, continuously developing economic infrastructure and accelerating the adoption of full-fledged market principles of operation by all socio-economic systems of the world.
As part of the accelerated development of social and economic institutions, the old type of multi-currency market system, established over a long historical period, is no longer relevant. The world economy, represented by a multitude of national markets with their currencies, does not meet modern requirements and growing globalization. The changed logic of the development of the world economy, the processes of decentralization of relations between economic subjects in the global network, and the appearance of marketplaces of any jurisdiction, available to any inhabitant of the earth in the virtual environment, have led to the appearance of decentralized means of exchange, the acceptance and popularity of which seems to be a natural phenomenon.
The world's financial authorities are faced with the need to reform the monetary system due to the unprecedented self-regulated modernization of world finance. In the global economy of the future, the exchange rates of national currencies, which theoretically should reflect the demand for the national gross product produced, will lose their relevance. Demand and supply of goods in different industries, regardless of their national origin, will play an increasingly important role. Instead of a competition between national currencies representing (1) the aggregate gross domestic product and (2) the political-economic environment, we will see a more understandable and logical competition between sectoral currencies, where, as IT technologies penetrate the processes of value creation, the role of the economic environment within national economies will gradually level off and market categories of supply and demand will come to the fore.
How did we arrive at this conclusion?
ALL TYPES OF UNIVERSAL MONEY HAVE IN COMMON THE VICE OF "ABSOLUTE" VALUE, BEING ONLY INTERMEDIARIES IN THE PROCESS OF EXCHANGE.
Prices in universal money do not reflect the fair use value of exchanged values, since the value of money itself is "mixed in" with these prices. The value of money is subject to change either by the deflationary nature of gold, by the actions of financial authorities, or by bitcoin, which is essentially the same modernized gold. Once the essence that gave market liquidity to all kinds of property, money evolved into an increasingly convenient form of a calculable symbol of wealth that could be stored and recorded. This made it a coveted commodity with the most powerful supply and demand. This circumstance elevated it as an intermediary in trade BEFORE the values themselves had any real use value.
The effect of universal money on property, in terms of redistributing the results of our activities, is much greater than it may appear:
1. THE GRAVITATIONAL EFFECT OF UNIVERSAL MONEY
I would call the effect of any universal money on the economy "gravitational". A single currency for all assets (be it gold, its symbols, or fiat currencies), being the "most significant", distorts the "estimated space" around it, by analogy with the gravitational effect of a massive body on the surrounding physical objects. But in this case, the "gravity" is of artificial origin. Whatever the demand for useful values of various origins and purposes, the market price for them will always be formed "with an eye" to the value of money since money is the most convenient form of wealth for storage and movement. This gives them a great value as the ultimate goal of any economic activity. WE ALWAYS PAY TRIBUTE TO MONEY BECAUSE IT IS UNIVERSAL.
The difference in prices for different groups of goods denominated in the "common currency" does not reflect the correct balance of supply and demand for different types of products:
Given the same rate of return, denominated in the same currency for all, the production of boots or potato chips, a person will choose the production of the product that is less labor intensive - chips. This is even though society's need for boots may be greater. If each industry had its currency, the rate of the "shoe" currency would be higher, which would lead to an influx of investment in that particular industry, and the shoemaker would increase his wealth due to the higher exchange rate of the shoe industry.
Mathematically speaking, the universal currency is the "common denominator" in the valuation of any asset. Not in the price equation
a variable that takes into account the degree of real demand or utility
of any asset or product separately.
The utility should come from creating the most necessary value for a person, not from extracting units of price. If each asset class is represented by its currency, then investment will be forced to flow into the most in-demand industries, as the exchange rate of their currency will rise against all others. But throughout the history of economic relations, there have been no other alternatives - gold and all subsequent forms of it have ideally solved problems of the market in terms of simplifying the exchange process.
Today the opportunity to free the economy from the hegemony of the intermediary - the means of exchange in all its forms (dollar,
bitcoin, etc.) has finally appeared.
2. THE RISK AND CONSEQUENCES OF MONEY LOSING ITS INTERMEDIARY FUNCTION
The inability of the market to respond promptly to fluctuations in demand for industrial products is another problem with any form of universal medium of exchange. This happens because it is not always possible to mobilize sufficient resources to smooth them out in the form of an intermediary currency that has its price in the market.
Let me translate the above into plain language:
In conditions of deflation and unemployment, when the value of money increases, a shoemaker can starve to death even with a shortage of boots. The people will be cold, but they will not come to the shoemaker's shop due to the lack of money (an obligatory intermediary in the exchange). But the most resourceful among them will be able to exchange his boots for food, thus eliminating the intermediary from the chain. In other words, when it came to a matter of life and death, the participants threw the intermediary out of the exchange process to obtain a product of real value to both parties.
We wanted to use this example to illustrate how the universal medium of exchange distorts real supply and demand in setting market prices, and how this affects people.
3. THE PROBLEM OF MONOPOLIES AND CARTELS
What is the nature of monopoly and cartel influence in the market? This influence is realized through unreasonable price dictation in the market of a product by a leader or a group of leaders in the market. Why is arbitrary pricing possible? Because the medium of exchange in which prices are set is unrelated to the commodity and carries no information. If values were represented in the market by their currency, and information about the real security of each was decentralized and publicly available, it would be harder to manipulate prices.
The economic influence of the intermediary currency remains unnoticed and invisible to us because we have been immersed in this given since the origins of social and economic relations, like fish in an artificial aquarium, unable to see from the inside what a more perfect world looks like.
Conclusion: We live in a world where the prices of different assets are denominated in a universal medium of exchange (dollars, pounds, etc.). Such prices, by definition, cannot accurately reflect the demand for each of the different asset classes separately, because they are influenced by the value of the intermediary itself: money.
Today, real values with utility values are just tools for making money.
LOGIC OF MONEY EVOLUTION
Historically, gold became the universal measure of value and the first circulating money on a global scale. The availability of this metal in every region of the world, its unique properties, and the necessary degree of rarity contributed to its globalization as a universal medium of exchange (the agreement of all market participants to accept gold as payment for any commodity).
These attributes, inherited from the distant past by all modern money, have given it its own added value, beyond the value of the objects of exchange themselves.
All modern forms of money are nothing more than different hypostases of the same gold.
One way or another, throughout the history of civilization, the universal medium of exchange has been the most optimal tool for providing exchange transactions.
As the scale of trade, the volume of transactions, the geography of economic relations, and the level of development of institutions and technology grew, gold changed its form only in response to the demands of the times. The changes involved an increase in the liquidity and speed of exchange transactions, but its universal nature remained unchanged. Money has never lost its role as a "universal medium of exchange", which has made it the most liquid form of all property, the most valuable commodity, and the ultimate goal of all economic activity.
The evolution of money manifested itself only in the increase of its liquidity and speed of circulation to serve the growing and accelerating circulation of goods. The intermediary nature of money remained unchanged.
Two conditions had to coincide for the money to accept the next format:
(1) the critical need for change and (2) the institutional and technical readiness of society for a new form of money.
METALLIC GOLD - DOLLAR
In the beginning, physical gold met the needs of the trading processes of the time. It was circulated in the form of coins bearing the coats of arms of various countries. Being both a medium of exchange and an "absolute value", it required no collateral (just like bitcoin).
The ability to exchange gold for any useful product or asset anywhere made it more valuable than the items exchanged themselves.
GOLD - DOLLAR - BANKNOTE
Then the growth of the volume of production and the expansion of the geographical scale of commercial operations as a result of the scientific and technological revolution at the beginning of the 19th century initiated the modernization of gold as money.
The "physical form" of gold could no longer serve the new scale of trade transactions. Hence the appearance of gold-backed banknotes - gold took on a more liquid form: with banknotes, there was no longer a need to move physical gold in large quantities and over long distances due to the increased volume and geography of trade. Secured banknotes became the first industrial token (gold), to put it in modern terms. More specifically, the banknote became the first industrial token of the gold industry because it was backed by gold in a bank vault. Gold didn't go anywhere - it just changed form and remained the "value of last resort.
GOLD - DOLLARS - ELECTRONIC RECORDS ON ACCOUNTS
As a result of the further acceleration of world trade in the 20th century and thanks to the emergence of appropriate information technologies, non-cash money came to the aid of banknotes, again without changing its "golden" essence.
With the increase in trade turnover and the geography of trade associated with the scientific and technological revolution and the development of technology, different forms of gold succeeded each other to satisfy the economy of the subsequent technological order.
Conclusion: Despite changing "aggregate states," gold in the form of banknotes or electronic money remained a secure universal intermediary in the trade of values produced by various industries until the gold standard was abolished.
Imagine if an alien from a more advanced civilization came to Earth... Not bound by the authority of gold, he would be able to assess the situation objectively and ask a legitimate, common-sense question:
"Your economy is not limited to the mining of gold, it is driven by the demand for values that have a value for human use, why do you value gold more than anything else?"
To which the wisest earthlings might reply:
"You're right, but we don't yet have the technology to tokenize real value. In addition, the world economy is not yet global enough to replace gold with industry tokens and eliminate it as an intermediary in exchange processes”.
This hypothetical dialog is a reflection of the true place and logic of the role of the universal medium of exchange in the process of trade.
DOLLAR - GDP
The next stage in the evolution of money can be characterized as a tectonic shift in the development of the institution of money. For the first time, it touches on the ancient basic characteristic of a medium of exchange - gold has significantly lost the status of a security asset.
For the first time, the evolutionary step was not an increase in money liquidity and settlement speed, but the recognition of the priority of real values over gold in terms of GDP.
This refers to (1) the Bretton Woods Conference at the end of World War II in 1944, which resulted in the U.S. dollar becoming the reserve currency, and (2) the subsequent abandonment of the gold standard in 1975.
This happened as a result of one of the two prerequisites for the next evolutionary stage - economic necessity. This necessity was so critical that technological unpreparedness was ignored, and this was reflected in the quality of the currencies of the "post-golden" era.
The economic impact of this and subsequent events can be characterized by using the title of one of the works written by Lenin, the creator of the failed socialist economic system: "One Step Forward - Two Steps Back”:
Step forward
Recognition of the priority of values over gold
For the first time, the world "stepped over" gold and took the first intuitive step toward tying the means of exchange to real values - national product (GDP) began to be implied as collateral for currencies. One way or another, prices expressed in currencies without gold backing are already trying more to reflect the demand for the various assets produced by countries' economies.
This happened not because of the realization of the rightness of such a step in this particular way, but because of the circumstances:
After World War II, the national currencies of the world's major economies gave way to the U.S. currency in world trade. This was the result of the Bretton Woods Conference. The currency of a country retaining economic power, unlike countries directly affected by hostilities, became a reserve currency. No one thought seriously about gold then because of the criticality of the situation: "you can't eat gold".
That is, at a critical moment, the world felt the priority of real values over gold in search of a new reference point or base denominator against which assets should be valued. The universal medium of exchange, as an economic category, for the first time embodies real values, albeit “piled up in one heap”. However, the formal de jure overthrow of the “metal idol” did not yet have the courage, which led to an attempt at a golden revenge in the early 70s of the twentieth century:
After the recovery of their economies thanks to the leverage provided by the U.S. economy in the form of dollar loans backed by gross product (not gold), the leaders of several countries suddenly remembered gold ("absolute value"), forgetting that it was the economy, not gold, that "pulled" the world out of the post-war crisis. The demand to "cash in" dollars in gold speaks to the continued engagement of consciousness with the gold idol, even though, more recently, real values have already proven their priority.
The evolutionary shift away from gold-backed money in 1975 was not due to the inability of the US economy to pay its debts. It would have happened sooner or later anyway, no matter what the immediate trigger was.
If, in 1944, the decision to link currencies to the dollar was an intuitive recognition of this economy's capacity for value creation as the more important factor, by 1975 mankind had already been forced to formulate and implement the priority of real values OVER gold. Faced with the choice between gold from the vaults and real values in exchange for paper money, they chose the latter by the mere fact of the adoption of new rules. It does not matter that this was done on the initiative of the United States (the debtor), but the important thing is that everyone was forced to agree.
Even if the United States were declared bankrupt due to insufficient gold reserves, its economy in the early 1970s was producing enough competitive national product to service the dollar supply. It had something to offer creditors instead of gold that they could not refuse. Gold was replaced by a "renewed" dollar backed by the national product of the world's most developed and richest economy.
The loss of gold's economic significance was natural.
The rest of the world has followed the U.S. example about its national currencies. Gold has lost some of its relevance as a store of value, although the world still pays tribute to its habit of holding it in its reserves.
Conclusion: The abolition of the gold standard was an evolutionary step forward in terms of an intuitive attempt to back the money with real values (represented by GDP) instead of "useless" gold.
Step Backward #1
Loss of collateral
Due to the lack of technological capabilities for the correct provision of national currencies with new and complex collateral in the form of GDP, the concept of collateral has moved into an abstract area of perception:
If previously currencies were secured by a specific asset in the form of gold, now it has become impossible to correctly and accurately determine the degree of its security.
Currencies became fiat. The role of guarantor of security was delegated to national governments.
As a result, "obscurely" secured fiat money replaced gold, but retained its universal role in the exchange of value.
In addition, the reserve status of the dollar, obtained as a result of the Bretton Woods Conference, and which remained after the abolition of the gold standard in 1975, continues to "drag" the lion's share of surplus value in favor of a certain part of the world's population. Hence the destructive frenzy of trade wars and currency manipulation by the authorities of competing economies.
Fiat money cannot be fully backed by the “lumped together” values of a diversified gross product: the transfer of the right to guarantee the security of fiat money to the government has expanded the possibilities for artificially manipulating their value through changing interest rates and expanding the money supply. This, together with the universal nature of money inherited from gold, increased their influence on the economic space.
In this way, the financial authorities manage people's economic behavior to correct unavoidable macroeconomic mistakes at their expense. This is made possible by the fact that the population does not have equal access to accurate and timely information about the volume of the country's gross product as a factor of securing money.
Conclusion: The second obligatory condition for the full-fledged transition of the institution of money to a more perfect level was that there was no technological readiness for a new type of security at that time. A diversified GDP cannot serve as the correct provision for a universal medium of exchange. For this reason, too, the state made money fiat, acting as a “guarantor” of securing money.
Step Backward #2
Return of Gold
The removal of the gold backing of money and monetary regulation led not only to conspiracy theories about the causes of the crises but also to legitimate public questions about fiat currencies. The weak link between the universal medium of exchange and real values in the case of fiat currencies is rejected because of its imperfection. No one has yet thought about the emergence of commodity or sectoral currencies: the predominance of the multinational paradigm of the world monetary system and the technological immaturity of humanity has not yet contributed to the emergence of serious prerequisites for this, even of a theoretical nature.
And society decided to return the gold...
Bitcoin was the brainchild of enthusiasts with the best of intentions, as an updated version of good old-fashioned but useless gold. But now the new gold is perfect, with attributes perfected by the blockchain. Now money is independent of the decision-making centers that affect people's property.
Bitcoin solves several shortcomings of modern money. But as a representative of the old paradigm of the "universality of money", it continues to carry the innate vice of "absolute value".
Plus, bitcoin, being the "best gold," is simply doomed to perpetual appreciation because of its deflationary nature and perfect rarity. Bitcoin's deflationary nature leads to the inevitable widening of the quantitative gap between money supply and commodity fill, so it is doomed to rise in value relative to any commodity. The cause of deflation will be not so much the growth of world GDP as the ever-growing shortage of money. This will intensify the negative "gravitational" effect of money on the prices of all products of a multisectoral economy without exception.
The impact on human investment activity. GDP growth and the emergence of new values are associated with investment activity, while the "new gold" represented by bitcoin does not contribute to it. The economic sense of any project becomes unobvious when it requires investment in an ever-price increasing asset. Bitcoin's rise in value relative to any assets is guaranteed by an algorithm, so holding bitcoin and doing nothing becomes more profitable than investing it in a project with any planning horizon.
Despite its "advancedness," bitcoin is a movement back to the past in terms of a return to the institution of "absolute value," unrelated to the objects of exchange.
Bitcoin's "gravitational" impact on the economic space will have an overwhelming effect on all economic activity. This disadvantage is so obvious and so significant in its dramatic effect on the economy that bitcoin proponents cannot get around it, and, impressed by the ingenious blockchain technology that underlies it, try to present this disadvantage in their eyes and the eyes of the public as a virtue:
They say bitcoin is "brilliant" at everything, and that the inevitable rise in its price will limit overconsumption, thereby having a healing effect on society.
But they "forget" that to an even greater extent, the "growing scarcity" of money will inevitably suppress investment-technology-development-value-creation - society evolution.
Conclusion: The bitcoin investor is less interested in investing in projects with any lengthy production cycle because there is a high probability that the future benefits of the project will be lower than the guaranteed benefits of simply keeping bitcoin in the wallet.
IMPACT OF DIFFERENT MONEY TYPES ON ECONOMIC MOTIVATION, DISTRIBUTION OF INVESTMENT, AND WEALTH
The primary motive of human economic activity, inherent to all without exception, is the accumulation of wealth. But in an environment where wealth and property appreciation is associated with a single asset, economic activity does not lead to a fair distribution of wealth.
When wealth is identified with universal means of exchange - gold, dollars, bitcoins - the motive to increase wealth manifests itself as an accumulation of these intermediaries of the exchange process. Real assets themselves do not yet have the attributes of money to replace and exclude the "intermediary" from the trade turnover. Today, the part of the value added that forms accumulation is converted into the "intermediary" asset - money because it is the one that is perceived by everyone as an absolute value.
Thus, a whole industry of money generation was formed, including through the credit multiplier, surpassing in capitalization any of the industries that create real values.
The fact that well-being is measured by the number of units of means of exchange makes a person indifferent to the kind of activity that leads to their accumulation. The proverb "money doesn't smell" accurately describes this thesis.
To carry out investment activities, we pay tribute twice: (1) to the most capitalized global money industry, leaving the financial industry players with a significant part of the added value, and (2) to the government, which manages the value of the intermediary asset itself at its discretion (in the case of fiat money).
Why do we transfer real assets into universal money? Because they have always been the most liquid and therefore the preferred form of holding any asset, which has given them the highest value.
But what if the products of an industry finally acquire the same properties of money, allowing them to be quickly and easily exchanged for the assets of any other industry? That is when the assets of the industry itself become money with a clear and accessible collateral for any market participant? Then capital will flow from the same considerations of "greed" to the industry that produces the most demanded products, directly and without the mediation of a universal currency. Even a simple currency conversion from one industry to another would be a "direct investment" in the target asset without transaction losses. To better characterize the quality of the financial environment described, let's use the physical term "superconductivity", which implies the absence of obstacles in the way of moving entities. The only beneficiaries of the economic effect will be the direct participants of the industry and not the owners of the financial infrastructure. The mechanism of growth of the rate of sectoral currency would work faster by removing the excess drive and increasing the property of the entrepreneur exactly as much as the demand for his product increased about the rest.
Now, the production-financial cycle is considered complete when the universal medium of exchange is received because it is the main goal. At this point, the cycle of the circulation of the added value is interrupted, as it is stored in "useless" assets: fiat currency or bitcoin for an indefinite period, until it falls into the "right" hands. In our case, the capital either stays in the industry or flows directly and immediately into another industry, materializing in the form of growth in the value of the next currency/industry. In this way, wealth must move from industry to industry, making the direct creators of value richer. Each producer of a commodity with growing demand, receiving the currency of his industry at the time of production, can more profitably exchange it for another value due to the increased exchange rate of his currency.
Investors and entrepreneurs would invest directly in creating the most profitable and promising future values.
The exchange rates of industry currencies would accurately reflect the market demand for various asset classes. Accordingly, the movement of capital and the direction of society's intellectual and physical efforts would become more meaningful.
In an economy with a branch-based monetary system, creating the most sought-after product will be the only way to increase wealth, even in the absence of good intentions.
So far, only those with a higher level of consciousness see the way to increased prosperity through the creation of social values.
When values themselves become money, eliminating the intermediary in the form of the dollar, gold, or bitcoin the incentive to accumulate wealth and the noble desire to create will "work" together without contradicting each other.
Capital should consist of native industry currencies, perceived simultaneously as money, an industrial commodity, and an investment. Then the motivation to increase wealth would direct physical and intellectual resources directly to the industries of greater interest to the market at the time of the investment decision. Thus, as a result of inter-sectoral competition, all kinds of capital would tend to concentrate in the most desirable and profitable sectors of the economy, bypassing the stage of transformation into "intermediate instruments" of exchange.
Money should have a "smell" so that investments become more meaningful, but, more importantly from a motivational point of view, more profitable.
A GENERAL SUMMARY OF THE IMPACT OF UNIVERSAL MONEY ON THE ECONOMY AND THE WELFARE OF SOCIETY
The dollar, being a centralized currency due to unreasonable issuance, depreciates people's savings and assets over time.
Whereas bitcoin, on the contrary, does not stimulate creative activity, despite its serious advantages over "old money”.
Bitcoin is a transitional currency or "trial balloon" of blockchain technology before "real value money" emerges. Blockchain technology is a revolution in giving individual economic freedom and self-actualization and the self-organization of entire communities of free people. The possibilities of using this technology have not yet been fully understood by humankind.
Bitcoin and fiat money are two extremes that, each in its way, negatively affect the economy. In an economy with any universal medium of exchange, the growth of wealth is not always related to the creation of a valuable product, because money is neutral concerning values, being the ultimate primary goal of economic activity. Whether people are aware of this fact in this way or not, it is true.
Common sense, “purified from the primitive habit” of a universal currency, could reasonably raise the question of the need to adopt a more adequate sectoral multicurrency system with a full-fledged institution of value provision.
As the global industrial infrastructure develops, consciously or by instinct, the monetary system will inevitably change according to the logic described here. Not only that, but the level of information technology is already ready for it, and its integration into the global financial market infrastructure is only a matter of time. This could be the ultimate solution to the monetary problem of inflation/deflation, as supply and demand for goods would be reflected in the mutual exchange rates of the sectoral currencies, without the monetary factor of "extra" or, conversely, scarce old money influencing them. The possibility, as well as the necessity, of manipulating the value of money, would disappear, leaving the role of the regulator to the market itself.
The main obstacle that stood in the way of creating more logical industry currencies, compared to national ones, is the insufficient degree of globalization of the world economy and information technology, as well as the lack of an asset backing mechanism. Today we have the emergence of the first branches of the world economy, in all respects ready for the next stage in the evolution of money.
Today's level of technology makes it possible to correct the "birth trauma" of money - to exclude the intermediary in the form of a universal means of exchange from the commodity turnover.
We can state now the existence of both prerequisites for the next stage in the evolution of money:
(1) People are aware of the need and even have a vision of the format of the necessary change;
(2) Humanity's technological readiness for the necessary infrastructure - blockchain and Internet of Things (IoT) technologies provide a unique opportunity to create a new decentralized currency system, the subjectivity of which will be transferred to the global economic community painlessly for national financial authorities. The combination of economic necessity and technological readiness played the role of a "trigger" at different times for the emergence of secured banknotes and the abandonment of the gold standard. So the next practical step towards common sense and improvement of the institution of money is not far off:
the issue of intellectual and technological readiness can be considered solved, which means that political awareness is only a matter of time.
THE NATURE AND EVOLUTION OF MONEY
The processes of globalization of the world economy and the development of human civilization are "flattening" the differences between the economies of different countries by integrating them into a single, continuously developing economic infrastructure and accelerating the adoption of full-fledged market principles of operation by all socio-economic systems of the world.
As part of the accelerated development of social and economic institutions, the old type of multi-currency market system, established over a long historical period, is no longer relevant. The world economy, represented by a multitude of national markets with their currencies, does not meet modern requirements and growing globalization. The changed logic of the development of the world economy, the processes of decentralization of relations between economic subjects in the global network, and the appearance of marketplaces of any jurisdiction, available to any inhabitant of the earth in the virtual environment, have led to the appearance of decentralized means of exchange, the acceptance and popularity of which seems to be a natural phenomenon.
The world's financial authorities are faced with the need to reform the monetary system due to the unprecedented self-regulated modernization of world finance. In the global economy of the future, the exchange rates of national currencies, which theoretically should reflect the demand for the national gross product produced, will lose their relevance. Demand and supply of goods in different industries, regardless of their national origin, will play an increasingly important role. Instead of a competition between national currencies representing (1) the aggregate gross domestic product and (2) the political-economic environment, we will see a more understandable and logical competition between sectoral currencies, where, as IT technologies penetrate the processes of value creation, the role of the economic environment within national economies will gradually level off and market categories of supply and demand will come to the fore.
How did we arrive at this conclusion?
ALL TYPES OF UNIVERSAL MONEY HAVE IN COMMON THE VICE OF "ABSOLUTE" VALUE, BEING ONLY INTERMEDIARIES IN THE PROCESS OF EXCHANGE.
Prices in universal money do not reflect the fair use value of exchanged values, since the value of money itself is "mixed in" with these prices. The value of money is subject to change either by the deflationary nature of gold, by the actions of financial authorities, or by bitcoin, which is essentially the same modernized gold. Once the essence that gave market liquidity to all kinds of property, money evolved into an increasingly convenient form of a calculable symbol of wealth that could be stored and recorded. This made it a coveted commodity with the most powerful supply and demand. This circumstance elevated it as an intermediary in trade BEFORE the values themselves had any real use value.
The effect of universal money on property, in terms of redistributing the results of our activities, is much greater than it may appear:
1. THE GRAVITATIONAL EFFECT OF UNIVERSAL MONEY
I would call the effect of any universal money on the economy "gravitational". A single currency for all assets (be it gold, its symbols, or fiat currencies), being the "most significant", distorts the "estimated space" around it, by analogy with the gravitational effect of a massive body on the surrounding physical objects. But in this case, the "gravity" is of artificial origin. Whatever the demand for useful values of various origins and purposes, the market price for them will always be formed "with an eye" to the value of money since money is the most convenient form of wealth for storage and movement. This gives them a great value as the ultimate goal of any economic activity. WE ALWAYS PAY TRIBUTE TO MONEY BECAUSE IT IS UNIVERSAL.
The difference in prices for different groups of goods denominated in the "common currency" does not reflect the correct balance of supply and demand for different types of products:
Given the same rate of return, denominated in the same currency for all, the production of boots or potato chips, a person will choose the production of the product that is less labor intensive - chips. This is even though society's need for boots may be greater. If each industry had its currency, the rate of the "shoe" currency would be higher, which would lead to an influx of investment in that particular industry, and the shoemaker would increase his wealth due to the higher exchange rate of the shoe industry.
Mathematically speaking, the universal currency is the "common denominator" in the valuation of any asset. Not in the price equation
a variable that takes into account the degree of real demand or utility
of any asset or product separately.
The utility should come from creating the most necessary value for a person, not from extracting units of price. If each asset class is represented by its currency, then investment will be forced to flow into the most in-demand industries, as the exchange rate of their currency will rise against all others. But throughout the history of economic relations, there have been no other alternatives - gold and all subsequent forms of it have ideally solved problems of the market in terms of simplifying the exchange process.
Today the opportunity to free the economy from the hegemony of the intermediary - the means of exchange in all its forms (dollar,
bitcoin, etc.) has finally appeared.
2. THE RISK AND CONSEQUENCES OF MONEY LOSING ITS INTERMEDIARY FUNCTION
The inability of the market to respond promptly to fluctuations in demand for industrial products is another problem with any form of universal medium of exchange. This happens because it is not always possible to mobilize sufficient resources to smooth them out in the form of an intermediary currency that has its price in the market.
Let me translate the above into plain language:
In conditions of deflation and unemployment, when the value of money increases, a shoemaker can starve to death even with a shortage of boots. The people will be cold, but they will not come to the shoemaker's shop due to the lack of money (an obligatory intermediary in the exchange). But the most resourceful among them will be able to exchange his boots for food, thus eliminating the intermediary from the chain. In other words, when it came to a matter of life and death, the participants threw the intermediary out of the exchange process to obtain a product of real value to both parties.
We wanted to use this example to illustrate how the universal medium of exchange distorts real supply and demand in setting market prices, and how this affects people.
3. THE PROBLEM OF MONOPOLIES AND CARTELS
What is the nature of monopoly and cartel influence in the market? This influence is realized through unreasonable price dictation in the market of a product by a leader or a group of leaders in the market. Why is arbitrary pricing possible? Because the medium of exchange in which prices are set is unrelated to the commodity and carries no information. If values were represented in the market by their currency, and information about the real security of each was decentralized and publicly available, it would be harder to manipulate prices.
The economic influence of the intermediary currency remains unnoticed and invisible to us because we have been immersed in this given since the origins of social and economic relations, like fish in an artificial aquarium, unable to see from the inside what a more perfect world looks like.
Conclusion: We live in a world where the prices of different assets are denominated in a universal medium of exchange (dollars, pounds, etc.). Such prices, by definition, cannot accurately reflect the demand for each of the different asset classes separately, because they are influenced by the value of the intermediary itself: money.
Today, real values with utility values are just tools for making money.
LOGIC OF MONEY EVOLUTION
Historically, gold became the universal measure of value and the first circulating money on a global scale. The availability of this metal in every region of the world, its unique properties, and the necessary degree of rarity contributed to its globalization as a universal medium of exchange (the agreement of all market participants to accept gold as payment for any commodity).
These attributes, inherited from the distant past by all modern money, have given it its own added value, beyond the value of the objects of exchange themselves.
All modern forms of money are nothing more than different hypostases of the same gold.
One way or another, throughout the history of civilization, the universal medium of exchange has been the most optimal tool for providing exchange transactions.
As the scale of trade, the volume of transactions, the geography of economic relations, and the level of development of institutions and technology grew, gold changed its form only in response to the demands of the times. The changes involved an increase in the liquidity and speed of exchange transactions, but its universal nature remained unchanged. Money has never lost its role as a "universal medium of exchange", which has made it the most liquid form of all property, the most valuable commodity, and the ultimate goal of all economic activity.
The evolution of money manifested itself only in the increase of its liquidity and speed of circulation to serve the growing and accelerating circulation of goods. The intermediary nature of money remained unchanged.
Two conditions had to coincide for the money to accept the next format:
(1) the critical need for change and (2) the institutional and technical readiness of society for a new form of money.
METALLIC GOLD - DOLLAR
In the beginning, physical gold met the needs of the trading processes of the time. It was circulated in the form of coins bearing the coats of arms of various countries. Being both a medium of exchange and an "absolute value", it required no collateral (just like bitcoin).
The ability to exchange gold for any useful product or asset anywhere made it more valuable than the items exchanged themselves.
GOLD - DOLLAR - BANKNOTE
Then the growth of the volume of production and the expansion of the geographical scale of commercial operations as a result of the scientific and technological revolution at the beginning of the 19th century initiated the modernization of gold as money.
The "physical form" of gold could no longer serve the new scale of trade transactions. Hence the appearance of gold-backed banknotes - gold took on a more liquid form: with banknotes, there was no longer a need to move physical gold in large quantities and over long distances due to the increased volume and geography of trade. Secured banknotes became the first industrial token (gold), to put it in modern terms. More specifically, the banknote became the first industrial token of the gold industry because it was backed by gold in a bank vault. Gold didn't go anywhere - it just changed form and remained the "value of last resort.
GOLD - DOLLARS - ELECTRONIC RECORDS ON ACCOUNTS
As a result of the further acceleration of world trade in the 20th century and thanks to the emergence of appropriate information technologies, non-cash money came to the aid of banknotes, again without changing its "golden" essence.
With the increase in trade turnover and the geography of trade associated with the scientific and technological revolution and the development of technology, different forms of gold succeeded each other to satisfy the economy of the subsequent technological order.
Conclusion: Despite changing "aggregate states," gold in the form of banknotes or electronic money remained a secure universal intermediary in the trade of values produced by various industries until the gold standard was abolished.
Imagine if an alien from a more advanced civilization came to Earth... Not bound by the authority of gold, he would be able to assess the situation objectively and ask a legitimate, common-sense question:
"Your economy is not limited to the mining of gold, it is driven by the demand for values that have a value for human use, why do you value gold more than anything else?"
To which the wisest earthlings might reply:
"You're right, but we don't yet have the technology to tokenize real value. In addition, the world economy is not yet global enough to replace gold with industry tokens and eliminate it as an intermediary in exchange processes”.
This hypothetical dialog is a reflection of the true place and logic of the role of the universal medium of exchange in the process of trade.
DOLLAR - GDP
The next stage in the evolution of money can be characterized as a tectonic shift in the development of the institution of money. For the first time, it touches on the ancient basic characteristic of a medium of exchange - gold has significantly lost the status of a security asset.
For the first time, the evolutionary step was not an increase in money liquidity and settlement speed, but the recognition of the priority of real values over gold in terms of GDP.
This refers to (1) the Bretton Woods Conference at the end of World War II in 1944, which resulted in the U.S. dollar becoming the reserve currency, and (2) the subsequent abandonment of the gold standard in 1975.
This happened as a result of one of the two prerequisites for the next evolutionary stage - economic necessity. This necessity was so critical that technological unpreparedness was ignored, and this was reflected in the quality of the currencies of the "post-golden" era.
The economic impact of this and subsequent events can be characterized by using the title of one of the works written by Lenin, the creator of the failed socialist economic system: "One Step Forward - Two Steps Back”:
Step forward
Recognition of the priority of values over gold
For the first time, the world "stepped over" gold and took the first intuitive step toward tying the means of exchange to real values - national product (GDP) began to be implied as collateral for currencies. One way or another, prices expressed in currencies without gold backing are already trying more to reflect the demand for the various assets produced by countries' economies.
This happened not because of the realization of the rightness of such a step in this particular way, but because of the circumstances:
After World War II, the national currencies of the world's major economies gave way to the U.S. currency in world trade. This was the result of the Bretton Woods Conference. The currency of a country retaining economic power, unlike countries directly affected by hostilities, became a reserve currency. No one thought seriously about gold then because of the criticality of the situation: "you can't eat gold".
That is, at a critical moment, the world felt the priority of real values over gold in search of a new reference point or base denominator against which assets should be valued. The universal medium of exchange, as an economic category, for the first time embodies real values, albeit “piled up in one heap”. However, the formal de jure overthrow of the “metal idol” did not yet have the courage, which led to an attempt at a golden revenge in the early 70s of the twentieth century:
After the recovery of their economies thanks to the leverage provided by the U.S. economy in the form of dollar loans backed by gross product (not gold), the leaders of several countries suddenly remembered gold ("absolute value"), forgetting that it was the economy, not gold, that "pulled" the world out of the post-war crisis. The demand to "cash in" dollars in gold speaks to the continued engagement of consciousness with the gold idol, even though, more recently, real values have already proven their priority.
The evolutionary shift away from gold-backed money in 1975 was not due to the inability of the US economy to pay its debts. It would have happened sooner or later anyway, no matter what the immediate trigger was.
If, in 1944, the decision to link currencies to the dollar was an intuitive recognition of this economy's capacity for value creation as the more important factor, by 1975 mankind had already been forced to formulate and implement the priority of real values OVER gold. Faced with the choice between gold from the vaults and real values in exchange for paper money, they chose the latter by the mere fact of the adoption of new rules. It does not matter that this was done on the initiative of the United States (the debtor), but the important thing is that everyone was forced to agree.
Even if the United States were declared bankrupt due to insufficient gold reserves, its economy in the early 1970s was producing enough competitive national product to service the dollar supply. It had something to offer creditors instead of gold that they could not refuse. Gold was replaced by a "renewed" dollar backed by the national product of the world's most developed and richest economy.
The loss of gold's economic significance was natural.
The rest of the world has followed the U.S. example about its national currencies. Gold has lost some of its relevance as a store of value, although the world still pays tribute to its habit of holding it in its reserves.
Conclusion: The abolition of the gold standard was an evolutionary step forward in terms of an intuitive attempt to back the money with real values (represented by GDP) instead of "useless" gold.
Step Backward #1
Loss of collateral
Due to the lack of technological capabilities for the correct provision of national currencies with new and complex collateral in the form of GDP, the concept of collateral has moved into an abstract area of perception:
If previously currencies were secured by a specific asset in the form of gold, now it has become impossible to correctly and accurately determine the degree of its security.
Currencies became fiat. The role of guarantor of security was delegated to national governments.
As a result, "obscurely" secured fiat money replaced gold, but retained its universal role in the exchange of value.
In addition, the reserve status of the dollar, obtained as a result of the Bretton Woods Conference, and which remained after the abolition of the gold standard in 1975, continues to "drag" the lion's share of surplus value in favor of a certain part of the world's population. Hence the destructive frenzy of trade wars and currency manipulation by the authorities of competing economies.
Fiat money cannot be fully backed by the “lumped together” values of a diversified gross product: the transfer of the right to guarantee the security of fiat money to the government has expanded the possibilities for artificially manipulating their value through changing interest rates and expanding the money supply. This, together with the universal nature of money inherited from gold, increased their influence on the economic space.
In this way, the financial authorities manage people's economic behavior to correct unavoidable macroeconomic mistakes at their expense. This is made possible by the fact that the population does not have equal access to accurate and timely information about the volume of the country's gross product as a factor of securing money.
Conclusion: The second obligatory condition for the full-fledged transition of the institution of money to a more perfect level was that there was no technological readiness for a new type of security at that time. A diversified GDP cannot serve as the correct provision for a universal medium of exchange. For this reason, too, the state made money fiat, acting as a “guarantor” of securing money.
Step Backward #2
Return of Gold
The removal of the gold backing of money and monetary regulation led not only to conspiracy theories about the causes of the crises but also to legitimate public questions about fiat currencies. The weak link between the universal medium of exchange and real values in the case of fiat currencies is rejected because of its imperfection. No one has yet thought about the emergence of commodity or sectoral currencies: the predominance of the multinational paradigm of the world monetary system and the technological immaturity of humanity has not yet contributed to the emergence of serious prerequisites for this, even of a theoretical nature.
And society decided to return the gold...
Bitcoin was the brainchild of enthusiasts with the best of intentions, as an updated version of good old-fashioned but useless gold. But now the new gold is perfect, with attributes perfected by the blockchain. Now money is independent of the decision-making centers that affect people's property.
Bitcoin solves several shortcomings of modern money. But as a representative of the old paradigm of the "universality of money", it continues to carry the innate vice of "absolute value".
Plus, bitcoin, being the "best gold," is simply doomed to perpetual appreciation because of its deflationary nature and perfect rarity. Bitcoin's deflationary nature leads to the inevitable widening of the quantitative gap between money supply and commodity fill, so it is doomed to rise in value relative to any commodity. The cause of deflation will be not so much the growth of world GDP as the ever-growing shortage of money. This will intensify the negative "gravitational" effect of money on the prices of all products of a multisectoral economy without exception.
The impact on human investment activity. GDP growth and the emergence of new values are associated with investment activity, while the "new gold" represented by bitcoin does not contribute to it. The economic sense of any project becomes unobvious when it requires investment in an ever-price increasing asset. Bitcoin's rise in value relative to any assets is guaranteed by an algorithm, so holding bitcoin and doing nothing becomes more profitable than investing it in a project with any planning horizon.
Despite its "advancedness," bitcoin is a movement back to the past in terms of a return to the institution of "absolute value," unrelated to the objects of exchange.
Bitcoin's "gravitational" impact on the economic space will have an overwhelming effect on all economic activity. This disadvantage is so obvious and so significant in its dramatic effect on the economy that bitcoin proponents cannot get around it, and, impressed by the ingenious blockchain technology that underlies it, try to present this disadvantage in their eyes and the eyes of the public as a virtue:
They say bitcoin is "brilliant" at everything, and that the inevitable rise in its price will limit overconsumption, thereby having a healing effect on society.
But they "forget" that to an even greater extent, the "growing scarcity" of money will inevitably suppress investment-technology-development-value-creation - society evolution.
Conclusion: The bitcoin investor is less interested in investing in projects with any lengthy production cycle because there is a high probability that the future benefits of the project will be lower than the guaranteed benefits of simply keeping bitcoin in the wallet.
IMPACT OF DIFFERENT MONEY TYPES ON ECONOMIC MOTIVATION, DISTRIBUTION OF INVESTMENT, AND WEALTH
The primary motive of human economic activity, inherent to all without exception, is the accumulation of wealth. But in an environment where wealth and property appreciation is associated with a single asset, economic activity does not lead to a fair distribution of wealth.
When wealth is identified with universal means of exchange - gold, dollars, bitcoins - the motive to increase wealth manifests itself as an accumulation of these intermediaries of the exchange process. Real assets themselves do not yet have the attributes of money to replace and exclude the "intermediary" from the trade turnover. Today, the part of the value added that forms accumulation is converted into the "intermediary" asset - money because it is the one that is perceived by everyone as an absolute value.
Thus, a whole industry of money generation was formed, including through the credit multiplier, surpassing in capitalization any of the industries that create real values.
The fact that well-being is measured by the number of units of means of exchange makes a person indifferent to the kind of activity that leads to their accumulation. The proverb "money doesn't smell" accurately describes this thesis.
To carry out investment activities, we pay tribute twice: (1) to the most capitalized global money industry, leaving the financial industry players with a significant part of the added value, and (2) to the government, which manages the value of the intermediary asset itself at its discretion (in the case of fiat money).
Why do we transfer real assets into universal money? Because they have always been the most liquid and therefore the preferred form of holding any asset, which has given them the highest value.
But what if the products of an industry finally acquire the same properties of money, allowing them to be quickly and easily exchanged for the assets of any other industry? That is when the assets of the industry itself become money with a clear and accessible collateral for any market participant? Then capital will flow from the same considerations of "greed" to the industry that produces the most demanded products, directly and without the mediation of a universal currency. Even a simple currency conversion from one industry to another would be a "direct investment" in the target asset without transaction losses. To better characterize the quality of the financial environment described, let's use the physical term "superconductivity", which implies the absence of obstacles in the way of moving entities. The only beneficiaries of the economic effect will be the direct participants of the industry and not the owners of the financial infrastructure. The mechanism of growth of the rate of sectoral currency would work faster by removing the excess drive and increasing the property of the entrepreneur exactly as much as the demand for his product increased about the rest.
Now, the production-financial cycle is considered complete when the universal medium of exchange is received because it is the main goal. At this point, the cycle of the circulation of the added value is interrupted, as it is stored in "useless" assets: fiat currency or bitcoin for an indefinite period, until it falls into the "right" hands. In our case, the capital either stays in the industry or flows directly and immediately into another industry, materializing in the form of growth in the value of the next currency/industry. In this way, wealth must move from industry to industry, making the direct creators of value richer. Each producer of a commodity with growing demand, receiving the currency of his industry at the time of production, can more profitably exchange it for another value due to the increased exchange rate of his currency.
Investors and entrepreneurs would invest directly in creating the most profitable and promising future values.
The exchange rates of industry currencies would accurately reflect the market demand for various asset classes. Accordingly, the movement of capital and the direction of society's intellectual and physical efforts would become more meaningful.
In an economy with a branch-based monetary system, creating the most sought-after product will be the only way to increase wealth, even in the absence of good intentions.
So far, only those with a higher level of consciousness see the way to increased prosperity through the creation of social values.
When values themselves become money, eliminating the intermediary in the form of the dollar, gold, or bitcoin the incentive to accumulate wealth and the noble desire to create will "work" together without contradicting each other.
Capital should consist of native industry currencies, perceived simultaneously as money, an industrial commodity, and an investment. Then the motivation to increase wealth would direct physical and intellectual resources directly to the industries of greater interest to the market at the time of the investment decision. Thus, as a result of inter-sectoral competition, all kinds of capital would tend to concentrate in the most desirable and profitable sectors of the economy, bypassing the stage of transformation into "intermediate instruments" of exchange.
Money should have a "smell" so that investments become more meaningful, but, more importantly from a motivational point of view, more profitable.
A GENERAL SUMMARY OF THE IMPACT OF UNIVERSAL MONEY ON THE ECONOMY AND THE WELFARE OF SOCIETY
The dollar, being a centralized currency due to unreasonable issuance, depreciates people's savings and assets over time.
Whereas bitcoin, on the contrary, does not stimulate creative activity, despite its serious advantages over "old money”.
Bitcoin is a transitional currency or "trial balloon" of blockchain technology before "real value money" emerges. Blockchain technology is a revolution in giving individual economic freedom and self-actualization and the self-organization of entire communities of free people. The possibilities of using this technology have not yet been fully understood by humankind.
Bitcoin and fiat money are two extremes that, each in its way, negatively affect the economy. In an economy with any universal medium of exchange, the growth of wealth is not always related to the creation of a valuable product, because money is neutral concerning values, being the ultimate primary goal of economic activity. Whether people are aware of this fact in this way or not, it is true.
Common sense, “purified from the primitive habit” of a universal currency, could reasonably raise the question of the need to adopt a more adequate sectoral multicurrency system with a full-fledged institution of value provision.
As the global industrial infrastructure develops, consciously or by instinct, the monetary system will inevitably change according to the logic described here. Not only that, but the level of information technology is already ready for it, and its integration into the global financial market infrastructure is only a matter of time. This could be the ultimate solution to the monetary problem of inflation/deflation, as supply and demand for goods would be reflected in the mutual exchange rates of the sectoral currencies, without the monetary factor of "extra" or, conversely, scarce old money influencing them. The possibility, as well as the necessity, of manipulating the value of money, would disappear, leaving the role of the regulator to the market itself.
The main obstacle that stood in the way of creating more logical industry currencies, compared to national ones, is the insufficient degree of globalization of the world economy and information technology, as well as the lack of an asset backing mechanism. Today we have the emergence of the first branches of the world economy, in all respects ready for the next stage in the evolution of money.
Today's level of technology makes it possible to correct the "birth trauma" of money - to exclude the intermediary in the form of a universal means of exchange from the commodity turnover.
We can state now the existence of both prerequisites for the next stage in the evolution of money:
(1) People are aware of the need and even have a vision of the format of the necessary change;
(2) Humanity's technological readiness for the necessary infrastructure - blockchain and Internet of Things (IoT) technologies provide a unique opportunity to create a new decentralized currency system, the subjectivity of which will be transferred to the global economic community painlessly for national financial authorities. The combination of economic necessity and technological readiness played the role of a "trigger" at different times for the emergence of secured banknotes and the abandonment of the gold standard. So the next practical step towards common sense and improvement of the institution of money is not far off:
the issue of intellectual and technological readiness can be considered solved, which means that political awareness is only a matter of time.
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