Understanding Finance from scratch

Chapter 10 Once you see through the essence of money, you will understand the true meaning of finance——learn some currency knowledge every day (2)
In fact, at the beginning, there was no difference between the minting industry and other industries. At the beginning of capitalism in the early 19th century, the minting power was decentralized, and each minter produced the most pleasing coins—the size or shape that the customers liked. Its price is determined after free market competition.Almost every city-state in ancient Greece had its own currency minted, and there were more than 600 mints of feudal lords in Germany in the Middle Ages.

Humans have been cheating with money as long as gold coins were first used.Cattle used to be used as money in Tanzania, but unfortunately it was discovered that the cows paid for in the trade were all weak and sick cows, because the price is only expressed in terms of the number of cattle, and the price is between good and bad cattle There is no difference, so it is only natural that the lower quality cattle be paid for while the better ones are kept.Even in Nazi concentration camps, bad money drove out good money, and hand-rolling cigarettes soon drove out machine-made cigarettes.

At the craziest time in ancient Rome, silver coins containing only 2% silver were minted.Gradually, those currencies with sufficient value will leave the market.

In order to avoid flooding the market with bad coins, people began to oppose private coinage. They preferred to rely on government coinage, and believed that the government could prevent or punish fraudulent private coinage.As a result, the government gradually monopolized the right to mint coins.

But is the government really trustworthy?
In Britain in the 16th century, precious metals were not enough for coinage, and other metal components had to be added to the newly minted currency. Therefore, there were two kinds of currency on the market at that time, one was the currency that did not contain impurities originally, and the other was the currency that had been minted. Currency added to other metals.Although the legal value of the two currencies is equal, people can recognize them, store the currency without impurities, and take the currency with impurities to trade and circulate.Therefore, the good coins on the market are gradually being stored and their circulation is reduced, leaving only bad coins in the market.

In the 1st century AD, under the infamous Emperor Nero, the precious metal content of these coins began to decrease, and gold and silver coins were increasingly mixed with alloys, followed by an unprecedented increase in prices expressed in this unit of measurement, The decline of the Roman Empire began with inflation.

But in many cases, the phenomenon of "anti-Gresham's law" also exists in economic life, that is to say, good money drives out bad money.

You are buying vegetables in the vegetable market with 100 yuan. When you carefully examine the 50 yuan bill you got back, do you realize what you are doing?You're checking to see if you've received counterfeit money, and to paraphrase economics: you're driving out bad money.

Yes, under the conditions of market competition, bad money cannot drive out good money, because every day countless people are spontaneously driving out bad money.Buyers, of course, tend to pay with inferior coins, but they may not be able to succeed.Because sellers are as savvy as buyers, they will refuse to accept bad money.Buyers wanted to buy goods, so they had to put the good coins they had hidden into use.

Everyone is both a buyer and a seller. When he is a buyer and the seller rejects the bad money, he will naturally reject the bad money when he is the seller.Why are you double-checking the change the taxi driver gave you?Because you know that if you receive counterfeit money, it will be difficult to spend it.In the long run, bad money will withdraw from circulation.Therefore, under the conditions of market competition, good money always drives out bad money, rather than bad money driving out good money.

For example, in the era of banks and bank notes in China, whichever credit is good, the banknotes of that bank will be strong.The four major constant bank accounts in Shanxi have outstanding credit, and the bank notes of the four banks are used throughout the country at the same time, and even the Empress Dowager Cixi has to use them.As for bank notes with questionable credit, their bank notes will be quickly thrown out of the market, which fully demonstrates the power of good money to drive out bad money.The Fukang Bank of Hu Xueyan, a red-top businessman, also ended up being abandoned after his credit problems.In the silver dollar era, Mexico's Eagle Ocean and Yuan Datou have been stably occupying the market as good coins due to their high-quality fineness, and they have never been worried about being expelled.

That is to say, when the financial currency is replaced by bank notes or banknotes, the "Gresham's Law" is reversed, that is, good money drives out bad money.This is because when financial currency is exchanged with commodities, it embodies an equivalent transaction of "money and goods are cleared"; while paper money itself has no value, and its exchange with commodities embodies a credit relationship of creditor's rights and debts. Commodity producers sell commodities and accept banknotes on the premise of trusting the credit of the issuer of banknotes.Therefore, the banknotes issued by "good" banknote issuers are bound to be welcomed, while the banknotes issued by "bad" banknote issuers are bound to be boycotted, so good banknotes drive out bad banknotes.

Paper money is the best way to make a country prosperous

John Law was a financier in 18th-century Europe, known for promoting paper money.At that time, the currencies of European countries were still based on the metal standard, and there were either gold coins or silver coins in the market. In short, there were no banknotes.Because people in Europe feel that paper money is too unreliable compared with gold and silver.But Mr. John Law said: "No, paper money is the best way for a country to prosper." His belief was, "To prosper, issue paper money."

Louis XIV of France died in 1715.The dead king liked luxury goods and advocated high consumption during his lifetime, which brought France to the verge of financial bankruptcy.The Duke of Orléans, the regent who took charge of France after his death, had a hard time trying to pay off the financial hole left by his brother during his lifetime.At this time Mr. John Law appeared, and he said that paper money would bring prosperity and pay off debts easily.The Duke of Orleans immediately followed this suggestion and authorized Law, an Englishman, to set up the first bank in French history and issue banknotes.In the early days of the business, Mr. John Law kept his promise that any note issued by his bank would be immediately redeemable for gold at face value.Therefore, the common people believed that his banknotes were valuable and rushed to hold them.However, later, the French government could not resist the temptation to issue more banknotes, and banknotes flooded.Finally, one day in 1720, it was discovered that the face value of the banknotes was more than double the total metal coins in the country, so the banknotes collapsed, and all of them had to be recovered at a discount, and the metal coins were recirculated.Countless people suffered huge losses, and France almost broke out in revolution.Mr. John Law fled to Italy. The once biggest celebrity in France died silently in a slum in Venice in 1.

This Mr. John Law can be regarded as a well-known figure in the history of currency, and there is nothing wrong with the concept of issuing banknotes.So why did Mr. John Law fail?What was his mistake?

Law's initial success lies in his discovery that when there is a shortage of commodity money, he can re-achieve the optimum by issuing credit or paper money, thus making up for the impact of money shortage on the economy.But John Law's later mistake was that he equated the creation of money with the creation of wealth.However, what is important for a country is not the creation of money, but the creation of wealth.

As a symbol of currency value, banknotes are now popular all over the world.For example, the RMB in China and the U.S. dollar in the United States are legal tenders of a country. They are issued and circulated by the central bank of the country in a unified manner. They are guaranteed by national credit, and private individuals cannot print or issue currencies.Paper money itself does not have the intrinsic value of metal currency, and the value of paper money itself is much smaller than the currency value determined by the country. It is only a symbol of currency value.

If you look at the texture of the banknote itself, its own value is almost negligible.However, not only paper money can be exchanged for any commodity, but even gold, the former monetary aristocrat, can also be exchanged.Why is this?To answer this question, we still start with the history of paper money.

The earliest banknotes in the world appeared in China.During the Northern Song Dynasty, Sichuan was short of copper, and iron coins were mainly used in circulation.Iron coins are perishable and of low value. 10 units of iron coins are only equivalent to 1 unit of copper coins, which is extremely cumbersome to use.For example, buying a piece of cloth requires 2 iron coins and weighs 500 catties.In order to solve this problem, some wealthy businessmen opened "Jiaozipu". People can give the heavy iron money to Jiaozipu for safekeeping, and at the same time exchange it for the paper notes issued by Jiaozipu - Jiaozi, and then take Buy and sell goods with a portable jiaozi, and jiaozipu charges a certain percentage of storage fees.The earliest Jiaozi was printed with passwords and monograms to prevent forgery, and the amount was temporarily filled in when exchanging.Later, some wealthy businessmen joined forces to jointly issue standardized Jiaozi with a written amount.

With Jiaozi and Jiaozipu, people can exchange coins for buying and selling at any time, and they can also use Jiaozi to exchange cash from Jiaozipu at any time, which really greatly facilitates circulation.But a problem arises. If the merchant who issued the Jiaozi is not trustworthy, or cannot get the cash that others want to exchange due to operating losses, or even resorts to fraud, the Jiaozi ticket will not be cashed, and the person who holds the Jiaozi will be in a relationship with the Jiaozi. The wealthy businessman who opened Jiaozipu started a lawsuit.Later, the government of the Northern Song Dynasty had to intervene, prohibiting private distribution of Jiaozi, and the government printed and issued official Jiaozi, called Qian Yin.It is a pity that due to various reasons, this banknote has not been able to continue to circulate.

After the birth of paper money, it can only serve as a "vassal" of metal currency (mainly gold, but also silver in some countries) for a long time, just like a shadow, but a symbol of the value of gold.The country determines the gold content of banknotes in legal form, and people can freely exchange banknotes for gold. This currency system is also known as the gold standard.For a long historical period, the gold standard system was the basic currency system of human society, but it has inherent and insurmountable defects.

What troubled the gold standard was the ratio and quantity of paper money to gold.When issuing banknotes based on gold, a price ratio must be determined. Afterwards, whether the quantity of gold or banknotes changes, the original price ratio cannot be maintained, and the gold standard system cannot operate stably.

Britain was the first to implement the gold standard. The country stipulated a fixed price ratio between banknotes and gold, and banknotes could be freely exchanged for gold.During the First World War, Britain issued a large amount of banknotes in order to raise military expenses, and at the same time purchased military supplies from the United States and paid a large amount of gold.The issuance of banknotes increased sharply, and the amount of gold reserves dropped sharply. The original price ratio between banknotes and gold could not be maintained.Britain had to stop converting the pound to gold during the war, temporarily abandoning the gold standard.In the great world economic crisis from 1929 to 1933, the British gold standard collapsed completely.

This problem persisted in the later Bretton Woods system and eventually led to the collapse of the Bretton Woods system.

The final collapse of the gold standard and its withdrawal from the stage of history showed that paper money could no longer be directly exchanged into gold, that is, it could not be directly exchanged back into metal currency. Paper money, the "vassal" of metal currency, finally stepped onto the center of the stage and became the protagonist of the currency family.Banknotes became the standard currency, guaranteed by national credit, and circulated relying on the coercive power of the country.

During the Second World War, the United States made war windfalls, and its gold reserves ranked first in the world. In 1944, various countries held a meeting in Bretton Woods and decided to determine a fixed exchange rate between the U.S. dollar and gold ($35 = 1 ounce), and then determine a fixed exchange rate between the currencies of various countries and the U.S. dollar.This new monetary system was also known as the Bretton Woods system.Since then, in order to adapt to the increasingly prosperous international trade, the United States has issued a large number of US dollars, far exceeding the gold reserves. People gradually lost confidence in the US dollar, and the rush to buy gold continued. In August 1971, the United States had to announce that it would stop exchanging U.S. dollars for gold. The gold standard completely withdrew from the stage of history, and paper money has been popular since then.

1 yuan in 1 year is different from today's 1 yuan
A devout believer met God one day and asked: "God, what does 100 years mean to you?" God replied: "It's just a moment." "It's only 100 yuan." So the believer said happily: "God, please give me 1 million yuan!" God gave him a desperate answer: "No problem, please wait for me for a while." moment."

Please think carefully after a knowing smile. What kind of truth does this little humor tell us?

Please answer this question: Is the same 1 yuan worth the same today and in the future?Many would say yes, but economists say: different.Why?The answer is, because people have time preference—people always hold the attitude of rushing in when they consume, and believe that the utility of current consumption is greater than the utility of future consumption of the same commodity.Therefore, even if the same 1 yuan can buy the same product today and in the future, its value is not the same—because the utility of the same product is different today and in the future.It is people's time preference that gives money time value.This is exactly the moral of the little humor above: money has time value.Today's 1 yuan may not be 1 yuan next year. Usually, today's 1 yuan is worth more than tomorrow's 1 yuan.

The so-called time value of money refers to the added value of money after a certain period of investment and reinvestment.In other words, money is used for investment and will increase in value after a certain period of time, and the added value is the time value.The potential economic value of 1 yuan today and 1 yuan a year later is not equal, the former is greater than the latter, because the current 1 yuan can exceed 1 yuan in 1 year.Because if this 1 yuan is used for investment, from a social point of view, the investment will have a return, and this return is the value of time.If analyzed from the perspective of investors, investment means postponing current consumption to the future and using the 1 yuan for investment instead of consumption. Investment requires remuneration, and this remuneration is the time value of money.Of course, it can also be considered in this way. Since the consumption time of investors is delayed, the time value of money can be understood as a kind of compensation for investors to sacrifice current consumption.

I believe that everyone has a certain life experience about the value of time, but some people don't pay attention.For example, the interest rate of a one-year fixed deposit is 1%, so if you deposit 5 yuan in the bank, you can get 1 yuan after 1 year, and this 1.05 yuan is the time value of money.If the bank deposit interest rate is 0.05%, then as long as you deposit 5÷(1+1) yuan now, you can get 0.05×(1+1)÷(1+0.05) yuan after 1 year, which means that 0.05 year The subsequent 1 yuan is only equivalent to the current 1÷(1+1) yuan.This principle constitutes the basis of investment analysis. No matter how complicated the pricing formula is, its analysis model is based on this basis.

In the calculation of the time value of money, there are two calculation methods: simple interest and compound interest.

Simple interest means that when calculating interest, the interest is calculated each time according to the principal confirmed by the original financing parties, and the interest calculated each time is not transferred to the next principal.For example, if Zhang San lends Li Si 1000 yuan, the two parties agree that the annual interest rate is 5%, and the loan will be repaid in 3 years. Based on the calculation of simple interest, the interest receivable by Zhang San after 3 years is 150 yuan (3×1000×5%).

When calculating interest on simple interest, there is an implicit assumption that the interest calculated each time is not automatically transferred to the principal, but is kept by the borrower or taken away by the lender, so no interest is generated.

Compound interest means that every time the interest is calculated, the interest is re-added to the principal, so that the next interest calculation is based on the previous sum of the principal and interest. To put it bluntly, it is rolling interest.In the above example, if Zhang San and Li Si agreed to calculate interest based on compound interest, then the sum of principal and interest that Zhang will receive after 3 years is as follows:

Interest in the first year: 1×1000%=5;

转为本金后，第2年利息：（1000+50）×5%=52.5；

转为本金后，第3年利息：（1050+52.5）×5%=55.125；

加上本金，第3年的本利和：1050+52.5+55.125=1157.625。

From the examples above, we have seen the huge profits that come with compound interest.In fact, compound interest is the greatest miracle of wealth.

Remember the story about $24 buying the island of Manhattan?That's a solid deal, but what if we recalculated from another angle?What if the original $24 was not used to buy Manhattan, but was used to invest?Let's assume an annual investment income of 8%, regardless of various wars, disasters, economic depressions and other factors in the middle, how much will this 24 dollars be in 2004?Saying it will scare you: 4307046634105.39 is more than 43 trillion US dollars.Not only can you still buy Manhattan, but if you take into account the depreciation of real estate in New York after the "9" incident, it is no problem to buy New York.

Go back to the previous example of God and believers.Suppose you invest 1 yuan in the stock market, and reinvest every dividend you receive. If you can get a 15% return on investment every year, according to scientific calculations, the income after 1 years of continuous investment of 100 yuan is nearly 120 million Yuan!

In case you realize it or not, this is the time value of money at work.

Investment can earn income, and bank deposits can bring interest to depositors. A dollar received today is worth more than a dollar received tomorrow.Let's illustrate with a simple example.If you deposit the current 1 yuan in the bank, and the deposit interest rate is assumed to be 1%, then you will get 100 yuan in one year.This 5 yuan is the time value of money, or the time value of money is 1%.

(End of this chapter)