Understanding Finance from scratch

Chapter 9 Once you see through the essence of money, you will understand the true meaning of finance——learn some currency knowledge every day (1)
in a world without money

During the Second World War, a special commodity currency was circulated in the concentration camps of the Nazis: cigarettes.The Red Cross at that time managed to provide various humanitarian items such as food, clothes, cigarettes, etc. to the prisoner-of-war camps.Due to the limited quantity, these items can only be distributed among prisoners of war according to some egalitarian principle, without taking into account the specific preferences of each prisoner of war.But preferences obviously vary from person to person, with some preferring chocolate, others cheese, and still others more likely to want a pack of cigarettes.Therefore, this distribution is obviously inefficient, and the prisoners of war need to be exchanged.

But even within the narrow confines of a prisoner-of-war camp, barter was inconvenient because it required both parties to the transaction to happen to want what the other had, a so-called double coincidence of needs.In order for the exchange to proceed more smoothly, there needs to be a commodity that acts as a medium of exchange, that is, money.So, in the POW camp, which item is suitable as a medium of exchange?Many POW camps have chosen cigarettes to fill this role.Prisoners of war used cigarettes for pricing and transactions. For example, a sausage was worth 10 cigarettes, a shirt was worth 80 cigarettes, and one piece of laundry for others could be exchanged for two cigarettes.With such a unit of account and medium of exchange, the exchange of prisoners of war was much more convenient.

Over the past 100 years, anarchists, even those extreme conservatives and hippies, they have dreamed of abolishing money.So let's imagine: what would a world without money look like?

In modern society, every family or individual, and various economic units have access to currency almost every day; any commodity needs to be denominated in currency, and any purchase must be paid in currency.But let's go back to the beginning, assuming that this is a world without money, what would our life be like?

Now let's revive the ancient way of trading: in a village live people who raise sheep, grow wheat, and blacksmith.Now the sheepman wants an axe, but the blacksmith is stubbornly willing to accept only bread, so what will the sheepman do?First, after negotiating with the wheat grower, he will ask the other party to take away a sheep, and then exchange for 50 bread. Next, he negotiates with the blacksmith, and finally exchanges 20 bread for an ax he needs. .

Before the emergence of money, people adopted this form of barter exchange. Such direct barter exchange is extremely troublesome. People have to spend a lot of time bargaining for the most trivial results, and this exchange often brings Come on some unhappiness.

However, as the population increases and the products increase, the scale of commodity circulation also increases.In this case, simple barter exchange can no longer meet the demand, and in order to speed up the trade, people invented "money".In the above example, a sheep can eventually be exchanged for a stone axe.However, sometimes limited by the types of materials used for exchange, it is necessary to find an item that can be accepted by both parties in exchange.This item is the most primitive currency.Livestock, salt, rare shells, rare bird feathers, gems, alluvial gold, stones, and other items not readily available in large quantities have all been used as money.

According to the explanation of modern economics, currency is a means of transaction, an institutionalized credit symbol, which can effectively reduce transaction costs.When people introduce money into the economic system, the price of any commodity can be represented by this degree of freedom, and the economic system has undergone earth-shaking changes. "Homer's Epic" records such content: People at that time often used cattle to represent the value of items. A skilled female slave was worth 4 cows, while the prize for the No. 1 gladiator was worth 12 cows.But what we need to understand is that currency in circulation is like a road, and although they can circulate and bring all the pasture and grain from the countryside to the market, the currency itself does not produce anything.

Finally, we briefly summarize the functions of the currency:

(1) Pricing unit.All exchange is mediated by money, so that people have a standard of measurement for any kind of commodity.

Through money, we can easily link one good or service to another, and from this great price systems are born, and people can calculate gains and losses from an economic point of view: a car is worth about 60 ounces of gold, and a car is worth about 180 ounces of gold. A house is worth [-] ounces of gold, which means that one house can be exchanged for three cars.Voila, it's very simple and straightforward!
(2) means of circulation.The introduction of currency eliminates various disadvantages in barter exchange. Currency acts as an intermediary for commodity exchange and facilitates the exchange of goods and services, which not only improves the efficiency of exchange, but also improves people's living standards.

Currency originates from circulation and serves circulation.As the medium of commodity exchange, the ultimate destination of any form of currency movement is exchange. Whether it is borrowing, lending, saving, storage, remittance, etc., the ultimate purpose is consumption (that is, exchange), and its end point is always commodities. , otherwise the currency loses its meaning.

(3) Store of value.Currency can be hoarded as a representative of social wealth, that is, to "transform current purchasing power into future purchasing power".

As a carrier of value, the movement of money is the movement of value, and the hoarding of money is also the hoarding of value.Generally speaking, banknotes are relatively less stable than physical currencies.Because the value of paper currency and its issuance are determined by the central bank, it has the possibility of unlimited expansion.Moreover, modern governments and central banks also like this mechanism of creating wealth out of thin air, and they always have the urge to expand issuance.The value stability of paper money is much worse than that of commodity currency, thus weakening the value storage function of paper money. In extreme cases, paper money becomes a piece of white paper, completely loses its value, and does not have the real function of currency, such as Zimbabwe 100 trillion banknotes.

(4) Means of payment.The transfer of money means the transfer of value, and this transfer is the payment process.

Commodity exchange with currency as the medium, whether it is converted from commodity to currency, or converted from currency to commodity to finally complete the exchange between commodities, contains two aspects.One is the transfer of commodities, that is, the process of delivery, the process of selling; the other is the transfer of money, that is, the process of payment, the process of buying.The process of buying or selling ends with delivery and payment.The process of payment is the process of payment.The function of money as a means of payment is a necessary condition for money to act as a medium of exchange.

The irresistible golden temptation

The Inca Empire, the most advanced society in South America 500 years ago, had no currency. Although the Inca Empire owned precious metals, the Incas viewed rare metals with appreciation.They believed that gold was the "sweat of the sun" and silver the "tears of the moon".

In the Inca Empire, labor was considered a unit of value.In addition, the Inca economy was often dependent on draconian central planning and forced labor.So when the Spanish colonist Francisco Pizarro imprisoned the son of the Inca emperor, the Incas handed over 13420 pounds of gold and 26000 pounds of sterling silver within a few months, but they still couldn't satisfy the appetite of the other party.The Incas could not understand the insatiable appetite of those Europeans for gold and silver. "Even if all the snow in the Andes were turned into gold, they would still not be satisfied," the Incas complained.

What the Incas could not understand was that, for Pizarro and his men, gold and silver were not just gleaming metal ornaments, they could be cast as currency, they could be used as a unit of calculation, and they had store value, that is, they were convenient. purchasing power.

Gold in troubled times, collection in prosperous times.So, what is the value of gold that makes it so popular?
As a hard currency, gold has always been favored by people for its value-preserving and storing functions, as well as its liquidity, rarity, durability and ductility, and a country's gold reserves symbolize the country's economic strength.Gold is known as the most honest financial asset. The fundamental difference between it and other assets is that gold is not anyone's liability.Fiat money will never be accepted by anyone in extreme cases, and gold can never be rejected.

The way of bartering in ancient times was extremely cumbersome, so people at that time gradually thought of finding a trading medium to simplify this transaction.Aristotle described people's requirements for us in "Politics": this kind of thing can be exchanged equally among people, must have value in itself, and for the sake of life, it should be like iron and silver or other things. Items of a similar nature have the added advantage of being portable.

So what medium to use to trade?This kind of thing must be acceptable to both sides of the exchange, and it must not be easy to obtain in large quantities, and it must be portable...Livestock, salt, rare shells, feathers, stones, etc. have all been used as currency.However, after years of natural elimination, these items used as currency were gradually replaced by precious metals represented by gold.Not only in China, but all over the world.That is, when people had to choose the most suitable commodity as a form of money, gold and silver were chosen almost without exception.So Keynes said: The gold standard is a relic of barbarism.

People say: Gold and silver are natural currencies. Here we might as well explain the inherent conditions and advantages of gold as currency:
First of all, gold is bright in color and lustrous, and it is the only metal that does not fade or rust.Secondly, gold has high value and is easy to carry.Just imagine, if sheep are used as currency, how should we carry it in a hurry?Thirdly, gold is easy to divide and forge, and can meet the payment needs of different amounts.Finally, gold is easily identifiable and easy to measure.

However, there are also many inconveniences in using gold transactions: the fineness needs to be identified, and the weight needs to be weighed.Gradually, people came up with a better way - casting precious metal coins with uniform weight and fineness.In this way, there is no need to weigh or test the quality of currency when using it.The coins featured the king's or emperor's head and intricate designs of coats of arms and seals to thwart counterfeiting.

The gold coins of the Kingdom of Lydia in Asia Minor (now western Turkey) are the earliest gold coins discovered in the world.The coins are made of natural gold and silver ore grains flowing through the Sardis River, the capital of the Kingdom of Lydia.The composition of this ore grain is about 3 gold and 1 silver, and it is yellow-white, commonly known as amber gold.

The main coins in Western countries are gold coins and silver coins, and the auxiliary coins are made of copper and copper alloys.With the development of the European economy, the volume of commodity transactions gradually increased. By the 15th century, there was a panic of deflation in the economically developed Flanders and northern Italian states.Beginning in the 16th century, a large amount of gold and silver from the Americas flowed into Europe through Spain, saving the European monetary system.

Slowly, people found that metal currency was not convenient to use.The large number of metal coins required for large transactions can be annoying due to their weight and size.Metal coins also suffer from wear and tear from use.Behold an astonishing fact: Over twenty thousand tons of gold have been worn away in mints or in people's hands, purses and pockets of clothing since man used gold as money.

In this case, the gold standard emerged.Under the gold standard monetary system, the government stipulates the value ratio between gold and silver and buys and sells gold and silver indefinitely at this ratio.Let us take a look at the basic characteristics of the gold standard: a certain amount of gold is used as the monetary unit to cast gold coins as the standard currency; gold coins can be minted and melted freely, and have unlimited solvency, while restricting the casting and solvency of other coins; auxiliary coins and Bank notes can be freely exchanged for gold coins or an equivalent amount of gold; gold can freely enter and exit the country; gold is the only reserve.

The first gold coin standard international monetary system in human history uses gold as the core and standard currency.By 1914, 59 countries were on the gold standard.Gold is the first international and the last substantive currency in the history of currency that has its own value and is fixed as a general equivalent and a measure of value.Gold is the standard currency, an international hard currency, can be imported and exported freely, can pay for trade deficits, and can be used as domestic currency circulation.Gold can be minted, exchanged and exported freely.In this way, gold has become the center of currency and the center of the economy, and the financial attributes of gold are very complete.

However, the First World War had a great impact on the gold standard: during the global economic crisis in 1933, gold was in short supply and under official control, the London gold market was closed, and the "gold standard" completely collapsed, and we entered the era of currency credit.

Since 1938, no country has allowed its citizens to exchange currency or deposits into gold, and the currency attribute of gold has disappeared.Despite gold's rally in recent years, a return to the gold standard remains a distant dream.

Bad money drives out good money and good money drives out bad money

George Akerlof, a professor of economics at the University of California in the United States, once cited such an example: There is a used car market. Although the cars in it look the same on the surface, their quality is very different.The seller knows the quality of his car very well, but the buyer has no way of knowing the quality of the car.Assuming that the quality of cars is evenly distributed from good to bad, and the price of the best car is 50 yuan, how much will the buyer be willing to pay for a car whose quality he does not know?The most normal bid is 25 yuan.So, what does the seller do?Obviously, the owner of a "good car" with a price of more than 25 yuan will not sell his car in this market.In this way, it enters into a vicious cycle. When car buyers find that half of the cars have withdrawn from the market, they will judge that the rest are cars of below-average quality, so the buyer’s bid will drop to 15. The reaction of the car owners is to withdraw the car with a quality higher than 15 yuan from the market again.And so on, the number of "good cars" on the market will become less and less...

Please think about it: Why do cars with poor quality beat better cars and become the mainstream in the used car market?
This problem can perhaps be explained by a well-known law. More than 400 years ago, Gresham, the British Chancellor of the Exchequer, discovered an interesting phenomenon. When two currencies with different real values ​​but the same nominal value were in circulation at the same time, the currency with a higher real value, that is, "good money", would inevitably withdraw from circulation—— They were hoarded, melted down, or exported; currencies of lower real value, or "bad money," flooded the market.People call this phenomenon "Gresham's law", which is "the law of bad money driving out good money".

In the age of minting, when those coins that were below the legal weight or fineness - "bad coins" - entered the circulation field, people tended to collect those coins with full value - "good coins".In the end, good money will be expelled, and only bad money will be left in the market.Under the gold-silver double standard system, since the value of gold and silver itself changes, the change in the value of the metal currency itself and the exchange ratio between the two remain relatively unchanged, resulting in the phenomenon of "bad money drives out good money", making the double standard system can not achieve.For example, when the exchange ratio of gold and silver is 1:15, when the value of silver decreases due to the reduction of its mining cost, people exchange silver for gold according to the above ratio, store it, and finally make silver flood currency circulation, Gold was rejected.If, on the contrary, the value of silver rises and the value of gold falls, people will exchange gold for silver according to the above ratio, hoard the silver, and there will be only gold coins in circulation.

In fact, the law of bad money driving out good money is not difficult to understand, because this situation also exists widely in life.For example, in the public sphere, when unspoken rules prevail, those who abide by the rules will definitely not be able to compete with those who do not.Let’s say queuing up for shopping or getting on the bus. In cities with low civilized level, those who line up according to the rules are always crowded and unable to get on the bus for several times. time.In the end, there were fewer and fewer people queuing up to get on the bus in accordance with the order. When the bus came, everyone was scrambling, making every ride like a war, which was unspeakably miserable.

Back to the topic, how did the phenomenon of bad money driving out good money come about?

Economist Adam Smith said: "I believe that the monarchs of all countries in the world are greedy and unfair. They deceive their subjects and reduce the metal weight originally contained in the currency. In Europe, from the Roman era to the 17th century , the history of coinage is almost a history of constant depreciation.Can subjects reject a devalued currency?cannot!That would be seen as a challenge to the crown.

In China, Emperor Wu of the Han Dynasty once made the white deerskin in the forbidden garden into coins, stipulated that a piece of white deerskin was worth 40 yuan, and sold it to the royal family forcibly.In Europe, for the gold and copper coins minted by the government, some people always try to get some leftovers from the edges, which reduces the actual value of the currency, but because they are legal tender, they can still be circulated.In short, in every large-scale case of bad money driving out good money, "legal currency" can be seen.

If you explore it further, have you ever wondered why currencies are all "monopolized" by the state?Why can't private individuals mint coins?

(End of this chapter)