How to explain what money is for a 10 year old

money

What is money?

The money. Try to remember the last time you asked this question, you were probably less than 10 years old and should have received a vague answer such as “That’s how we can buy what we want.”

Your parents and our education system can do better than that, and Anthony Freeman can explain better:

Money is a medium of exchange to get what we want and offer what we have, whether it is a product or a service. That is why ideal money must have three characteristics: to act as a medium of exchange, to be imperishable, and to be easily calculable.

Swap medium

To better understand money as a medium of exchange let us remember the first methods of exchange. Before money was invented we had to resort to barter. A farmer who owned rice – but wanted shoes for his family – would have to find a person who, a) had shoes and, b) wanted rice. Imagine the difficulty in finding exactly the person who was selling what the farmer needs and wanting to buy what the farmer owned.

Through necessity, the onset of indirect bargaining begins. Continuing with the above example, let’s assume the farmer found a shoemaker and found that the shoemaker did not want rice – he wanted firewood. While the farmer was having a drink at a local bar he heard a man say that he wanted to buy rice and was selling firewood. Naturally, the farmer sold the rice for the wood and offered the shoemaker wood for his shoes. In this example, the farmer performed a form of indirect barter.

Imperishable

Over time, different commodities served as bargaining chips but the problem of durability came to the surface. A commodity much needed and easily exchangeable was food. The problem was that it spoiled very easily. You had to use it or market it before it got spoiled. Over time, the most durable commodities began to be used as currency – commodities like gold and silver. As gold and silver did not spoil, they were ideal for this purpose, and were preferably adopted as the bargaining chip.

Easily calculable

Money is an expression of exchange value (the exchange value of each commodity placed by the sellers in the market). In our example above, it was very inefficient to measure the exchange value in units like rice bags, shoes or firewood. Once again the need generated has made the market seek a simpler solution that would be to use an exchange value based on fixed measures of gold and silver. As an example, the original dollar called U.S. Silver Dollar had a corresponding value in silver (it represented 416 grams of pure silver). This was inspired by the model of the Spanish Dollar that also used a silver ballast. A simple calculation method consisting of weights and measures dramatically increases the efficiency of transactions and encourages economic development.

What is the best form of money?

Currently, the best procedure is to let people decide what they want to use as money. There is no need for a central bank, government control, or monetary legislation. History has shown that when we leave it to people, gold and silver tend to become the currency of exchange due to the following reasons:

  1. Shortage – supply can not be manipulated like fiduciary money – our current model – that is the cause of the cycles of expansion and contraction of our current economy.
  2. Durability – gold and silver will not spoil or rot which gives them much value to stock.
  3. Divisibility – they can be divided into small parts that become ideal for trade.
  4. Portability – by concentrating much value you do not need to carry a large amount of gold or silver in order to carry out our transactions.
  5. Historical – gold and silver are used as money for over 6000 years of history.
  6. Usage value – both gold and silver have a lot of use value for the industry. However, its highest value in use is to serve as the bargaining chip.

How Honest Money Increases Purchasing Power Over Time

Honest money (defined as a medium of exchange that consists of real material that has a limited supply) can actually gain value over time. Let’s explain. When economic goods are produced at a faster rate than the production of the money in question (for example mined gold) money can buy (to be exchanged for) more of those economic goods (gold supply divided by the total number of goods). This means that it can actually generate positive returns if we keep this money because its exchange value will increase over time. This also means that wages will decrease over time as the real wage increases (the value on the paycheck decreases but your purchasing power increases).

How and why did government money replace gold and silver?

The first bankers were the people who worked in the goldsmith shop. The miners brought the gold to the goldsmith for the making of the coin. The goldsmith would then hand over a receipt to the miner for him then withdraw his coins when produced. The miner soon realized that he could immediately negotiate his receipt (his share of the coins) for tools and supplies and return to his mine without having to wait for the goldsmith.

Over time, the goldsmiths realized that the receipts they produced were in circulation and used as a medium of exchange. Only a small part of the population came to his establishment to request the gold that his receipt represented. To increase their purchasing power, he simply started issuing his own fraudulent receipt (without having a counterpart in gold) and used them to purchase goods and services. This increased the number of receipts in circulation by creating inflation and decreasing the value of all other receipts.

Some time later, central banks did the same thing. They issued more receipts (currency) than they possessed in gold and silver to represent them. The dollar was initially a receipt for gold or silver. Each note had the following message:

Certificate in English: “This certifies that there is deposited in the treasury of the United States of America five dollars in silver payable to the bearer on demand.”

Translating: “This certifies that there is a deposit in the United States national treasury corresponding to five dollars in silver for the bearer who demands it.”

In March 1964, Treasury Secretary C. Douglas Dillon quit the silver withdrawals for dollars by immediately breaking the contractual terms of the Silver Certificates.

The Gold Certificate was used between 1882 and 1933 in the United States and was a form of currency. Each certificate gave its owner the corresponding value in gold coins. In 1933 the practice of withdrawing gold through these notes was terminated by the US Government and until 1964 it was considered illegal to possess such notes (in 1964 these restrictions were withdrawn, primarily allowing collectors to legally own these notes, but this action technically converted those notes into currency current, with no correlation with gold). When paper money was modernized (smaller, with fewer variants or types) in 1928, gold certificates were no longer produced.

In essence, the goldsmiths (central banks) broke the promise of honoring the receipts produced by them and blatantly stole the gold and silver that belonged to the population. Now they could deliberately expand and contract the supply of fiduciary money (with no counterpart) to exert their power and influence over the population.

This model has been replicated for all the existing countries and Brazil is no different.

A brief summary of the history of paper money in Brazil:

Bank of Brazil Notes

The creation of Banco do Brasil, by means of a Letters of October 12, 1808, had as its main objective to provide the Crown with an instrument to collect the resources necessary for the maintenance of the court.

According to its bylaws, the bank should issue tickets payable to bearer, with values ​​starting at 30 thousand reis. The Bank’s issues began in 1810 and from 1813 tickets were issued with values ​​below the initially established minimum limit.

Between 1813 and 1820, the issues reached 8,566 contos de reis, largely determined by the supply of paper money to meet the increasing expenses of the court and the royal administration, which annually exceeded the revenue collected. Beginning in 1817, Bank notes began to lose credibility, suffering great devaluation.

In April 1821, before returning to Portugal, the king and all his court rescued all the notes in his possession, exchanging them for coins, metals and jewels deposited in the Bank, forcing the institution to suspend, as of July, the convertibility of tickets.

In the next post we will explain how the Bitcoins can be the best medium of exchange already created by humans.

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