The value of money

Currency really started with the barter system, trading one good or service for another. The first evolution was metal ingots: spare pieces of metal blacksmiths had lying around whose value was based on weight and purity. Then the Roman Empire started using coinage. Coins were still made of precious metals, but they were stamped and had very distinct values.

The biggest reason for currency evolving then to where it is today is what is known as the double coincidence of wants. That says another person must have something you want, or trade can’t occur. If I’m a dairy farmer and you’re a wheat farmer, and you don’t like dairy, we’re not going to trade. But if I’m a dairy farmer and I sell it to somebody else, I get currency for it.

Until 1931 nations were on a gold standard, a system in which a country's currency's value is directly linked to a fixed amount of gold. The U.K. was the first to leave; other nations then followed. There were some instabilities from then until the Modified Gold Standard was implemented through the Bretton Woods Accord. As a part of the Bretton Woods Accord in 1944, countries set a modified gold standard at $35 per ounce. The modified gold standard went into effect in 1947. Now countries could trade or make international payments in their metal reserves or the U.S. dollar. This is also when the dollar became the international reserve currency.

The biggest reason for currency evolving then to where it is today is what is known as the double coincidence of wants.

Nixon decided the U.S. was going to go off the gold standard entirely in 1973, which is how we ended up with fiat money today, which is defined as currency that has no intrinsic value.

The main factor in currency valuation is the state of supply and demand at any given moment. You have what’s called a foreign exchange market, which operates very similarly to the stock market. For example, if a lot of people are buying a certain stock, the value goes up. If a lot of people stop buying and start selling it, the value goes down. It’s the supply and the demand of dollars relative to that of the other three main trading currencies—the euro, the pound and the yen—that determines whether a currency is strong—has a high value—or weak.

The Federal Reserve controls the supply of money, so it has a big role in the strength of the U.S. dollar. The decisions the Fed makes about its supply also changes the interest rate. If the rates are low, it encourages us to take out more loans and spend money. But if you have high inflation, the Fed almost always has to increase rates, which slows down debt spending and inflationary pressure.

The main factor in currency valuation is the state of supply and demand at any given moment.

One of the biggest areas currency valuation affects is imports and exports. If the dollar has appreciated and is a stronger currency, your exports will be relatively more expensive and you’re less likely to sell as many. At the same time, imports are going to cost less. If the dollar is lower in value, you would see an increase in U.S. exports, and foreign goods would cost relatively more for U.S. consumers.

But valuation has a lot of other effects as well.

There are two types of policies the government holds concerning finances:

• monetary policy, which is the central bank controlling the supply of money and interest rates.
• fiscal policy, which is taxes and government spending.

Those impact currency values and can then also impact what is happening in the economy. If we have a small amount of inflation, that’s not terrible, but it’s not great. If the government dramatically increases domestic spending, that in turn could add additional inflationary pressure into the economy that in turn would hurt individuals because now what we’re buying costs more.

Part of the allure of crypto is the minimal government interaction in this market, so how people who trade in this market react is uncertain.

Controversy over the existence and behavior of central banks goes back to the beginning of the United States. There’s a story that Thomas Jefferson and Alexander Hamilton were in a literal fistfight on the floor of Independence Hall in Philadelphia, arguing over the central bank. Jefferson was opposed to one, saying it’s more detrimental to freedom than any country’s standing army. Hamilton felt it was imperative for economic growth to have a central bank.

Fast forward to now and a big issue is cryptocurrency. There is a lot of debate on this topic. Part of the allure of crypto is the minimal government interaction in this market, so how people who trade in this market react is uncertain.

I don’t think that this will impact traditional currencies much, at least not the main internationally traded ones. Without some type of firm backing from a government, I feel it will have little impact on valuation, at least in the immediate future on more traditional currencies. But we’ll see.