People spend their whole lives working for it ... what is money?

There is Wealth and there is Money – they are not the same.

Wealth is the stuff we produce – cars, cows, computers, etc.

Money is a granular, fungible token representing wealth, it’s purpose is to make trade efficient.

All societies engaged in the trade of produce – I give you 10 sacks of grain for 1 cow. Clearly this was inefficient, what if I only wanted 5 sacks of grain? I can hardly sell you half a lamb.

Initially the tokens were metal coins, often gold was used.

I sell my lamb for 10 gold pieces and pay you 5 gold pieces for the grain. Much better.

Already in this simple situation there is scope for things to go awry. After a while people believed that the tokens (money) itself had value. Well, it kind of did, gold can be used for stuff like jewellery but ultimately the value of gold relative to everything else depends on how much gold is around. The less gold the more it is worth - the more gold, the less it is worth. A long long time ago, when Spain used gold for currency, some explorers found lots of gold in Peru, they brought it all back for the royal coffers – all they achieved was to increase the amount of tokens in the system, real wealth had not changed, prices went up.

These days we have Fiat Currency, money that is worth what it is because the government says so, i.e. “by fiat”. Clearly the notes in your wallet have zero intrinsic value – they are just bits of paper. Their value depends entirely on how much money is in the system, the “money supply”. And that is determined ultimately by the government.

When the token was a physical commodity it was possible to produce more– as in the Spanish example – however there was a natural restraint, there was only ever going to be so much gold around. With Fiat Currency – the money is printed entirely at the behest of governments.

once you have Fiat Currency there is much more scope for funky stuff to start happening.

First - a commodity like gold has some intrinsic value – the bits of paper in your wallet only have meaning while the power and institutions of the issuing government exist. Fiat Currency is always under this risk, sudden severe political instability can render an entire currency worthless in surprisingly short periods of time – But lets be clear, this risk is rare in western countries.

Second - The theoretical maximum amount of money is infinite! And there are so many reasons why a government might print more than it should. For example – to pay it’s bills – say the government needs to pay it’s employees but hasn’t got the cash - Just print some more and pay them with that.

Historically governments have always increased the money supply - often rapidly – what this means in effect is that they are skimming from everyone with money – by producing more tokens, they devalue the worth of all the tokens.

So why have a Fiat Currency?

+ Because it allows an economy to grow rapidly, why be constrained by the supply of gold.

+ Maybe because you need more money than you have gold (Britain came off the gold standard to fund WW1).

+ Politically it's clever, it can make people feel good – people mistake more tokens for more wealth - so print loads of tokens – salaries are rising year on year - let the good times roll!

Now of course the actual wealthy of the country is (probably) increasing too. But the amount of tokens (money) is increasing faster that the wealthy is increasing – We know this because economists measure inflation, positive inflation means that the tokens are increasing faster than the wealth is increasing.

The UK Money supply - M4 “broad money” in £billions – all coins, notes, bank deposits - BoE.