Financial Literacy 101: How Money Works Today

There once was a time when the answer to the question “what is money?” was pretty straightforward. The coins we traded were perceived to have actual value based on the type and amount of material they were made of, or there were paper notes that explicitly told you that you could exchange them for a set amount of gold (or silver). By tying the amount of money in circulation to the amount of precious metals in the country’s treasury, it was possible to keep the money supply pretty static.

Now, money has become an abstraction. By breaking the link between paper money and precious metals (i.e. the “Gold Standard”), the money supply has taken off, the purchasing power of the US Dollar has dropped precipitously since 1913, and most of us either don’t know why that has happened, or how it affects us.

To make a long story short, most people have no clue how money works, and that’s the way the people in charge of the banking industry like it. Money is an abstracted fiction that we all buy into. Many of us spend our days working at jobs we don’t care for in order to keep adding electronic digits to our bank accounts, and those digits seem to purchase less and less stuff while we keep working more just to keep up.

Management of debt is now the largest struggle for many in the first world (the USA for sure). We live in a society that encourages and in many cases requires taking on debt. Most folks need loans to buy a house, a car, or to get a college education. Your credit score plays a large role in your life, and you are punished by credit rating agencies for not having enough open credit cards. Consumers need to take on a large amount of debt and show skill in paying it off, otherwise you’re determined to be a credit risk.

The modern, first world human experience revolves around inequality… and the impacts of modern finance and technology has made this easier than ever. The “American Dream” has become a financial trap for many people, as the recent subprime/ARM fiasco is proving. This wouldn’t happen to as many people if they knew more about how the system works, in my opinion. The first step for most is to wrap their brain around how money works, and how our financial system is set up to benefit those at the top. The best introduction to how money works these days is in this 47-minute animated video, Money as Debt. When you have a block of time, I highly encourage you to watch this.

I plan on revisiting this subject in the near future, for it’s of critical importance to all of us in the peak oil/sustainability community. Modern fiat currency systems rely on perpetual, unsustainable growth in the money supply to continue to function, and the only way that happens without a crash is to continue to harness ever increasing amounts of energy & resources to continue growing the economy. In a finite world with declining natural resources, this poses a major problem for all of us.

As the saying goes, until you change the way money works, you change nothing.


One Response to Financial Literacy 101: How Money Works Today

  1. […] Ka-bar Money as Debt website money as debt Stumble it! […]

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