You use money every day and while paper and coin money continue to lose favor in the face of credit and debit cards, it’s still the backbone of our economy. For many people, money is a mystery.
We know how much it’s worth at face value, but do you know why? Do you know what is money made of? If you’re like most people, probably not.
I’ll attempt to dispel the mystery of money and explain why it’s worth what it is and how it’s made. I’ll also explain why money has no inherent value, nor does it have a fixed worth as a medium of exchange.
Finally, we’ll explore why your money is rapidly decreasing in value and what to do about it to achieve financial freedom.
Sound good? Let’s dive in.
How Does Money Have Value?
The concept of money or currency began with bartering. A person had something of value but needed something else. Thus, they would trade what they have in exchange for something they need. The problem is each person had to find someone who had what they needed, while simultaneously needing what they had.
Over time as populations increased, it made sense to create a common currency to exchange for goods. This eliminated the inherent difficulties and limitations of bartering.
In order to set a value to paper currency, countries originally backed it with a precious commodity, such as gold or silver. This was particularly helpful as international trade became common, because a country who paid in paper currency could exchange it for gold at a guaranteed rate.
Gold backed the American dollar until 1971.
Death of the Gold Standard
Then, in the 1970s, the amount of money available suddenly outpaced the mining of gold. This meant that the government could no longer guarantee an exchange for gold.
Because of this, the U.S. removed the gold standard in 1971 and instead changed to a system of fiat money. Fiat money simply means a government has declared a type of printed paper to be legal tender. It has no inherent value, like gold or silver.
Fiat Money = Any paper money created by government decree.
Within a fiat system, the strength of a country’s economy determines the value of the money. If the economy worsens, the value of the dollar drops both internationally and domestically, due to inflation.
Purchasing power determines the value of most currency. It’s because of this that a country can’t become wealthy by simply printing more money. The more money that is out there, the less it will be worth, because you need more of it to buy tangible things.
How Much Money Is Out There?
While other measurements and inflation determine the value of the dollar, there’s lots of money floating out in the world. It’s separated into three different categories.
M1 money is known as active money. It includes all physical currency, including paper money and coinage, checking accounts, travelers’ checks, and similar accounts. This is money that is immediately available to make purchases payments.
M2 money includes everything in M1, plus time-related deposits and non-institutional money market funds. It’s any money easily liquidated into cash.
M3 money is everything in M1 and M2, plus large deposits, institutional money market funds, significant liquid assets, and short-term repurchase agreements. This is money that is less liquid that other components of the money supply.
What is Money Made Of?
Large printing presses create paper currency using specially designed paper and ink. When people think of paper, they imagine wood pulp, which is used in newspapers and most forms of commonly used paper products.
The paper used by the U.S. Bureau of Engraving and Printing (BEP) isn’t made using wood pulp, but 75 percent cotton and 25 percent linen. This makes the money more durable yet thin. This is why people can trade money for years without it tearing.
Since this paper is valuable and unique, the government tracks the paper throughout the process.
Denominations of $5 and more come with the watermarks embedded within the paper. The $100 denomination also has a 3-D ribbon woven throughout the paper. These are all methods to deter counterfeiting.
The BEP formulates and blends its own unique ink for the currency. The backs of bills are made from green ink, the faces of bills are made from black ink and metallic ink is used for our freedom icons.
The $100 also has a special icon that uses a high-tech, color-shifting ink.
How Does the U.S. Mint Make Coinage?
You might think that the Bureau of Engraving and Printing (BEP) makes coins along with paper currency, but the U.S. Mint actually oversees all coin production.
It creates the penny, nickel, dime, and quarter, as well as our other less common denominations, such as the $1 coin. Initially, the U.S. Mint made coins with copper, silver, and gold. As the prices for these metals increased, they started mixing in other cheaper metals.
The U.S. government initially made pennies with copper; but later mixed them with nickel.
In 1943, copper was a scarcity because of World War II and zinc pennies were minted. Today’s pennies are primarily composed of zinc, with only 2.5 percent copper.
Silver coins decreased their silver content through the decades until they became primarily copper and nickel. Today, no common denominations of coin contain silver.
The government also used gold in coins until The Great Depression. At that time, the mint stopped using gold to help stabilize the price of the precious metal and never returned to the practice.
Coin production was initially powered by horses (“horsepower”), and later by steam and electricity. While the U.S. Mint still creates coins similarly to how they were created 200 years ago, it now integrates computer technology. Using dies and presses, computers can create as many as 720 coins per minute. With 65 presses available, the U.S. Mint has the ability to create 46,800 coins per minute.
U.S. Mint Created More Than U.S. Coins
The mint produced more than U.S. coins in the last two centuries. In 1874, the government allowed the Mint to create coins for foreign governments if it didn’t impact the production of U.S. coins.
The practice lasted into the late 1980s, with the U.S. Mint creating coins for more than 40 foreign governments!
There are still coins created by the U.S. Mint circulating through many countries.
The Mint also creates military medals including the Navy Cross, Purple Heart and Silver, and Bronze Stars.
Your Money is Decaying. Fast.
I hope you found it slightly frightening to learn that money has no inherent value other than what it can trade for, because it should motivate you to stop trying to hoard it and stash it away.
No one in history has ever gotten rich off of savings. At best, these types of savers achieved financial “comfort” very late in life. In contrast, every wealthy person on this planet achieved the bulk of their wealth through investments.
The reason for this is that money has no inherent value beyond what it can trade for. Thus, it can’t multiply. However, it can and will decay in value if you don’t deploy it into investments. And, it can decay fast. Really, really fast.
Within the U.S., the average inflation rate is 3.22% per year.
That doesn’t sound frightening until you realize that means prices will:
- Double (2X) in 20 years
- Quadruple (4X) in 40 years
- Increase 8X in 60 years
- Increase 16X in 80 years
To give you an example, a conservative primary residence (house) that costs $100,000 today will cost around $1.6 million in 80 years. Yikes! Or, a moderate house that costs $300,000 today will cost around $4.8 million in 80 years. Damnnn.
What Causes Inflation?
Inflation is caused by a range of factors, but one that contributes to it is that every single day, the U.S. Bureau of Engraving and Printing (BEP) produces 38 million notes valued at approximately $541 million. Of this amount, 95% is used to replace bills already in circulation, but around 5% ($27 million) is new money created each day.
Over 365 days, that means the U.S. BEP prints approximately $9.9 billion in new money ($27 million x 365 = $9.9 billion). Again, yikes. These numbers vary slightly depending on the reporting agency, but even if they are slightly high or slightly low, an enormous amount of new money is being created each day.
Another frightening fact is that banks are legally allowed to lend out 10 times more than their reserves. Meaning, there is an enormous amount of money being lent out to individuals that doesn’t even exist. Crazy, right?
Why am I Telling You This?
Are you wondering why I am sharing this with you?
The reasons is that you need to learn how to invest so that you can multiply your money faster than inflation.
You need to be buying assets that will pay you income and multiply in value faster than the rate of inflation. One such choice is to put your money to work in real estate, either through buying it directly or through using crowdsourced real estate investing.
For example, Fundrise.com let’s people invest in real estate online through which it calls an e-REIT (electronic Real Estate Investment Trust) or an e-Fund. Historically, Fundrise has paid out a 12.4% return to investors over the past 20 years, has their fund backed by real (“hard”) assets, and lets you invest for as little as $500.
Investing, and not saving, is the only strategy that will create financial freedom during your lifetime. Period.
Life’s not hard if you accept this truth, but unfortunately, your parents and teacher told you to save, and that is, literally, a losing formula.
In contrast, I’ve written this article to teach you the truth about money and inspire you to action, because I don’t want you to work hard for money to have it decay dramatically in worth during your lifetime.
Money is a Tool of Measurement
In summary, money is simply a tool of measurement. It has absolutely no inherent value, other than what other citizens are willing to trade it for. It is not backed by gold, nor anything else of value. It was created by government decree.
Also, the value of money isn’t fixed. It is decreasing in value every day. Your job is simple. It is to collect money and then multiply it faster than the rate of inflation. This is how you become financially free.
You may ask “What is money made of,” but now you know, so go out, collect it, and learn to multiply it.