How Money & Banking Work (& why they’re broken)

How Money & Banking Work (& why they're broken)

Sharing is caring!

Understanding our financial system is crucial for everybody looking to secure their future in an uncertain economic landscape. If you’re over 40, you might share my frustration with traditional financial advice. It seems like the game is rigged, doesn’t it? You save, you invest, but the value of your hard-earned money fades away. Currencies are multiplying, but so are the problems. Why does our money lose its power so stealthily? Why do the rules benefit the bankers and the elite, while ordinary savers find themselves running to stand still?

I’ve seen the impact of a failing financial system from two very different worlds, dividing my time between the prosperity of the United States and the distinct challenges within Egypt. Despite the disparities, the pattern is unmistakable. Everywhere I turn, money, a staple in our economic diet, is broken, and it’s weighing heavily on us all. It’s the medium we rely on to trade, plan, and save for our futures, but its chronic ailment is global. So, why does inflation continue to eat away at our purchasing power, despite technological advancements? How did money evolve from a simple barter tool to the complex system that’s so challenging to navigate today?

Key Takeaways

  • Money’s value is being diluted globally, impacting savings and wages under complex systems that favor the few.
  • The historical evolution of money has transitioned from barter to commodities, and now to a more intricate and problematic banking system.
  • Understanding money’s true nature and the current financial system’s pitfalls is essential for protecting and asserting our financial freedom.

This idea is perfectly encapsulated in a video by Lyn Alden, as seen below:

YouTube video

Grasping the Nuances of Monetary Concerns

Issues Present in Today’s Currency Systems

Understanding our financial system is crucial for everybody looking to secure their future in an uncertain economic landscape. If you’re over 40, you might share my frustration with traditional financial advice. It seems like the game is rigged, doesn’t it? You save, you invest, but the value of your hard-earned money fades away. Currencies are multiplying, but so are the problems. Why does our money lose its power so stealthily? Why do the rules benefit the bankers and the elite, while ordinary savers find themselves running to stand still?

I’ve seen the impact of a failing financial system from two very different worlds, dividing my time between the prosperity of the United States and the distinct challenges within Egypt. Despite the disparities, the pattern is unmistakable. Everywhere I turn, money, a staple in our economic diet, is broken, and it’s weighing heavily on us all. It’s the medium we rely on to trade, plan, and save for our futures, but its chronic ailment is global. So, why does inflation continue to eat away at our purchasing power, despite technological advancements? How did money evolve from a simple barter tool to the complex system that’s so challenging to navigate today?

Key Takeaways

  • Money’s value is being diluted globally, impacting savings and wages under complex systems that favor the few.
  • The historical evolution of money has transitioned from barter to commodities, and now to a more intricate and problematic banking system.
  • Understanding money’s true nature and the current financial system’s pitfalls is essential for protecting and asserting our financial freedom.

Grasping the Nuances of Monetary Concerns

Issues Present in Today’s Currency Systems

Paper money isn’t just paper, right? It’s a promise that doesn’t always hold up. We live in a world with an overwhelming variety of currencies—over 160! Yet, consistent is their capacity to devalue our hard-earned cash. It’s a silent process, making things costlier without people even noticing where their value is going. Have you ever wondered why that paycheck doesn’t take you as far as it used to?

The Escalation of Wealth Disparity and Debt

It seems a smaller circle is hoarding a bigger piece of the pie. Wealth just gravitates toward them. Debts on nation ledgers are piling up high, political views are dividing friends, and the conversation about who’s to blame goes round and round. Shouldn’t advancements in technology be making life cheaper for everyone? But no, we’re on a hamster wheel where prices just keep bumping up.

Financial Misdirection and Missteps

Now, how is all this cash being steered wrong? There’s a hidden face behind it—sometimes it’s a corporation, a banker, or maybe a politician. Our savings are like a tank of water with a small leak, and that’s how the value is draining away. The system is complex; it’s like a piece of machinery with plenty of hidden gears and levers. Transparency? That’s almost a fairy tale when it comes to understanding where every dollar is going. My background in engineering helps me see through this complexity, but it shouldn’t take an engineer to understand one’s finances.

Let me offer you a real-life example. Where I come from, and where I spend my time—both in the States and in Egypt—I’ve noticed the struggles are all too common yet worlds apart. It’s evident—money is a system, and to manage our future, we need to dissect this system layer by layer. We need to understand the very fundamentals, right down to the core idea of what money is and how the game of trade works. Only then can we see clearly how far we’ve veered off course.

Understanding the Past of Currency Exchange

Trade by Barter: Its Shortcomings

Imagine trying to make a trade without a common medium – you’ve got a surplus of spears but desperately need furs, and I’m here with ample furs but no use for more spears. We strike a deal only if our needs miraculously align. But as more items enter the mix, the odds of finding perfect trades plummet. With 100 products, we’d face a dizzying 4,950 potential exchanges. Can we really depend on such chance?

The Birth of Credit-Based Transactions

What if you could trade now and receive later? You hand me furs against a future favor, an IOU of sorts. In small communities, this sort of credit is informal – we help each other expecting nothing immediate in return. But as communities grow, things get formalized. Now, suppose a baker offers “bread credits” to a butcher who doesn’t need bread at that moment. The butcher agrees, betting on the continued success of the baker’s trade. Feels like a gamble, right?

Transition to Commodity Currencies

But then, why not use something everyone values as a makeshift currency? Early communities did exactly that with shell jewelry—durable, desirable, and difficult to create. These were the portable assets everyone agreed on. As civilizations advanced, so did our choice of currency—gold and silver coins came on the scene. Weighted and stamped, their standardized form made transactions seamless. Why was this so revolutionary? Because these metals were rare, making them hard to produce en masse. Their acceptance within regional economies sealed their status as the go-to choice for sustained trade.

Evolution of Trade and Financial Exchange

Transition from Direct Barter to Metallic Money

Have you ever considered the sheer complexity of trying to trade goods directly without a common medium? Imagine possessing an abundance of spears yet lacking the furs you need. I experienced a similar dilemma, but I discovered that as societies grow and our economy becomes more complex, this becomes incredibly inefficient. There must be a better way, right? Well, rather than stumbling upon someone with the exact opposite needs, it makes more sense to use a universally accepted item in exchange – a common denominator, if you will. In my journey, I saw this evolve from beads and jewelry to the wide acceptance of gold and silver coins. They had to be divisible, durable, and scarce to truly facilitate trade. These coins made transactions smoother because their value was guaranteed by weight and purity. Suddenly, trade wasn’t just possible; it was efficient.

The Function of Hawala in Early Finance

Ever wondered what people did before banks were easily accessible? In places like the Middle East and North Africa, gold was a burden to carry for long-distance dealings. That’s where the ingenious Hawala system came in, transforming medieval finance. A hawaladar in my city would coordinate with a partner in another locality, enabling me to deposit gold locally and have my associate withdraw the same from a distant city. This system was built on a foundation of trust and a ledger of credit – nothing new today, but it was revolutionary at the time. It sidestepped the dangers and impracticalities of hauling precious metals over large distances. Can you imagine the relief of traders? They could conduct business without the physical risks, thanks to this early paper-based credit system. While it might seem archaic now, this network was an essential precursor to our modern banking.

Understanding Money’s Core

Recording Economic Exchanges

Have you ever considered the essence of currency? It’s akin to a ledger, a record-keeping tool that meticulously tracks our economic interactions. I liken it to an intricate dance where we exchange favors, goods, and services. Think about it: when was the last time you swapped something with no immediate return? It’s a callback to the old barter system, isn’t it?

In our complex world, we’ve moved past direct barter. I give you something today, and you owe me a favor down the road, right? It’s this social credit that becomes indispensable within communities. In larger societies, we transitioned to a more formal credit approach, where we trust someone—or a system—to give value today with a promise for the future.

Trust becomes the foundation. Think of the neighborhood baker who issues “bread credits”—promises that can be redeemed for bread later. If the local butcher believes these will be honored, they’ll part with their goods. But what if the baker closes shop? It introduces risk into the transaction.

Material Wealth to Trustworthy Promises

Now, what about trading with a universal asset—a commodity? Remember, efficient trade needs something portable, divisible, durable, scarce, and desired, like gold, silver, or in ancient times, shell jewelry. Have you ever wondered why precious metals became so valuable across empires? They’re tough to get more of and easy to split into coins and verify, right?

These golden coins forged a path towards a standardized trading system. They held more clout and liquidity locally than foreign equivalents, grounding them as a widespread unit of exchange. But at the end of the day, isn’t money just a tally of our transactions and savings?

Combining commodity money and different credit systems, our ancestors smartly managed their economies. Physical money allowed for value storage without depending on someone else—no need to remember who owes whom. Credits, on the other hand, made trade smoother within and between communities or under an authority’s watchful eye, simplifying the complexity of barter. That’s the evolution that brought about banking systems like the ‘hawala’ in the Middle Ages, don’t you think?

With the ‘hawala’, you could hand over gold to a money changer in one city, and your recipient could collect the same amount from another—avoiding the risks of transferring it across distances. Such a paper-based credit system paved the way for the secure, efficient transfer of wealth we continue to build upon. So, this begs the question: do you trust the system your money is floating in?