Andy Tempte (0:00)

Foreign hi, I'm Andy Tempte, and welcome to the Saturday Morning Muse. Start your weekend with musings that are designed to improve financial literacy around the world. Today is June 7, 2025. This week, we're going to return to the main story arc and talk about the evolution of money through time, specifically, why trust and confidence are paramount to health of any economic system, and why governments have historically been the primary issuers of money. As we've discussed in previous episodes, the reliability of whatever we decide to call money is based on trust between trading partners. If I decide to mint my own coins for use in trade relationships with other parties, my trading partners will only trust the value of my coins as a medium of exchange, unit of account, store of value, and standard of deferred payment insofar as they trust me. Remember that under the credit theory of money, the coins that I'm stamping or minting represent a promise that I've made to repay a debt. If I give a trader coins to purchase whatever they're selling me, the trader must have confidence that they will be able to use those same coins in a future transaction with their trading partners. The trader gives their trading partners coins in return for goods. In turn, their trading partners must have confidence that the coins I originally minted and gave to my trading partner possess the four properties of money, medium of exchange, unit of account, store of value, standard of deferred payment to use in transactions with their trading partners, and so on and so on and so on. It should be a bit clearer now that money the coins that I minted, they represented a debt. I gave the coins to my trading partner in return for goods that I needed. These coins then circulate amongst other trading partners to allow other traders to receive goods they need without directly bartering physical goods for physical goods. The coinage I minted will only hold their value, meaning be a store of value if there's trust and confidence within and across the trading community, specifically that I, the issuer, will pay whoever shows up at my doorstep in the future with the coins that I minted with something of equal value to the initial trade that started the entire circulation process. Now, we use the word circulate when we talk about the economic use of coinage and currency. Because money flows from trader to trader over time. Like anything that flows, water, lava, clouds, and even glacial ice, the velocity or speed of the flow matters when referring to money. Its velocity is a measure of economic activity in an economy. In our simple example, where I minted some coins to buy goods from my trading partner Those same coins were used by other traders in future transactions to buy goods that they needed. The number of times that my coins were used in transactions over a specific period of time, typically measured over a year, is called the velocity of money. There's one of your first big economic terms, the velocity of money. For example, if I minted 50 tempte coins, my hypothetical coin in return for two cows, and then my trading partner uses those 50 tempte coins to buy grain from someone else, and then that someone else uses 50 tempte coins to buy what they need, then the capacity of money is three times. How do we know this? A total of 150 tempte coins worth of transactions occurred when only 50 physical tempte coins exist. Said more succinctly, 50 physical tempte coins supported an economy worth 150 tempte coins. Now, none of this works. If trust and confidence in the Tempte coin system breaks down, if the Tempte coins I mint make their way back to the issuer, me, and I don't honor the original debt that I created with the initial transaction with my trading partner, then trust and confidence in the system I created will collapse. Tempte coins will be worthless as word spreads among the trading community that I renege on my obligation. And the coins will only be as valuable as the metal I use to stamp my name on them. And more importantly, my reputation as a reliable trading partner and issuer of currency will be toast. Now, it's clear from our simple example that relying on the word of an individual is problematic. So governments got involved to improved trust and confidence in early trading systems. Indeed, we can't talk about the evolution of money without making clear the link between early advances in legal frameworks and the development of money. Money and the law are tightly linked together. Now, the earliest known legal framework is called the Code of Hammurabi, which was established in the 18 century BCE by the Babylonians. Babylon was located in modern day Iraq, and you might have heard of the Babylonian empire when you were growing up. You know, the Tower of Babel and its tale of excessive pride. Anyway, the Code of Hammurabi codified laws on the treatment of all sorts of societal issues. Land, marriage, personal property, physical violence, and, you guessed it, commerce. It had detailed instructions on the treatment of loans and trade, fraud and the obligations of debtors and creditors. Put simply, it's the first written example of laws enacted by a government to control what we would think of as money. Now, next week, we'll discuss specific types of money and the governments that issued them. We'll talk about the Romans, the Chinese, and money in medieval Europe with an eye toward the bad things that happen when governments collapse and trust and confidence in the money they've issued is lost. So what's the modern lesson here in a modern context? The US Dollar has been the dominant currency of reserve since the end of World War II. A reserve currency is defined as a foreign currency that is held by central banks for use in international transactions and investments. Toward the end Of World War II, in July 1944, Allied countries gathered in Bretton Woods, New Hampshire to prepare for the post war era and to establish the economic framework that would govern commercial relationships between allied nations. It was agreed that the US Dollar would be the foundation of this new economic system, essentially turning the US Dollar into the dominant reserve currency for central banks around the world. This system depends on the stability of the US Economy and the US Dollar. Banks, investors, traders and consumers rely every day on the full faith and credit of the United States government to pay its debts on time and uphold the trust and confidence that the global financial system has placed on the US Government and as an extension, the US Dollar. Now, as we briefly discussed last week, the US Government has issued an unsustainably large amount of debt to pay for debt decades of budget deficits, meaning it spends more than it collects in taxes. If we don't get our national debt under control, central banks, investors, traders and consumers will ultimately lose trust and confidence in the US Dollar and its status as reserve currency to the world. That status will be lost. Now, unfortunately, we don't have time today to talk about all the really bad things that would happen if US Defaulted on its debt and trust and confidence in the US Dollar as the foundation for the global banking system eroded. However, a luminary in this space that I recommend you follow is a guy named Ray Dalio. Ray's new book, How Countries Go the Big Cycle, is an advanced but approachable treatise on what happens when trust and confidence in a global power are lost. Until next week, I wish you grace, dignity and compassion. My name is Andy Tempte. This is the Saturday Morning Muse. You can find the show on all the major streaming services as well as out on YouTube. Please like subscribe, rate and most importantly, share this public good with your friends, your family, your colleagues and the show is produced by Nicholas Tempte. We'll see you next time on the Saturday Morning Museum.