B Invested

How Money Became Worthless

Most people these days have never known currency that had any real value.

The notes in your wallet may have $50 or $20 printed on them, but the paper they are printed on is not worth that amount of money.

For some time now, paper notes or coins made to imitate the colours of gold, silver and bronze are what we use to trade goods. But the currency itself is essentially worthless. And inflation, worsened by the way in which governments keep printing more money, is making our currency worth less by the day.

So how did we get here? Let’s take a look back at the history of money for a better idea.

The first ‘money’

Around 5000 years ago, people stopped bartering with livestock and sacks of barley and began using the first form of currency. The Mesopotamian civilization developed the ‘Shekel’, which was nominally equivalent to the specific weight of barley that was previously traded as a unit.

Around 1000 BC the first coins began to be used as currency in various empires and cities. India used metal, China used cast bronze. By 7 BC, coins of gold, silver and bronze became the mainstay in Greece, and featured the traits we recognise today… images stamped on both sides, often one side the human head of a ruler. The coins had value attached to them by the materials they were made from.

Paper money began to be used alongside coins as currency in the 1000s (AD). Turned out it was easier to transport ‘promissory notes’ great distances than cartloads of metal coins. The notes would entitle the holder to be paid the amount specified. These were the predecessors of regular banknotes.

Gold reserves

In the 1400s, people stored their gold with English goldsmiths, who issued promissory notes that could be redeemed at any time. The goldsmiths were however allowed to use the gold in their possession, which made this an early form of reserve banking. The promissory notes developed into a form of money, backed by the goldsmith’s promise to pay.

In the following centuries, banknotes became the norm, and were attached directly to gold until in 1971 when US President Richard Nixon announced the US dollar would no longer be directly convertible to gold. Which meant therefore, no other currency would be either. This was an important moment for the devaluing of money.

Rise of the digital age

By 1990, all money transferred between the US central bank and commercial banks was in electronic form and by the 2000s, most money existed as digital currency in banks’ databases.

Of course this meant that adding money to someone’s account could be done without even bothering to necessarily print more money. Represented by just numbers on a screen, money was no longer attached directly to anything of value, but was only valuable because the government and central bank said so.

The Dotcom bubble

A bull market in the 1990s saw investors pile on board the Dotcom train. As the value of equity markets grew, US technology stock went through the roof, as everyone wanted a piece of rising internet-based companies. The tech-based Nasdaq index rose by 500% between 1995 and 2000, before crashing in the following two years.

The bubble that had emerged was the result of cheap money, market overconfidence in the many tech start-ups and too much speculation. Much of the liquidity created by the US Federal reserve in anticipation of a potential Y2K bug was invested by banks into tech companies that ended up amounting to nothing. Investment funds dried up, dotcom companies that had reached market caps of hundreds of millions of dollars became worth nothing almost overnight and by the end of 2001, the majority of publicly traded dotcom companies folded, causing trillions of dollars of investment capital to disappear.

It was an example of money that didn’t actually exist being used to prop up expansion of a false economy and it got to a point where something had to give and the bubble burst. Amazon was one of the recognised companies to survive the following crash and the Nasdaq took 15 years to recover.

Global financial crisis

Considered to be the most severe crisis since the great depression of 1929, the GFC saw the collapsing US housing market spark the implosion of banks who had been careless with risk taking and enormous bailout packages put in place to prevent the collapse of the global financial system.

More than $2 trillion disappeared from the global economy. In response, governments and large federal reserves provided unprecedented trillions of dollars in bailouts and stimulus. The US Federal Reserve, the European Central Bank and the Bank of England purchased US$2.5 trillion of government debt and private assets from banks. The Federal printed vast amounts of new currency. It took years to recover and saw interest rates seemingly become ‘permanently’ low.

The current situation

Here we are in 2021, after a year in which the COVID pandemic and lockdown saw a recession in Australia for the first time in nearly three decades. Unemployment went through the roof as whole sections of the economy were shut down. People suddenly realised that one income stream was not enough, because there were no guarantees anymore when it came to sectors like tourism, hospitality, and others that we had taken for granted for so long.

The government again issued significant stimulus for jobseekers, business owners, home buyers and builders and various others.

The RBA pumped $100 billion through the economy. The debt ceiling was raised, more money was printed and here, with zeros being added to bank accounts and interest rates teetering on the brink of going into negatives, we are reminded once again just how worthless money is.

The result is that real estate markets are booming throughout Australia as investors try to swap money for quality debt that has real value attached to it. And with that quality debt they also hope for a second income stream that can future proof their finances.