The Price of Money: Understanding the Value of Currency
Money is the lifeblood of any economy, serving as the medium of exchange that facilitates the trade of goods and services. But have you ever stopped to consider the price of money itself? What determines the value of a dollar, a euro, or a yen?
In a free market, the commodity with the highest marketability tends to become the preferred medium of exchange, becoming the money of a society. Prices denominated in this common medium allow for economic calculation, enabling entrepreneurs to identify opportunities, generate profits, and drive progress.
When it comes to determining the price of money, things get a bit more complex. Unlike goods and services, which are priced based on supply and demand, money poses a unique challenge. Since we already express prices in terms of money, we lack a unit of account to measure the price of money itself. Instead, we must look at money’s purchasing power.
People exchange goods and services for money based on what they expect that money will buy them in the future. Every economic decision is made on the margin, with individuals weighing the value of their choices. The law of diminishing marginal utility applies here as well, meaning that the more money a person has, the less value each additional unit provides.
Money’s value lies in the satisfaction it can provide, whether that is in purchasing necessities, security, or future opportunities. When individuals trade their labor for money, they do so because they value the purchasing power of that money more than the immediate use of their time. The cost of money in an exchange is the highest utility a person could have derived from the cash they gave up.
Just as the value of a homogenous good diminishes with each additional unit, the value of money is subjective and depends on an individual’s preferences. Each additional unit of money may have a different utility based on what the individual wants to achieve. Money, like a language, requires at least two participants to function, making it a tool for communication.
Inflation plays a significant role in the value of money, affecting people’s decisions to save, spend, or invest. Those who hold onto money instead of spending it seek to lower uncertainty and maintain optionality. Money is always performing a service for its owner, whether saved, invested, or spent.
Governments use indices like the Consumer Price Index (CPI) to measure inflation, but these metrics often overlook assets like real estate and stocks. Inflation is a result of monetary expansion, leading to a decrease in the purchasing power of money. The creation of new money benefits those closest to the source, while the poor and wage-earning class bear the brunt of price increases.
Inflation is often called the most insidious form of theft, as it erodes savings, widens inequality, and increases financial instability. A sound monetary regime benefits everyone in the long run, highlighting the importance of understanding the value of money in a free market economy. The origins of money can be traced back to the barter economy, where goods with nonmonetary value eventually evolved into a medium of exchange. This transition occurred organically in the free market, as goods that were durable, divisible, recognizable, portable, and scarce became widely accepted as money. Gold, for example, met all these criteria and became a popular form of money due to its use in jewelry and industry.
Banknotes, originally receipts redeemable for gold, provided a convenient solution to the transportability issue of gold. However, as issuers realized they could print more banknotes than they had gold backing, the link between gold and money was severed. This paved the way for the creation of unbacked fiat currencies by governments and central banks, leading to the modern-day fiat system.
Fiat currencies operate on a similar principle to pyramid schemes, where an increase in the money supply devalues each existing unit. While early recipients of new money may benefit, the general population suffers from inflation. This not only distorts economic calculations but also rewards debt over savings and harms those least able to protect themselves.
Sound money, on the other hand, is money that cannot be counterfeited and maintains its value over time. When enough people recognize the benefits of sound money, they may choose to move away from fiat currencies and towards a system where value is real, honest, and earned. Sound money is essential for the long-term flourishing of civilization as it allows the market to coordinate production, signal scarcity, reward thrift, and protect the vulnerable.
In conclusion, money is not just a means of exchange but a moral institution that plays a crucial role in maintaining trust and cooperation within society. When money is corrupted, it not only breaks the economy but also threatens the very fabric of civilization. By understanding the origins of money and the importance of sound money, individuals can make informed choices that benefit themselves and society as a whole. The truth about modern money is a hard pill to swallow because once you understand the magnitude of the problem, things start looking pretty bleak. Human beings cannot resist the urge to enrich themselves by exploiting others through printing money. The only way to prevent this, it seems, would be to remove us from the process altogether, or, at the very least, separate money from state control. Nobel Prize-winning economist Friedrich Hayek believed this could only be done in “some sly, roundabout way.”
The United Kingdom was the first nation to weaken the link between national currencies and gold. Before World War I, nearly all currencies were redeemable in gold, a standard that had emerged over thousands of years as gold became the most saleable good on Earth. However, by 1971, convertibility was abandoned entirely when U.S. President Richard Nixon famously proclaimed he would “temporarily suspend the convertibility of the dollar into gold” and unilaterally severed the final link between the two. He did this (at least partially) to finance the Vietnam War and preserve his political power.
We won’t dive into every detail of fiat currency here, but here’s what matters: State-issued money today is not backed by anything tangible but entirely created as debt. Fiat currency masquerades as money, but unlike actual money (which emerges from voluntary exchange), fiat is a tool of debt and control.
Every new dollar, euro or yuan enters existence when a large bank issues a loan. That money is expected to be paid back with interest. And since that interest is never created alongside the principal, there is never enough money in circulation to repay all debts. In fact, more debt is necessary to keep the system alive. Modern central banks further manipulate the money supply through mechanisms like bailouts, which prevent inefficient banks from failing, and quantitative easing, which adds even more fuel to the fire.
Quantitative easing is when a central bank purchases government bonds by creating new money, effectively trading IOUs for freshly printed currency. A bond is a promise by the government to repay the borrowed money with interest. That promise is backed by the state’s power to tax present and future citizens while you and your heirs are forced to cope with rising prices. The result is a quiet, continuous wealth extraction from productive people through inflation and debt servitude.
Money printing continues under the banner of Keynesian economics — the doctrine that underpins most modern government policies. Keynesians argue that spending is what drives an economy forward and that if the private sector doesn’t keep spending, the government must. Every dollar spent, they claim, adds one dollar’s worth of value to the economy, but this view ignores the reality of value dilution through inflation. It’s Bastiat’s Broken Window Fallacy all over again. Adding zeros adds precisely zero value.
If money printing could actually increase wealth, we’d all own super yachts at this point. Wealth is created through production, planning and voluntary exchange, not by increasing the number of digits on a central bank’s balance sheet. Real progress stems from people trading with others and their future selves by accumulating capital, delaying gratification and investing in the future.
Fiat Currency’s Final Destination
Printing more money doesn’t speed up the market process, but distorts and retards it. Literally. Slow and stupid follows. Ever-decreasing purchasing power makes economic calculation more difficult and slows down long-term planning.
All fiat currencies eventually die. Some collapse via hyperinflation. Others are abandoned or absorbed into larger systems (such as smaller national currencies being replaced by the euro). But before their end, fiat currencies serve a hidden purpose — they transfer wealth from those who create value to those with political proximity.
This is the essence of the Cantillon effect, named after 18th-century economist Richard Cantillon. When new money enters the economy, its first recipients benefit most — they can buy goods before prices rise. Those furthest from the source (ordinary workers and savers) absorb the cost. Being poor in a fiat system is very expensive.
Despite this, politicians, central bankers and establishment economists continue to assert that a “healthy” inflation rate is necessary. They should know better. Inflation does not fuel prosperity. At best, it shifts purchasing power. At worst, it erodes the very foundation of civilization by undermining trust in money, savings and cooperation. The abundance of cheap goods in today’s world was created in spite of taxes, borders, inflation and bureaucracy — not because of them.
The Good, the Bad, and the Ugly
When left unhampered, we know that the market process tends to deliver better goods at lower prices for more people. That’s what real progress looks like. Interestingly, praxeology isn’t just a tool for critique but a framework for appreciation. Many people grow cynical once they see how deep the dysfunction runs, but praxeology offers clarity: It helps you see how productive people are the real drivers of human flourishing. Not governments. Once you understand this point, even the most mundane forms of labor take on greater meaning. The supermarket cashier, the cleaning staff and the taxi driver all contribute to a system that meets human needs through voluntary cooperation and value creation. They are civilization.
Markets produce goods. Governments, by contrast, tend to produce bads. Catallactic competition, where businesses strive to serve customers better, is the engine of innovation. Political competition, where parties fight to control the state, rewards manipulation, not merit. The most adaptable rise in markets. The most unscrupulous rise in politics.
Praxeology helps you understand human incentives. It teaches you to watch what people do, not just what they say. More importantly, it teaches you to consider what could have been, not just what is. That’s the unseen world, the alternative timelines erased by intervention.
Fear, Uncertainty and Doubt
Human psychology is biased toward fear. We evolved to survive threats, not to admire flowers. That’s why alarmism spreads faster than optimism. In the face of crises such as terrorism, pandemics, and climate change, the knee-jerk reaction from those in power is always to seek more control. This approach, however, often leads to a trade-off between security and freedom, with history showing us that fear-driven decisions rarely yield positive outcomes. Understanding this dynamic can help us see through the noise and take back control of our own lives.
By turning off the constant stream of information from the media, we can reclaim our time and focus on what truly matters. Investing in ourselves, whether it be through developing new skills, building up savings, or nurturing relationships, not only benefits us but also contributes to the greater good. By increasing our own value and productivity, we are able to participate in the division of labor and create a more prosperous society.
One way to break free from the constraints of the current system is to minimize our use of fiat currencies. Every time we engage with these centralized forms of money, we are essentially trading our time for the benefit of those who control the currency. By seeking alternatives, such as decentralized currencies like Bitcoin, we can help pave the way for a world with less corruption and manipulation.
Knut Svanholm, a Bitcoin educator and author, emphasizes the importance of building a better future outside of the existing system. His book, “Praxeology: The Invisible Hand that Feeds You,” delves into the concept of voluntary action and the power of individual choice in shaping society. By taking radical steps to create a more self-reliant and independent life, we can contribute to a more resilient and just world for all.
In conclusion, the key to overcoming crises lies in empowering ourselves and taking control of our own destinies. By investing in our own growth and well-being, we can not only improve our own lives but also make a positive impact on the world around us. Let’s break free from the cycle of fear and control, and embrace a future built on freedom, self-reliance, and voluntary cooperation.