Money, from first principles
Money is the thing everyone accepts in trade because everyone else does, and the unit we price goods and keep savings in. These guides take it in reading order: what money is, the kinds there have been, how today's money is created, what it costs you, and where bitcoin fits.
01 · What money is
Start here: what money does, and what makes some money better than others.
What Is Money? A First-Principles Guide
Money is the most important technology in human civilisation and the least understood. This guide starts from first principles: what money is, what properties it needs, and why Bitcoin satisfies them better than anything that came before.
The 3 Functions of Money: Medium of Exchange, Unit of Account and Store of Value
Money has three functions: a medium of exchange (accepted in trade), a unit of account (what prices are measured in) and a store of value (it holds its purchasing power over time). Today's money does the first two well, but central banks aim for 2% inflation, so it is designed to fail the third.
The Characteristics of Money: The 5 Properties of Sound Money
Good money has a handful of characteristics: it is scarce, durable, portable, divisible and easy to verify. Gold met these tests for thousands of years. Fiat currency fails the one that matters most, scarcity. Bitcoin meets all five, and the scorecard below shows how each money compares.
Why Does Money Have Value? The Answer Most Economics Gets Wrong
The standard answer — 'because the government says so' — is not an answer. Governments have decreed many currencies that became worthless. The real explanation involves subjective value, network effects, and monetary properties.
02 · The kinds of money
From goods traded directly, to metal, to paper promises, to money by decree.
Types of Money: Commodity, Representative, Fiat and Bitcoin
There are four main types of money: commodity money, valuable in itself, like gold coins; representative money, a paper claim on a commodity; fiat money, valuable because a government declares it so; and bank money, the deposits banks create when they lend. Bitcoin fits none of them neatly.
Commodity, Currency, Money — and Why Bitcoin Is All Three
Commodity, currency, and money are three words used interchangeably and meaning different things. Gold is a commodity and money but not a modern currency. Fiat is a currency but not money. Bitcoin is the only thing that satisfies all three definitions.
What Is Fiat Money? How It Works, and Why It Loses Value
Fiat money is money that has value because a government declares it legal tender and people accept it, not because it can be exchanged for gold or anything else. The dollar, the pound and the euro are all fiat currencies. Since August 1971 the dollar has lost 88% of its purchasing power.
03 · How we got here
Clipped coins, the gold standard, and the day the dollar left gold.
A Short History of Money: From Shells to Satoshis
Money has been reinvented dozens of times across human civilisation. Each transition followed the same pattern: the market selected for the hardest available option. This is that story, ending with the most recent selection.
Currency Debasement: From Clipped Coins to Printed Money
Debasement is the lowering of a currency's value by the people who issue it. Rulers did it by clipping coins and mixing cheaper metal into the silver; central banks do it by creating new money faster than the economy grows. Every monetary authority in history has done it. Bitcoin is built so that nobody can.
What Happened in 1971? The Day the Dollar Left Gold
On 15 August 1971, President Nixon closed the “gold window”: foreign governments could no longer swap their dollars for US gold at $35 an ounce. He also froze wages and prices for 90 days and put a 10% surcharge on imports. The dollar has been pure fiat money ever since.
What Is the Petrodollar? Oil, the Dollar and the Reserve System
The petrodollar is the system in which oil is priced and sold in US dollars, and oil exporters invest their surplus dollars in US assets such as Treasury bonds. It took shape in US–Saudi dealings after the oil shock of 1973–74. No known US–Saudi agreement requires oil to be sold in dollars, and none expired in 2024.
04 · Where today's money comes from
Who creates it, how, and who gets it first.
How Is Money Created? Most New Money Is Made by Banks
Most new money is created by commercial banks when they lend: the loan creates a matching deposit, and repaying it destroys the money again. Central banks create the reserves banks settle with and set their price. As the Bank of England explained in 2014, banks do not simply lend out their depositors' savings.
Who Controls the Money Supply? A Guide to Central Banking
Most people assume the government prints money. The reality is more complex: commercial banks create the majority of new money through lending, with central banks setting the conditions. Here is how it actually works.
Fractional Reserve Banking: How Banks Really Create Money
Fractional reserve banking is a system in which banks keep only a fraction of their customers' deposits as cash or reserves and lend or invest the rest. In practice banks do not lend out deposits: each new loan creates a new deposit. The US reserve requirement has been zero since March 2020.
Why Do Governments Print Money, and Why Not Just Print More?
Governments print money because it is the one levy that needs no vote: it finances deficits, shrinks debts and rescues banks, while the cost arrives later as inflation. They cannot print without limit because each new unit dilutes all the others, and past a point people stop accepting the money at all.
The Cantillon Effect: Who Gets New Money First, and Who Pays
The Cantillon effect is the uneven way new money spreads through an economy. Whoever receives it first, such as banks, governments and asset owners, can spend it before prices rise; whoever receives it last, such as wage earners and savers, meets the higher prices. That is why inflation is never neutral.
What Is a Bank Run? Northern Rock, SVB and the Bail-in
A bank run is when many depositors try to withdraw their money at once because they fear the bank will fail. Banks keep only a fraction of deposits as cash and reserves, so no bank can repay everyone on the same day. Silicon Valley Bank lost over $40 billion of deposits in a single day in March 2023.
05 · What it costs you
Inflation, government debt, and the slow loss of what your money buys.
What Is Inflation? How It Works, Who Pays, and What's Immune
Inflation is a rise in the general level of prices, which means each unit of money buys less. Mainstream economics treats it as something that happens to prices; the older view says it is something done to money, by creating more of it. Here is how it works, who pays, and what holds its value.
How to Calculate Your Real Purchasing Power Loss Since 1971
Official inflation tracks a basket of consumer prices. Measured against gold, houses or bitcoin, holding fiat since 1971 cost far more. Here is how to calculate it.
What Is Deflation, and Is It Actually Bad?
Deflation is a sustained fall in the general level of prices, the opposite of inflation. It comes in two kinds: prices falling because money and credit are collapsing, as in the 1930s, and prices falling because production keeps getting cheaper. Central banks fear both, because debts do not shrink when prices do.
Other People's Debt: Why Your Money Is Backed by Government IOUs (and Bitcoin Isn't)
Every pound, dollar and euro is someone else's liability, and the main asset behind it is government debt. The latest figures — the US alone owes $40.1 trillion — and why Bitcoin, which is nobody's liability, is different.
06 · Where bitcoin fits
Money with no issuer, and a supply no one can change.
What Backs Bitcoin? The Question That Misunderstands Money
Nothing backs bitcoin — and nothing backs the dollar either. The question assumes money needs backing. It does not. It needs monetary properties. Here is the difference.
How Does Bitcoin Actually Work? A Plain-English Explanation
No jargon, no hand-waving. Here is how bitcoin actually moves value from one person to another without a bank in the middle — the ledger, the keys, and the miners.
Why Bitcoin Is Not 'Crypto'
Bitcoin is a monetary protocol with no issuer, no company, and a fixed supply. 'Crypto' is an industry of tokens with founders, treasuries, and discretionary rules. The difference is not branding — it is structural.
Questions people ask
- What is money?
- Money is whatever a community accepts as final payment for goods, services and debts, so that people can trade without bartering. Economists describe it by what it does: it is a medium of exchange, a unit of account and a store of value.
- What are the three functions of money?
- A medium of exchange (people accept it in trade), a unit of account (prices and debts are measured in it) and a store of value (it carries purchasing power into the future). Government money does the first two well. Central banks aim for inflation of about 2% a year, so it is meant to buy a little less each year, which weakens the third.
- What is the difference between money and currency?
- Currency is the form money takes when it changes hands: notes, coins and bank balances. Under the gold standard, gold was the money and notes were currency redeemable for it. Today the pound and the dollar are both: the central bank issues the notes, and the assets behind them are mainly government debt.
- Is bitcoin money?
- Bitcoin has the properties sound money needs: a fixed supply of 21 million that no one can change, and it is durable, portable, divisible and easy to verify. It already works as a medium of exchange and is widely held as a store of value, but few people price things in it yet, so for most people it is not yet a unit of account.
- Where should I start?
- Read What Is Money? first, then the characteristics of sound money and why money has value. If you prefer a structured path, the free Understanding Money course covers the same ground in four modules.
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