Importance of money holding value

Money is a metre/yardstick for measuring value. This aspect of money is taken for granted by everyone who participates in the economy by using it as a medium of exchange. All trade and economic activity relies on it – it’s like a universal language. And just like when we speak our own language, we don’t often stop and consider it; we just take it for granted.

Can you imagine a world where a metre kept constantly changing? Science, engineering and almost all commerce would be impossible.

The same goes for economic activity in a world where the value of money doesn’t hold. Even just buying a coffee would require both a lot of maths and a huge amount of risk, let alone more complex stuff like mortgages or insurance. The complexities of modern commerce would be impossible and we’d revert back to the simple credit system mentioned in the first article. 

Unlike the metre, however, which is a fixed, objective and universally agreed measurement that will never change, money’s value – its measurement – is subjective and therefore changes.

That change is the result of money’s relative scarcity; the impact on money’s value of the increase in its supply is called inflation.

That’s exactly what happens in countries suffering from inflation, and why sound money is so important and shouldn’t be taken for granted. Extreme instability of money is hard to imagine, but Germany between the wars gives good illustrations.

• The cost of a meal could change between ordering it and receiving the bill.
• People needed suitcases or wheelbarrows to collect their salary
• In October 1923 the number of German marks to the English pound were equivalent to the number of yards to the sun.

Before the First World War (1913) the German Mark, British Shilling, French Franc and Italian Lira were all worth about the same. At the end of 1923 this was the exchange rate for the Mark.

1,000bn
. Mark to Pound exchange rate at the end of 1923

If Germany of the 1920’s seems distant, similar – if slightly less extreme – examples have played out in Venezuela, Zimbabwe and Argentina, while lower, but consistent, rates of inflation erode the spending power of every fiat currency.

So if the key to money holding value is scarcity, how does cryptocurrency achieve digital scarcity?