Jimmie is back again this week after explaining to The Pen Team how money works, the basic anatomy of it, and what it means for society. For those of you who didn’t already know, Penning (directly translated from google) means Money. The back story is that Penning was the first coin denomination in the Nordics in the early 1600s, where a single Penning was 100% silver. Over time, it “deteriorated” down to 10% silver and only the King was entitled to print/denominate currency in the society. Fast forward to the 2000’s Penning is bringing the power back to the people, giving them control of your money with direct and tangible value. From Penning, the words, Pfennig, Penny, Pennies, and Pence were coined (pun not intended) as well. Have a good read.
THE FUNDAMENTALS OF MONEY AND FIAT CURRENCIES
Let's start slowly with the basics of money and its creation. The total value of all the world's money is about $130 trillion. What you probably didn't know is that each new fiat currency like the dollar, euro, pound, etc. is created by governments and banks as debt, which needs to be paid back by someone in the future with added interest. That's why there isn't enough money to repay all that debt, and there never will be.
All of the world's money is already digital, basically, just entries on a ledger, usually managed by a bank. Only a small portion exists as physical currency like cash notes or coins. There are still a lot of countries where cash money is still a fundamental way to pay for goods and services in the east, but also in Europe and in the US cash money is still the preferred means of payment and money transactions. In Denmark about 98 % of all money transactions are digital and I believe that’s also the reason why digital assets on the blockchain haven’t had a breakthrough here even though many leading companies in the blockchain and digital asset industries are from Denmark or have founders and lead developers from Denmark.
But what is money actually, the way we know it today?
THE 4 TYPES OF MONEY
There are basically 4 different types of money, commercial money, fiduciary money, commodity money, and fiat money here's what they are:
Commercial bank money consists mainly of deposit balances that can be transferred either by means of paper orders (e.g., checks) or electronically (e.g., debit cards, wire transfers, and Internet payments). Some electronic-payment systems are equipped to handle transactions in several currencies.
Fiduciary cash, currency, or money, alludes to banknotes and coins available for use in the economy. This is the liquidity accessible to financial actors to do exchanges. It is a method of payment. Cash is a substantial or tangible property, not at all like scriptural cash which is insignificant.
Commodity money is gold and silver coins. Gold coins were valuable because they could be used in exchange for other goods or services, but also because the gold itself was valued and had other uses. Commodity money gave way to the next stage-representative money.
Fiat money is backed by a country's government instead of a physical commodity or financial instrument. This means most coin and paper currencies that are used throughout the world are fiat money. This includes the U.S. dollar, the British pound, the Indian rupee, and the euro.
The Central bank creates money by purchasing securities on the open market and adding the corresponding funds to the bank reserves of commercial banks. Banks then increase the fiat money supply in circulation even more by making loans to consumers and businesses.
And how does it work?
THE MECHANICS OF MONEY
So, suppose you deposit $1,000 into your bank account, maybe as a salary or gift, and then you pay $200 in taxes (unless you’re in Europe or Denmark), $500 for rent, $200 for bills, shopping, general costs of living, shopping so on and so forth. Whether you use credit cards, debit cards, local payment solutions like Mobile Pay, or bank wire transfers, they're all just pluses and minuses in different digital ledgers. That's why there's technically (almost) no need for physical money in our day-to-day lives.
Money is basically an “I owe you”, certificate, that the bank is giving to you. Even though it’s cash money, it´s still owned by the Government. That´s also the reason that you are not allowed to destroy cash money. Worldwide we have about 180 different fiat money in the world circulating in 197 countries.
Fiat money (from Latin: fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically declared by a decree from the government to be legal tender. Throughout history, fiat money was sometimes issued by local banks and other institutions.
That means as the world gets smaller and through technology, we can reach and travel the world faster, 180 different currencies are getting more complex to handle. Banks must take fees for converting into different local currencies in order to handle the costs of money flow due to all the intermediaries, and as we are stepping into a more digital world, with the entire world being built through Meta and Augmented Reality, it´s also time that our payment system gets more digital as it is now. Back in 2009 a man, woman, or group of individuals have since gone under the synonym “Satoshi Nakamoto” released the first digital asset or digital money as a peer-to-peer electronic cash system, that we today know under the name Bitcoin, and that’s what I’ll be talking about next time.
Penning for your thoughts is a series compiled by the CEO and Co-Founder of Penning, Jimmie Hansen Steinbeck. A compilation of his vast experience, knowledge, failures, successes, know-how & ideas. Jimmie has spent the last decade (almost since the birth of bitcoin), working in the crypto, blockchain (now known as Web3) space, as an investor, entrepreneur, and expert advisor to numerous crypto companies.