Money has no “inherent” value in today’s world—that is, it has no beneficial attributes other than absolute liquidity, which allows people to acquire anything of value into ownership. Money is created at the discretion of modern society, without reference to gold reserves or any other commodities that must be procured. Fiat money is the name for this sort of money.
As a result, the worth of money and its purchasing power are entirely dependent on the maturity of the community that produced and accepted it.
The hazards that industrialized and developing countries’ monetary systems face are distinct. Deflation and currency overvaluation risks are common in rich countries, whereas inflation and devaluation risks are common in developing countries. We can see how money works now that we’ve identified it as a social institution.
Because their production systems are efficient and reliable, developed economies continue to create vast amounts of products and services. Simultaneously, these societies are so well-organized that each individual may be confident that his or her ownership rights, including the freedom to use money, are reliably protected from any outrage, even that of the government.
In such a culture, having money means that a person can obtain the product or service he or she requires at any moment. This skill ensures that a money owner’s economic rights will not be taken away from him or her in this society, even if he or she momentarily loses income for whatever cause.
This encourages people to own money, which provides security in this society; money is removed from circulation, resulting in cash flow shortcuts, i.e. decreased revenues to companies, which then begin to save money, resulting in salary cuts, etc.—as a result, the economy shrinks, resulting in recession and falling prices.
In undeveloped countries, the situation is substantially different. Their economic system, on the whole, is weak and does not guarantee consistent and reliable production of products and services. Furthermore, such cultures have poor confidence and weak institutions. People have little assurance that the economy will remain stable or that the government would consistently sustain the purchasing power of money. People in this position prefer to spend their money rather than save it. They like to invest in real estate or long-lasting commodities. As a result, prices rise. People who do not trust the soundness of their national currency generally want to acquiesce in large sums of money brought to market by the government or the banking sector.
As a result, this money is referred to as a reserve currency, and it acts as the foundation of the global financial system. We can now explain why: countries that issue reserve currencies have well-organized societies and well-established institutions. They serve as a sort of insurance policy for a stable global order. In truth, they sell their institutions, cultures, and ways of life in return for developing-country raw materials and industrial commodities.
The only way for developing countries’ currencies to be truly strengthened is for their institutions to evolve. The higher the social welfare, the larger and more stable the flow of goods and services generated by a nation’s economic systems.
Even a powerful economy and a well-built society, however, cannot protect industrialized countries from catastrophes. These countries face their own issues, and we shall dedicate this book to them, bearing in mind their global influence.