Wissensbasis / Grundlagen
What Is Money
Before any argument about inflation, the reader needs an honest answer to the prior question: what is money? The textbook answer (a medium of exchange, a unit of account, a store of value) is correct as far as it goes. It does not explain why a piece of paper or a bank-credit entry is treated as worth anything by the people receiving it. That answer requires a short walk through history.
Money is whatever a community trades
Across recorded history people have used as money: cattle, salt, grain, shells (cowries), beads, copper bars, bronze ingots, iron, silver, gold, copper coins, paper warehouse receipts, bank notes, central bank notes, electronic deposits, magnetic stripe records, blockchain entries.
The form changes; the function is the same. People accept a thing as payment because they expect others to accept it later. Money is a network-coordination good. Its value is in the size and stability of the network that uses it.
Carl Menger’s 1892 essay On the Origins of Money (Mises Institute) sets out the classical Austrian answer: money emerges in any sufficiently complex barter economy as the most “saleable” commodity, the one most readily acceptable in exchange. Across most of human history that has been a metal, almost always gold or silver, because of a small set of physical properties (durable, divisible, scarce, portable, fungible, recognisable). The metal won the network competition repeatedly across independent civilisations.
The six properties
A useful money is:
| Property | Why it matters |
|---|---|
| Durable | It must last long enough to hold value across time |
| Divisible | It must split into small enough units for any transaction |
| Scarce | New supply must be hard to produce, so the unit holds value |
| Portable | It must move easily across distance |
| Fungible | One unit must be interchangeable with any other |
| Recognisable | A receiver must be able to verify it is real |
Gold scores well on all six. Silver also. Cattle fail on divisibility and portability. Salt fails on durability in damp climates. Cowrie shells fail on scarcity once trade reached the source coastline. Paper notes fail on scarcity intrinsically (paper is not scarce); paper notes redeemable for gold inherit the scarcity of gold. Pure fiat paper has no scarcity property other than the issuer’s promise to limit issuance.
Hard money and easy money
The most useful distinction for our purposes, used throughout this site, is between “hard money” and “easy money.” Saifedean Ammous in The Bitcoin Standard (2018) phrased it precisely: a money is hard if its existing stock is large compared to the additional flow that can be created in any given year. The stock-to-flow ratio is the empirical measure.
| Money | Approximate stock-to-flow ratio |
|---|---|
| Gold | ~60 (the existing aboveground stock is ~60 years of mining at current rates) |
| Silver | ~22 |
| Bitcoin (post 2024 halving) | ~120 |
| US dollar (M2 vs annual M2 growth) | ~5 to 25 depending on year and policy |
| Hyperinflated currency (Weimar 1923, Zimbabwe 2008) | <1 |
A high stock-to-flow ratio is what makes a money “store value.” If next year’s new issuance is 1.5% of the existing stock, holding a unit of that money exposes you to 1.5% dilution. If next year’s new issuance is 30% of the existing stock (a moderate fiat expansion), holding the unit exposes you to 30% dilution.
The empirical record of the post 1971 fiat era is that broad money (M2) in the major economies has expanded at compound annual rates of roughly 6 to 8% in normal years and 15 to 40% in crisis years. The stock-to-flow ratio of these currencies is therefore between 2 and 17, an order of magnitude lower than gold. The visible result is that gold priced in any of these currencies has trended monotonically up since 1971, while the currencies measured against gold have lost 95%+ of their purchasing power.
This is not a mystery. It is arithmetic. A unit of money whose supply grows faster than another’s must, all else equal, lose value against the slower-growing one.
The three big technological eras
For visualisation purposes the timeline of money simplifies to three eras:
Commodity money (~3000 BC to 1914) The unit is a physical commodity, almost always a precious metal. Notes and bills are receipts for the metal. Issuers can default but cannot inflate without depositors noticing. Inflation is intermittent, regional, and self correcting through specie flows.
Convertible paper / gold-exchange (~1914 to 1971) Currencies are nominally convertible to gold, sometimes only by foreign central banks (post 1944 Bretton Woods), and the metal backing is fractional rather than 100%. Issuers can over-issue between redemption events. Inflation becomes structural in war years, suppressed in peacetime, but the gold ceiling is still there.
Pure fiat / credit money (1971 to present) The unit is a liability of a central bank, with no external constraint. Bank credit creates the overwhelming majority of money in circulation. Money supply is endogenous to credit demand; credit demand is engineered by monetary policy. Inflation is structural at the long-run trend; recessions are reflated rather than cleared. This is the era you live in.
The central thesis of this site is that the third era’s mechanism explains the loss of purchasing power, the asset-price escalation, the household-debt explosion, and the wealth concentration that the first two eras did not produce.
Money is a claim on present and future production
A more abstract framing, useful for the Germany 1933 case (see 02-history/05) and the WIR Bank case (Switzerland 1934 to present): money is a social technology for coordinating claims on present and future production within a community.
A gold coin is a claim against any seller in the gold-using network for any good they offer.
A bank note convertible into gold is a claim against the issuing bank for gold, transitively a claim against the gold network.
A pure fiat note is a claim against any seller in the fiat-using network whose acceptance is sustained by tradition, legal tender laws, tax obligations payable in the unit, and absence of a better alternative.
A MEFO bill in Germany 1934 was a claim against future German industrial production, guaranteed by the Reichsbank.
A WIR franc is a claim against the production of the WIR member-business cooperative, settled within that cooperative.
A Bitcoin is a transferable cryptographic claim secured by the network’s proof of work.
In each case the value depends on the credibility of the issuer’s promise (or, in Bitcoin’s case, the credibility of the protocol) and on the size and stability of the accepting network. A money’s purchasing power is therefore a function of two variables: the issuer’s restraint in creating new units, and the network’s confidence that the restraint will continue.
The post 1971 fiat regime fails the first variable systematically. It survives only because the second (network confidence, propped by reserve currency status, legal tender laws, and the absence of cheap alternatives) has held. CBDCs (see 02-history/07) are an attempt to deepen the second by removing exit options. Bitcoin and gold are the open exit ramps.
What this site does next
Subsequent pages in 02-history/ walk through the documented monetary history 1815 to 2026. Pages in 03-mechanisms/ explain how the current system creates money, transfers wealth, and conceals its own measurement. Pages in 05-effects/ show what the median household has lost by it. Pages in 06-actors/ document the institutions that operate it.
Read in order or follow your nose. Every page is independently sourced.
Primary sources
- Carl Menger, On the Origins of Money (1892). Mises Institute.
- Saifedean Ammous, The Bitcoin Standard (Wiley, 2018). Chapters 1 to 3 develop the stock to flow framing.
- Ludwig von Mises, The Theory of Money and Credit (1912). Mises Institute.
- F. A. Hayek, Denationalisation of Money (Institute of Economic Affairs, 1976). IEA archive.
- Murray Rothbard, What Has Government Done to Our Money? (1963). Mises Institute.
- Bank of England, “Money creation in the modern economy,” Quarterly Bulletin 2014 Q1. Bank of England.